In May 2014, the Financial Accounting Standards Board (FASB) issued Accounting Standards Update (ASU) No. 2014-09, Revenue from Contracts with Customers (Topic 606) that overhauled revenue recognition methodologies. There have been
several additional clarifying amendments to the standard since its original issuance. The ASU applies to organizations that enter into contracts, either written or implied, with customers for the transfer of goods and services in exchange for consideration. The objective of the ASU is to develop a single principle-based standard that will be applied across various industries rather than the industry-specific standards that are currently in existence. Non-public entities are required to adopt the standard for reporting periods beginning on or after December 31, 2018 (calendar year 2019) which relates to all June 2020 year ends. Even though the standard applies to June 30, 2020 year ends, it will have to be applied retroactively should comparative financial statements be issued.
The premise behind the standard is that revenue recognition should “depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services.” For non-profits, this guidance applies to contracts that are exchange transactions. FASB included a five-step process to achieve this objective. These steps will determine the revenue that should be recognized from contracts with customers.
The five steps are as follows:
• Step One Identify the contract or contracts with the customer. This identification can be in the manner of an enrollment deposit made by a student, a letter of acceptance from the institution, or communicating tuition pricing to the student.
• Step Two Identify the performance obligation. An institution’s delivery of an academic program throughout the academic term generally corresponds to the tuition and fees that will be charged to the student. An additional thought related to housing; since it’s a distinct service arrangement, as not all students require housing, the related revenue recognition may have to be accounted for as a separate service obligation.
• Step Three Determine the transaction price. The transaction price is the price from all sources (students as well as third parties) in exchange for transferring the goods or services to the student. Potential refunds through the add/drop period
should also be considered in the calculation of revenues.
• Step Four Allocate the transaction price. The transaction price for each performance obligation is allocated based on the amount of consideration the institution expects to receive for transferring the distinct goods or services to the student. This would apply in the situation where tuition and housing are separate obligations.
• Step Five Recognize the revenue when the performance obligation is satisfied. Revenue would be recognized ratably over the
courses of the semester as services are performed. Institutions that issue fiscal year-end financial statements with typical traditional semesters, i.e. fall, spring and summer (providing the summer term ends beforthe fiscal year-end), there will be minimal changes in the overall recognition of revenue from the way it is reported currently. Generally, the most significant change may be in the way the summer terms are recognized. The ASU also contains disclosure requirements to provide users information to understand the nature of contracts with customers. The disclosure requirements are grouped into several categories and include general disclosures, disaggregation of revenues, contract balances, and performance obligations to name a few. The new standard is complex and comprehensive. Organizations are encouraged to review the standard and to determine its relative impact. O’Connor and Drew, P.C. is available to assist with any questions related to the standard.