ASU 2014-09 states that entities should adopt a five-step method for recognizing revenue from contracts with customers:
- Identify contracts with a customer
- Identify performance obligations in the contract
- Determine the transaction price
- Allocate the transaction price to the performance obligations in the contract
- Recognize revenue when (or as) the entity satisfies performance obligations
The application of the five-step method poses a challenge to nonprofit organizations that charge a specified amount for membership dues and provide a suite of membership privileges to all dues paying members. Difficulties include determining what membership benefits constitute a performance obligation, allocating the amount of a member’s dues to each membership benefit, and determining when revenue should be recognized as members do or do not utilize various benefits. These difficulties are particularly troublesome if the organization’s membership renewal calendar is not aligned with its financial reporting period.
When identifying performance obligations in the contract with dues paying members, an organization should identify distinct benefits and those that represent general membership benefits. Distinct benefits are those that would allow the member to benefit from the promised good or service on its own and that are specifically identifiable from other benefits. One indicator that a benefit should be considered distinct is if the organization also offers that benefit to the general public on a standalone basis. For example, if an organization provides monthly publications to its members but also sells those publications to the public, the publication should likely be considered a distinct benefit and a separate performance obligation. Other examples of benefits that are typically considered distinct include discounted goods or attendance fees, access to a member only website or database, and free participation in trainings or networking events.
Once the performance obligations of the contract have been identified, ASU 2014-09 requires organizations to allocate the transaction price (dues payment) to the performance obligations in the contract. The value of a specific membership benefit is not typically identified in the dues invoice sent to members. As a result, it will be necessary for many organizations to determine the value of the benefit based on observable information or to produce an estimate. Observable information would include the price that is charged to the general public to purchase the membership benefit on a standalone basis.
An organization should recognize revenue in the amount of the allocated transaction price as it satisfies the performance obligations of the contract. For distinct benefits that occur at a specific time, such as attendance at an event, the organization should recognize revenue after the member attends the event or the option to attend that event expires. For distinct or general benefits that are satisfied over a period of time, the organization should recognize revenue over an appropriate period of time using an appropriate measure of progress. For example, an organization that charges dues on an annual basis and provides a number of general benefits to its members during the year should recognize revenue based on the amount of time that has passed at that given point.
If you need assistance applying the new revenue recognition criteria to your nonprofit, please contact Tyler Fallin at (859)231-1800. These rules are effective for all periods beginning after December 15, 2018 for all nonpublic entities, so don’t delay in implementing this new standard.