FASB Revenue Recognition - Deep dive into impact to private - PowerPoint PPT Presentation

FASB Revenue Recognition - Deep dive into impact to private institutions Katie Thornton, Robb Rose 1

FASB Revenue Recognition FASB ASU 2014-09 Revenue from Contracts • with Customers Retrospectively to each periods presented • Retrospectively with cumulative effect • Effective date • Institutions with public bonds – July 1, 2018 • Institutions without public bonds – July 1, 2019 • Impacts • Tuition & Housing • Other revenues from contracts with customers • 2

FASB Revenue Recognition – NOT Included What IS NOT included? Contributions • Grants* • Leases • Financial instruments (investments, debt, • derivatives, etc) Guarantees • Nonmonetary exchanges • *see next slide 3

FASB Revenue Recognition - Grants FASB proposed Accounting Standards Update (ASU) Not-for-Profit Entities (Topic 958): Clarifying the Scope and the Accounting Guidance for Contributions Received and Contributions Made Objective – To clarify existing guidance on • revenue recognition of grants Last meeting – March 2018 • Not issued as of April 13, 2018 • 4

FASB Revenue Recognition - Grants Diversity in practice by NFPS on: Issue 1: Characterizing grants and similar contracts • with government agencies and others as reciprocal transactions (exchanges)  nonreciprocal transactions (contributions)  Issue 2: Distinguishing between conditional and • restricted contributions. 5

FASB Revenue Recognition - Grants Issue 1 Are grants really an exchange/reciprocal • service to the grantor/resource provider (federal agency)? 6

FASB Revenue Recognition - Grants Issue 1 - FASB is exploring requiring a NFP consider a grant an exchange transaction if grantor, either (1) directly receives goods or services of commensurate • value or (2) fulfills a known and explicit obligation to provide goods • or services to others. If it is unclear whether the resource provider is fulfilling such an obligation by means of the grant (or similar contract), that ambiguity would be indicative of a nonreciprocal transaction. 7

FASB Revenue Recognition - Grants Issue 2 If grants are to be considered nonexchange • contributions/gifts, are the “grants” tied to a condition or a restriction? Condition – not recognized as revenue until condition is  met Restriction – fully recognized as donor restricted  revenue, released to unrestricted when restriction is met 8

FASB Revenue Recognition - Grants Issue 2 - FASB will clarify and refine guidance ASC 958- 605 by indicating that the definition of a donor-imposed condition would include the following: A right of return, entailing either a return of assets • transferred or a release of a promisor from its obligation to transfer assets. A barrier that must be overcome before the recipient is • entitled to the assets transferred or promised. A barrier would be described through use of indicators and  illustrative examples 9

FASB Revenue Recognition - Grants Likely result of FASB project Grant revenue Meets clarified continues to be criteria for recognized as conditional expended (no contribution change from current practice) Nonexchange Government grant revenue Revenue with Fails clarified donor restrictions criteria; restricted recognized up front gift (change from current practice) 10

FASB Revenue Recognition - Grants FASB Not-for-profit Advisory Committee (NAC) Met in March 2018: Amendments to emphasize the fact that a barrier is • only present, and a contribution can only be conditional, if a donor’s/grantor’s stipulation hinders entitlement to assets Suggestion to include an example involving a grant  agreement that explicitly states that the metrics in the agreement are intended as guidelines, which would emphasize that the contribution is not conditional because the metrics are only guidelines, rather than requirements 11

FASB Revenue Recognition - Grants FASB Not-for-profit Advisory Committee (NAC) Met in March 2018: When an NFP meets a condition and a restriction • simultaneously, it would be difficult for a user of the financial statements to understand how a contribution became restricted in the first place. This is especially true with most federal grants, which are  likely to be considered conditional contributions (nonexchanges) rather than exchanges under the new guidance, and where this release from restrictions has not been reported in the past 12

FASB Revenue Recognition - Grants As a private institution or Foundation, what about government grants? Either way – it will change policy notes of the private • institution or foundation about recognition of government grants as such Stay tuned for more information as the FASB board • formalizes guidance 13

FASB Revenue Recognition – Tuition and Room & Board Interim reporting (or not) – is KEY! Most performance obligations occur within the fiscal • year (i.e. the education and providing of housing for Fall/Winter semesters typically fall in the fiscal year of the institution) Summer semester will continue to be partially deferred  (no change) If you have GAAP interim reporting, may need to • change accounting Could request waiver from bank to keep reporting “as is”  Add in caveat that the interim board reports are “Not in  accordance with GAAP” If you do not have GAAP interim reporting, may not • need to change accounting 14

FASB Revenue Recognition – Tuition and Room & Board Overall thoughts for tuition and room & board: 6/30/19 revenue will be reported net of discounts • (same!) 6/30/19 accounts receivable from students only • includes balances where you’ve performed the service (unpaid balances from previous Fall & Winter and the current Summer semesters) (this is the same!) 6/30/19 contract liability (can still call it deferred • revenue) – cash collected but have not performed service (cash for Fall semester collected before 6/30/19) (this is the same!) 6/30/19 refund liability – might need to be recorded if • refunds for Summer semester could be granted after 6/30/19 (this is new!) 15

FASB Revenue Recognition - 5 step process 16

FASB Revenue Recognition – Step 1 Step 1 – Identify Contracts. A contract exists when all are met: 1. The parties to the contract have approved the contract (in writing, orally, or in accordance with other customary business practices) and are committed to perform their respective obligations. 2. The entity (you) can identify each party’s rights regarding the goods or services to be transferred. 3. The entity (you) can identify the payment terms for the goods or services to be transferred. 4. The contract has commercial substance (that is, the risk, timing, or amount of the entity’s future cash flows is expected to change as a result of the contract). 5. It is probable that the entity will collect substantially all of the consideration 17

FASB Revenue Recognition – Step 1 Step 1 – Identify Contracts The parties to the contract have approved the • contract (in writing, orally, or in accordance with other customary business practices) and are committed to perform their respective obligations. 18

FASB Revenue Recognition - Tuition Tuition conclusions to be documented for Step 1 – Contract Identification: Describe contract with student documentation (is it • electronic? Signed by student/parent?) Contracts are uniform/non-negotiable and fall within the • same fiscal year as the institution (except summer semester) Describe nonrefundable deposits for enrollment (creating • contract liability/deferred revenue) How institution determines collectability – ie. when does • the institution determine a student can pay for tuition (at admission? Approval of SFA?) Conclusion on when a contract is created under ASC 606 • (when student signs contract and student has ability to pay?) 19

FASB Revenue Recognition - Tuition Audit tests for Step 1 (Tuition): Obtain example student tuition contract in year of • implementation and maintain in the permanent/carryforward file and review for key items identified on previous slide (this is new!) In future years, we’ll inquire about significant changes to  the student tuition contract and obtain if necessary Inquire if any student tuition contracts are negotiated • outside of the standard process. Does this happen? Manual override?  20

FASB Revenue Recognition – Step 2 Step 2 – Identify the Performance Obligations A contract includes promises to transfer goods or • services to a customer. If those goods or services are distinct, the promises are performance obligations and are accounted for separately. A good or service is distinct if the customer can • benefit from the good or service on its own or together with other resources that are readily available to the customer and the entity’s promise to transfer the good or service to the customer is separately identifiable from other promises in the contract. 21

FASB Revenue Recognition - Tuition Tuition conclusions to be documented for Step 2- Performance Obligations: Document that all performance obligations are • completed during the fiscal year Document the one performance obligation = • Delivering education services Audit tests for Step 2 (Tuition): Validate that the performance obligation is singular • and will be completed with the fiscal year 22