Page 17 - Religious Organization Guide

REVENUE RECOGNITION 2. IDENTIFY PERFORMANCE OBLIGATIONS:

UNDER ASC 606 AND These are the promises to deliver distinct goods or services. For instance, a retreat fee might
include lodging, meals, and spiritual sessions—each a separate performance obligation if
distinct.
ASC 958 FOR FAITH-BASED 3. DETERMINE THE TRANSACTION PRICE:

NONPROFIT ORGANIZATIONS This is the amount the organization expects to receive. Variable considerations (e.g.,
discounts or refunds) must be estimated.
4. ALLOCATE THE TRANSACTION PRICE:

If multiple performance obligations exist, the price is allocated based on their standalone
selling prices.
5. RECOGNIZE REVENUE:

Revenue is recognized when (or as) each performance obligation is satisfied, either at a
point in time (e.g., delivering a book) or over time (e.g., a year-long membership).

While ASC 606 primarily governs exchange transactions (e.g., tuition fees or bookstore
sales), ASC 958 addresses contributions, which are common in nonprofits. ASC 958-
605 distinguishes between contributions (nonreciprocal transactions) and exchange
transactions (covered by ASC 606), requiring nonprofits to assess whether a resource
F aith-based nonprofit organizations, such as churches, synagogues, religious provider receives commensurate value in return. For faith-based nonprofits, most revenue
charities, and ministries, often face unique challenges when it comes to
streams fall under ASC 958, though some activities (e.g., tuition, day care, membership,
financial reporting. Unlike for-profit entities, these organizations rely heavily etc.) may trigger ASC 606.
on contributions, grants, and program-related income, which complicates revenue and
contribution recognition. The Financial Accounting Standards Board (FASB) provides OVERVIEW OF ASC 958: NOT-FOR-PROFIT ENTITIES
guidance through Accounting Standards Codification (ASC) 606, Revenue from
Contracts with Customers, and ASC 958, Not-for-Profit Entities. Together, these standards ASC 958 addresses recognition of contributions, which are vital to faith-based nonprofits.
establish a framework for recognizing revenue and contributions in a way that ensures Updated through ASU 2018-08, Clarifying the Scope and Accounting Guidance for
transparency and consistency. This article explores revenue and contribution recognition Contributions Received and Contributions Made, ASC 958 distinguishes between
under ASC 606 and ASC 958, with a focus on conditional revenue, restricted revenue, contributions (nonreciprocal transactions) and exchange transactions (reciprocal
bequests, pledges, agency transactions, in-kind contributions, and grants. transactions subject to ASC 606).

OVERVIEW OF ASC 606: REVENUE FROM CONTRACTS WITH CUSTOMERS Under ASC 958-605, contributions are recognized immediately when they are unconditional
(meaning there are no barriers or conditions the nonprofit must overcome to be entitled to
ASC 606, effective for annual reporting periods beginning after December 15, 2018, the funds). Key considerations include:
introduced a five-step model for recognizing revenue from contracts with customers. While ► Donor-Imposed Conditions: If a gift is contingent on a specific action (e.g., raising
primarily designed for for-profit entities, this standard also applies to nonprofits when they matching funds or completing a project), it’s conditional, and revenue recognition is
engage in exchange transactions—situations where goods or services are provided in return deferred until the condition is met.
for consideration of commensurate value. For faith-based organizations, this might include
tuition for religious schools, membership, fees for retreats, or sales of religious materials. ► Donor-Imposed Restrictions: Restrictions limit how funds can be used (e.g.,
for a specific ministry program) but don’t delay recognition if the gift is otherwise
THE FIVE-STEP MODEL UNDER ASC 606 IS AS FOLLOWS: unconditional. These are reported as net assets with donor restrictions. There is
frequent confusion between what constitutes a condition as opposed to a restriction.
1. IDENTIFY THE CONTRACT WITH A CUSTOMER: Generally speaking, conditions are stricter and provide donors with more control
over the use of funds (along with rights of return to the donor if conditions are not
A contract exists when there’s an agreement with enforceable rights and obligations. For met). Restrictions are more directional, leaving the nonprofit with more latitude in the
example, a faith-based nonprofit hosting a paid conference would have a contract with ultimate use of the funds.
attendees.
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