Best Practices for Implementing Revenue Recognition in Higher Education
Compliance with FASB’s new revenue recognition standard (Topic 606) has come due or will soon for your higher education institution. Many colleges and universities have underestimated the rule’s impact on their operations and are late in their efforts to fully incorporate it into their procedures. If yours is among these, you have the benefit of learning from other organizations’ implementation experiences. As a best practice, we’ve discovered that although Topic 606 was known before the release of its amendment clarifying contracts and grants (ASU 2018-08), the smartest way to approach implementation is actually to start with the amendment.
Review contracts and grants first
The ASU amendment requires you to assess each of your grants and contracts to decipher whether it is an exchange transaction — defined as one in which “the resource provider is receiving commensurate value in return for the resources transferred.” If that isn’t the case, you should also verify whether a third-party payer is making payments on behalf on an identified customer. If the grant or contract ultimately qualifies as an exchange transaction, then the new revenue recognition standard applies, and the updated reporting work begins, following the new five-step process.
- Identify the contract(s) with the customer.
- Identify the performance obligations.
- Determine the transaction price.
- Allocate the transaction price.
- Recognize revenue when (or as) a performance obligation is satisfied.
Document your work
Keep a written record of your work through the entire process, even if’s just an Excel spreadsheet that lists all of your current revenue sources and the corresponding five-step data. Document your revenue recognition policy, and update it to account for any changes that might have arisen from the implementation of the new standard. Having this documented in the year of implementation will spare you a lot of headaches when audit time rolls around. Auditors will be sticklers for this because they will be testing to ensure your implementation is appropriate.
Record conditional and non-conditional transactions
Once you have documented your revenue implementation in compliance with the ASU, you’ll need to determine if your “non-exchange transactions” grants and contracts are “conditional” or “non-conditional.”
A conditional grant agreement includes a barrier that must be overcome and either a right of return of assets transferred or a right of release of a promisor‘s obligation to transfer assets. (The amendment’s guidance further discusses what constitutes a barrier.) It is good to review your contributions as they come through and create an Excel spreadsheet that records whether a transaction is conditional or not.
You’ll also need to review your institution’s unconditional grants to decide whether they are contributions with or without donor restriction. Having this documented will save time during the year of implementation. If a contribution’s classification changes, communicate this with your auditor to make sure he or she concurs. Another best practice is to update your board and finance committee so they aren’t surprised when they see the change on your financial statements.
Implementation dates for Topic 606 and ASU 2018-08
Not-for-profit organizations that have issued or are conduit bond obligors for securities that are traded, listed, or quoted on an exchange or an over-the-counter market must comply in annual reporting periods beginning after December 15, 2017, and the interim periods within that year. For all other non-for profit entities, ASC 606 is effective in annual reporting periods beginning after December 15, 2018, and interim periods within annual periods beginning after December 15, 2019.
Not-for-profit organizations that have issued or are conduit bond obligors for securities that are traded, listed, or quoted on an exchange or an over-the-counter market must apply the new standard for transactions in which the entity serves as a resource recipient in annual reporting periods beginning after June 15, 2018, including interim periods within that annual period. Other organizations would apply the standard to annual reporting periods beginning after December 15, 2018, and interim periods within annual periods beginning after December 15, 2019.
Early implementation is allowed.
How we can help
CLA’s higher education professionals can help your college or university apply the new revenue recognition standard, document your work, determine the nature of your grants and contracts, and keep your auditors and governing body in the loop as you make changes.