Revenue Recognition and Related Accounts Refresher for Not-for-Profits

It’s been a few years since the revenue recognition guidance went into effect, yet many not-for-profits still run into challenges when applying it. This refresher highlights key steps for identifying revenue streams, applying the right accounting standard, and ensuring proper disclosures.

Step 1: Identify Your Revenue Streams

The first step is to map out where your organization’s revenue comes from. Example: private schools typically have revenue from tuition, annual fundraising, promises to give, capital campaigns, grants, and fundraising events.

Step 2: Review Supporting Documentation

Read through contracts, grant agreements, pledge forms, fundraising materials, or any other documentation that defines your revenue sources.

Step 3: Distinguish Between Customers and Donors

A critical assessment is to determine whether revenue is received from a customer (exchange transaction, ASC 606) or a donor (contribution, ASC 958).

• Customer: An entity or individual who receives something of commensurate value in exchange for payment (subject to ASC 606).
• Donor: An entity or individual who provides resources to support the organization’s mission without expecting anything in return (subject to ASC 958).

Step 4: Applying ASC 606 – Customer Revenue

When revenue is customer-based, it must be recognized in accordance with ASC 606 by applying a five-step process:

1. Identify the contract or agreement with the customer associated with the revenue.
2. Determine the performance obligation(s) (services or tangibles sold).
3. Determine the transaction price.
4.  If selling more than one item, allocate the transaction price associated with each performance obligation.
5. Recognize the revenue when your organization satisfies the performance obligation. This can be done at a point in time or over time as goods or services are transferred to the customer. Example: Tuition revenue is recognized over the course of the school year as services are delivered.

The agreement can include both ASC 606 (exchange) activity and ASC 958 (contribution) components.

Step 5: Applying ASC 958 – Donor Revenue

Revenue received from a donor is considered a financial contribution and must be recognized in accordance with ASC 958-605. The process begins with identifying the promise to give, grant, or other donor agreement and then determining whether the contribution is conditional or unconditional.

Conditional Contributions

A donor-imposed condition is a barrier to entitlement that includes a right of return or release of the contribution. These contributions require special consideration:

Recognition: Conditional contributions are not recognized as contribution revenue until the condition is substantially met.
Example: A $50,000 grant is pledged for a capital project, contingent upon the organization raising 50% of the total project cost ($100,000). Revenue is not recognized until the organization secures the required $50,000 in pledges from other donors.

Deferred Revenue: If funds are received before the condition is met, the amount is recorded as deferred revenue (liability). Recognition occurs only once the condition is satisfied.

Disclosure: Material conditional contributions must be disclosed in the financial statement footnotes even though they are excluded from contribution revenue on the statement of activities until the condition is met.

Unconditional Contributions

Once a donor-imposed condition has been satisfied (or if none exist), the contribution is recognized as revenue. At this point, organizations must determine whether donor restrictions apply.

Donor Restrictions: Restrictions may relate to purpose, time, or both. These are identified by reviewing pledge forms, donor correspondence, checks, or campaign materials. The key is to evaluate donor intent:

• If no restriction is evident, or if it is so broad it covers the organization’s general mission, the contribution is recognized without donor-imposed restrictions.
• If restrictions are specified, they must be observed.
  Example: A donor pledges $200,000 payable in two annual $100,000 installments to fund a new art studio. This contribution carries both a purpose restriction (funding the art studio) and a time restriction (based on installment payments).

Release from Restrictions: Contributions with restrictions are initially recorded as “net assets with donor restrictions.” They are reclassified to “net assets without donor restrictions” once the purpose or time stipulation has been satisfied.

Example: The $200,000 art studio pledge is released from its time restriction as each installment is received, and from its purpose restriction when the funds are used for the art studio and the studio is placed in service.

Step 6: Accounts Receivable Under CECL (ASC 326)

Accounts receivable tied to customer revenue (exchange transactions under ASC 606) are subject to the Current Expected Credit Loss (CECL) model. This requires not-for-profits to evaluate the collectability of receivables each reporting period.

CECL Allowance Basics

Allowance Assessment: Each reporting period, an allowance must be assessed to ensure receivables reflect the actual amount expected to be collected. This assessment is based on historical losses, current conditions, and reasonable, supportable forecasts.

Write-offs: Any receivable written off is recorded as a reduction to the CECL allowance (contra-asset account).

Recoveries: If a previously written-off receivable is later collected, it can be recognized either in the statement of activities or as an increase to the CECL allowance.

Reporting Period Adjustment: Adjustments to the CECL allowance at period-end are recognized as both a change in the contra-asset account and as an estimated credit loss expense.

ASU 2025-05 Update

The CECL model was updated under ASU 2025-05, providing practical relief for certain organizations:

1. Practical Expedient: Organizations may assume that current conditions as of the reporting date remain unchanged over the life of the asset.
2. Policy Election: Non-public business entities may elect to consider collection activity occurring after the statement of financial position date when estimating CECL allowances.
3. Application: If adopted, the expedient and/or election are applied prospectively.
4. Effective Date: This update is effective for years beginning after Dec. 15, 2025, with early adoption permitted.

Step 7: Promises to Give and Donor Receivables

Promises to give and other receivables related to contributions (recognized under ASC 958-605) require additional adjustments to ensure proper valuation and reporting.

Present Value of Long-Term Promises

Discounting Requirements: Long-term promises to give (those collectible more than one year after the reporting date) must be reported at the present value of future cash flows.

Discount Rate: The discount rate is established in the year the promise is made and remains fixed; however, annual adjustments are made for the accretion of the discount.

Scope: A discount rate is only applied to amounts expected to be collected beyond one year from the reporting date.

Allowance for Doubtful Accounts

Collectability Assessment: Management must evaluate whether an allowance is needed if there are indicators that a receivable will not be fully collected (e.g., a donor misses scheduled payments).

Recording the Allowance: If necessary, an allowance for doubtful accounts is recorded as a contra asset. Adjustments are recognized as bad debt expense in the financial statements.

Step 8: Gifts-in-Kind and Nonfinancial Contributions

Contributions of goods and services (nonfinancial assets) must be recognized and disclosed under ASC 958 and ASU 2020-07. These assets often require special attention because they cannot be combined with financial contributions and carry unique recognition and disclosure rules.

Recognition and Presentation of Nonfinancial Assets

Criteria for Recognition: A nonfinancial asset is recognized if it meets one of the following:

1. It creates or enhances nonfinancial assets.
   Example: Plumbing repair services provided at a school.
2. It requires specialized skills, is provided by qualified individuals, and would typically be purchased if not donated.
   Example: Legal services.

Presentation: If material, nonfinancial assets must be presented as a separate line item on the statement of activities. They may not be commingled with financial contributions.

Disclosure Requirements

To ensure transparency, organizations must provide detailed disclosures for contributed nonfinancial assets, including:

1. Disaggregation: Categories of contributed assets (e.g., food, legal services, plumbing services).
2. Use: Whether the assets were monetized or utilized during the reporting period.
3. Program Details: If utilized, describe the program or activity in which the asset was used.
4. Policy: Disclosure of any organizational policy on monetizing versus utilizing donated assets.
5. Donor Restrictions: Description of any restrictions imposed by donors.
6. Valuation: Techniques and inputs used to measure fair value in line with ASC 820.
7. Market Basis: Disclosure of the principal (or most advantageous) market used to determine fair value, particularly if donor restrictions prevent selling or using the asset in that market.

Why It Matters

Understanding revenue streams, their related valuation accounts, and disclosures is a critical component of timely and accurate financial reporting for not-for-profits.

CBIZ not-for-profit professionals are here to help if you need assistance assessing your revenue streams. Connect with our team today.