Revenue Recognition – It Affects Non-Profits Too
Perhaps, one of the big accounting issues that’s gotten more attention during the past decade has been revenue recognition. When do companies get to recognize the revenue that they earn? In many businesses, it can be fairly straightforward – a product is shipped, terms are FOB shipping point and revenue is earned right away. In other businesses, such as where there’s licensing revenue that can cover one to multiple years, revenues need to be deferred and allocated to the periods where the revenue is earned.
Revenue recognition can hit the nonprofit world too.
In some cases, it might be pretty straightforward. Donations are received and that represents contribution revenue to the nonprofit. But just like in the regular businesses, there can be other situations that demand different treatment and attention.
One example is at our church. Towards the end of the year, some people will make donations intended for their entire contribution for the next year. By paying it upfront, they get their tax deductions sooner. How we treat those donations is that we record them as prepaid donations that we then amortize on a monthly basis over the next year.
Other nonprofits can face that similar situation. Another instance, similar to the magazine subscription example is where members pay annual dues. In many cases, these dues might be paid at different anniversary dates, with some members having anniversary dates in January, some in February, etc. Here with the dues revenue, it should be booked as a liability and amortized over the next 12 months or whatever terms the dues cover.
Not all nonprofits that have dues situations like this are recording it properly. Many are taking it right to income for the entire dues amount. That leads to a mismatch of contributions and expenses. The expenses to service the members will occur throughout the 12 month period, yet the contribution revenue is recognized all upfront. If you look at it on the basis of one individual contributor, you’ll see that you create sort of a funny looking income statements with a lot of income right up front and then losses throughout the whole period of the remaining 11 months. It’s easy to see when you look at just one contributed, but when it’s looking at the whole nonprofit with thousands of contributors, it can get masked.
I know one nonprofit that did it this way and booked their contribution revenue early. It gave them a false sense of how well they were doing financially. The tables turned when their subscriber base fell. They faced sharply declining revenues while still having the expenses of serving the subscriber base that had not yet reached their renewal period. They began to show some serious losses, which may not have been quite so bad, but were really a reflection of the flipside of prematurely recognizing revenue by using an improper basis of accounting.
So, if you happen to be on the board of a not for profit or see the financials for the not for profit that you donate to and you know that they face a similar situation where some donation are paid in advance or there are membership dues that cover a period, raise the question if you don’t see a liability account created for deferred contribution revenue. Nonprofits have revenue recognition issues just like for profit businesses and if not treated properly, you could have distorted view of the organization.
Jon Paul, MBA, CPA, CMC, CM&AA
President, Value Added Finance Resources
Bringing new insights on results and maximizing company value
Thank you, this is a concise article to help explain a change in dues recognition policy to our management and board.
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Thanks for this valuable input and your blog - it seems this will be a valuable resource for me on issues relative to private industry practice.
Melanie Jones, CPA
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Thank you for the article. Do you have a sample amortization schedule that can be used for membership dues revenue? Also, if a member cancels a subscription after a period (or fiscal) year has been closed, how do I recognize the cancellation?
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I usually build these custom- it depends on your dues structure. A simple one is if you have annual dues.
The first column would be the month. The next column would be the amount of dues paid that month. Then going across in columns would be the calendar months. In each month would be the monthly amortization. The last column would then be the unamortized balance.
The rows going down would be the calendar months as well.
So if you had dues of 12,000 paid in January for annual dues, you would show in the first row of data, January, 12,000, then 1,000 in each month for the amortization. If you were looking at the end of January, you would then have an unamortized balance of 11,000 at the far right.
The sum of the columns each month would be the dues revenues that you would recognize.
Whether they cancel before or after a fiscal year does not matter then. Since you are recognizing dues over time, if they cancel after a fiscal year ends, that is OK. You earned a portion of their dues during the fiscal year. The cancellation took place afterwards and is recognized at that point.
You could build a separate schedule for cancellations. Say if some had paid dues in July and then cancelled in January so you gave them 300 back on their 600 dues. In January you would take out 300 from dues for that person. You would also reduce the amortization for January to June for the 50 per month that is being recognized for the person in January to July.
This assumes you prorate dues and do not give someone a full cancellation. If you give full cancellations that is a different matter. Hopefully that is not the case.
Does this answer your question? What is your dues structure?
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This article is helpful. Could you clarify FASB Statement No.116 "Accounting for Contributions Received..." that seems to differ by stating, "that generally, contributions received are recognized as revenues in the period received at their fair values."?
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