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Blog: Complications with Optimistic Outcomes: How ASU 2014-09 (Topic 606) Will Improve Your Organization and How Vault Can Walk You Through the Process.

Complications with Optimistic Outcomes: How ASU 2014-09 (Topic 606) Will Improve Your Organization and How Vault Can Walk You Through the Process.

Back in May 2014, The Financial Accounting Standards Board (FASB) finished a project that has now resulted in a new Accounting Standard Update (ASU). Generally speaking, ASU No. 2014-09 (Topic 606), referred to as ‘Update’, helps mainstream the way business entities, including publicly traded or privately held organizations and not-for-profits, record revenue from contracts with customers. The new Update, Revenue from Contracts with Customers (Topic 606), is a game-changer for how not-for-profits and associations will start recording their revenue this fiscal year.

The new guidelines in the Update will help organization leaders tell the story about the revenue their organizations recognize. The Update will help them identify each of their contracts’ individual performance obligations, assign transaction prices, and determine the estimated selling price of performance obligations that are not directly observable using either of these three approaches: Adjusted Market Assessment Approach, Expected Cost-Plus a Margin Approach, or Residual Approach. In other words, associations will no longer be able to tack on arbitrary pricing to membership contracts.

While the adjustment period to the new Update might interfere with other day-to-day tasks for association and not-for-profit leaders, Vault CPA and Senior Manager Whitney Man views the Update with a ‘glass-half-full’ approach and as a way for association and not-for-profit clients to lean on the expertise and experience of their outsourced accounting team at Vault, “we can help by partnering with our clients and helping them make those judgement calls.” What Man is referring to by ‘judgement calls’ are all the strategic and organizational structures that the Update is requiring leaders to consider, which may be some of the following variables:

  • Membership Renewal Process/ Dues Cycles
  • Standardization of Benefits for Different Member Types Within One Organization
  • Monetary Value of Individual Benefits
  • Duration of Performance Obligations

Luckily, FASB issued 5 handy steps that Vault will follow to make sure their clients are recording revenue properly. Below are the ordered steps and some tips and questions Man prompts her clients to consider:

  •  Identify the Contract with the Customer
    • How long is the agreement/membership term? How much is a customer (or member) required to pay (fixed dollar amount, percentage of total contract value)?
  • Identify the Performance Obligation
    • What are the distinct benefits or perks that members receive [i.e. advocacy, discounted registration fees, publication subscriptions, email updates, or access to advisory councils and boards]?
  • Determine the Transaction Price
    • What amount of money does your association or not-for-profit expect to receive for each of the goods or services as defined in the performance obligations?
    • Consider the duration of performance obligations and when the exchange of goods or services can be recognized. [i.e. the month of the conference, 12 months of a publication/quarterly subscription, etc.]
    • Consider discounts, rebates, refunds, performance bonuses, and penalties.
  • Allocate the Transaction Price to the Performance Obligations.
    • Think of each performance obligation as if it were sold separately, and then assign an individual monetary value to each one.
  • Recognize Revenue When a Performance Obligation is Satisfied
    • Performance Obligations are satisfied when control of the goods or services are transferred to the customer.

The Update will replace all previous guidelines on revenue recognition. In short, it will help association leaders, members, and accountants alike see financial statements and be able to determine the precise time a service or good was exchanged and how much revenue had been attributed to it. On a larger scale, it will help standardize the way revenue is recognized across different business entity types.

Most of all, the Update prompts association and not-for-profit leaders to leave their impression on their organizations by approving what goods and services, or performance obligations, are worth.

Sources: FASB.ORG