Nonprofit organizations are required to adopt the new revenue recognition standards during 2021. For schools, this means that if they haven’t already early adopted the new standard, they will need to adopt it for the 2020/2021 fiscal year. The new revenue recognition standards are not applicable to support (e.g. contributions), it is only for exchange transactions. This will make it more important for schools to analyze their revenue streams (especially grants) to determine if they are contributions or exchange transactions.

For many schools, where the revenue is transactionally based (bookstore sales) or generated within the school’s fiscal year (tuition-based), the adoption of the new standard will have little anticipated impact on the school’s financial reporting.

In order to determine the impact, for each revenue stream, there is a 5-step process that needs to be considered:

  • Identify the contract(s) with the customer
  • Identify the performance obligation
  • Determine the transaction price
  • Allocate the transaction price
  • Recognize revenue when (or as) a performance obligation is satisfied

Example:

Your school charges $20,500 per year tuition for the school year September through June. The tuition includes a $500 non-refundable activity fee. In addition, the students need to purchase $250 of books from the school bookstore.

  • Identify the contract(s) with the customer: In this case, there are two contracts, the tuition and the purchase of the school books
  • Identify the performance obligation: The school is required to provide 10 months of education throughout the school year and is required to provide the student with appropriate textbooks
  • Determine the transaction price: The tuition and activity fee is $20,500, and the books are $250
  • Allocate the transaction price: The tuition is $20,000 and the activity fee is $500
  • Recognize revenue when (or as) a performance obligation is satisfied: The $500 activity fee is recognized as revenue when the contract for the student is signed as the activity fee is non-refundable. The tuition revenue is recorded ratably over the 10 months as the service is delivered ($2,000 per month). The bookstore sales of $250 are recorded at the time the books are transferred to the student.

As you can see, there is not a significant difference between the current methodology and the new revenue recognition standards.

The main area of FASB ASU 2014-19 that will impact schools is the additional footnote disclosures which should address the following:

  • Disaggregation of revenues – qualitative and quantitative disaggregation of revenue into categories that depict how revenue and cash flows are affected by economic factors (if this information is not already provided on the financial statements elsewhere)
  • Information about contract balances – opening and closing balances, amount of revenue recognized from contract liabilities, and an explanation of significant changes in contract liabilities (this would rarely be applicable to NFP entities based on their revenue streams)
  • Remaining performance obligations – transaction price allocated to remaining performance obligations and quantitative or qualitative explanation of when amounts will be recognized as revenue (again this would rarely be applicable to NFP entities based on their revenue streams)

Example:

The following is an example of a significant accounting policy disclosure that addresses the elements of the changes prescribed by FASB ASU 2014-09:

NOTE X –
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Accounts Receivable, Grants Receivable and Revenue Recognition:

Revenue from government agencies, including mandated service income and title funds, and other third-party payers, such as school districts, are recognized as the school satisfies its performance obligations under such contracts by delivering services to the students the school serves. Revenues for tuition-funded students are recognized ratably, over the term of the school year. The School’s performance obligations include providing educational and other services to students predominantly funded for self-pay tuition-based services. The transaction price is based on contracts signed with families, net of any scholarships or financial aid provided to such students.

Government-funded revenue is subject to audit and retroactive adjustment. Settlements with third-party payers for retroactive revenue adjustments due to audits, reviews, or investigations are considered variable consideration and are included in the determination of the estimated transaction price for providing services using the most likely outcome method. These settlements are estimated based on the terms of the payment agreement with the payer, reports filed with the payer, correspondence from the payer, and historical settlement activity, including an assessment to ensure that it is probable that a significant reversal in the amount of cumulative revenue recognized will not occur when the uncertainty associated with the retroactive adjustment is subsequently resolved. Estimated settlements are adjusted in future periods as adjustments become known, (that is, new information becomes available), or as years are reconciled or are no longer subject to such audits, reviews, and investigations. Differences between the estimated amounts accrued and interim and final settlements are reported in operations in the year of settlement.

Laws and regulations governing the school’s government funding streams are extremely complex and subject to interpretation. As a result, there is at least a reasonable possibility that recorded estimates will change by a material amount in the near term.

The School records revenue from bookstore and athletic equipment sales when title transfers from the school to the purchaser. Performance obligations for all the School’s services are provided and consumed either at a point in time or in-full during the School’s fiscal year, and therefore these types of fee allocation performance obligations are not left unsatisfied at the end of the reporting period. The School records receivables and revenue when earned based on contracted rates for services provided. Prepayments of services (e.g. the following year tuition or summer camp) are recorded as deferred income until such time as the School meets its performance obligation.

Example:

The following is an example of the disaggregation of revenue disclosure that addresses the elements of the changes prescribed by FASB ASU 2014-09:

NOTE XX –
REVENUE

Note – If the School disaggregates revenue by type is depicted o=n the face of the statement of activities, this example is not applicable. If the disaggregation requirements of paragraphs 4 and 5 of FASB ASC 606-10-50 are not available within the financial statements, they should be presented within a separate footnote as provided in this example.

The School disaggregates revenue from contracts with customers by type of service or payor source as this depicts the nature, amount, timing, and uncertainty of its revenue and cash flows as affected by economic factors. Revenue from contracts with customers consist of the following for the year ended June 30, 2021:

Note – If revenue was recognized during the period of performance obligation that was satisfied or partially satisfied in prior periods (i.e. rate changes), that should also be disclosed. Additionally, a school should also provide information about significant changes in contract assets, if applicable. The example below follows the disclosure requirements under FASB ASC 606-10-50-11 and assumes that contract assets appear on the face of the statement of financial position, and assumes that the tuition and room and board are considered separate performance obligations under FASB ASC 606-10-25-9. Deferred tuition includes upfront payments from students that span two fiscal years.
Ted Campbell, CPA, CGFM, CGMA

Ted Campbell, CPA, CGFM, CGMA

Manager

Ted Campbell, manager in the Not-for-Profit Services group with Cerini & Associates, LLP, has been with the firm since 2020. He has more than fifteen years of experience in providing various audit, review, accounting and consulting services to for-profit and not-for-profit entities.