Revenue recognition is a vital aspect of accounting that determines a company's earned income and when it should be included as revenue. For non-profit organizations, revenue recognition can be particularly complicated due to the multiple sources of income they deal with. Recent changes in accounting standards, such as ASUs 2014-09 and 2018, have created discussions among businesses about how and when to account for various revenue sources. This article focuses on non-profit income recognition, outlining the main challenges involved in the process and explaining the required procedures for revenue recognition according to the new models.

Non-profit organizations must adhere to specific principles when it comes to income recognition. Examining contracts with consumers, contribution scope, and return rights are just a few examples. The Financial Standards Board (FASB) provides guidance in ASU No. 2014-09 for calculating revenue from customer contracts. These accounting rules exclude donations, making non-profits believe that the changes will not affect their operations. However, non-profit organizations must establish and specify contracts with their consumers to determine if they earn income from them and account for it accordingly.

Non-profit organizations are mandated to define accounting standards' advice precisely in order to explain their contribution scope. They should determine if a specific income stream is an exchange or non-exchange based on the accounting standards' principles before determining if the rules apply. If an income stream is determined to be a swap, ASU 2014-09 must be followed. However, if income is received in the form of a donation instead of an exchange, ASU 2018-08 guidelines must be followed. Organizations must also understand how to handle transactions involving both exchange and non-exchange revenues in accordance with the rules to determine the precise extent of contributions and other income.

Non-profits must differentiate between conditional and unconditional donations. Conditional contributions have their revenue recognized after the criteria are fulfilled, as dictated by accounting rules. Non-profits must identify the obstacles to receiving conditional donations, as well as the rights of return associated with them, under ASU 2018-08 standards.

The new guidelines outline a five-step procedure for revenue recognition. Establishing contract revenue recognition requires extensive research. Contracts should be approved by both parties, and both sides should be dedicated to their responsibilities. This phase also defines the rights of each party in relation to the products or services provided during the exchange. The most challenging part of this process is figuring out which contracts are genuine and which are agreements with consumers. Co-operation agreements may sometimes seem more like partnerships than contracts because of this.

The process for determining the total cost of a transaction involves several steps. Firstly, the overall transaction price must be determined, which is the amount expected from exchanging specific products or services with customers. The new accounting model considers all factors owed to customers such as rebates, vouchers, discounts, and credits. Therefore, the final transaction price must include all these factors to arrive at a fair price. The likelihood of these factors is computed and utilized to lower or raise the overall transaction price before signing a contract.

Secondly, the cost allocation for contractual performance obligations is determined in relation to the transaction price. This involves allocating the entire transaction amount to the performance requirements where each performance requirement is priced separately. The process requires different pricing strategies such as the residual method, anticipated cost-plus margin, or modified market evaluation.

The third step involves recognizing revenue when a performance obligation is met. Businesses must meet several requirements throughout time to recognize income, such as the client receiving and using the company's advantages while money is being generated, the success of the organization resulting in a customer-controlled asset, and creating an asset with an alternate use and a right to payment for fulfilled performance commitments. Organizations that are not-for-profit must also consider existing warranties, return rights, and service obligations before recognizing income that has been received and performance obligations that have been fulfilled.

Implementing the new accounting model requires the involvement of accountants in planning and coordination for non-profit managers. It is crucial to educate other stakeholders in the company and examine existing processes before adopting revenue recognition standards. There are five steps in implementing the new accounting model, including compiling an inventory of all income sources, examining each contract made with customers, evaluating the software and data collection procedures, deciding on the implementation strategy, and educating key stakeholders about the standard modifications.

In conclusion, the accounting process of revenue recognition helps understand how a company earns and recognizes income. Non-profit organizations face difficulties with the process, and Accounting Standards Updates (ASUs) 2014-09 and 2018-08 guide revenue recognition. Non-profit principles such as the extent of the donation and the rights to returns are essential to consider when implementing revenue recognition.

Brian Bluhm, a certified public accountant, wrote an article in 2017 stressing the importance of the revenue recognition standard. This standard requires businesses to reevaluate their accounting practices and make adjustments accordingly. It establishes guidelines for how and when revenue should be recognized on the financial statements.

In 2018, the Financial Accounting Standards Board (FASB) released ASU No. 2018-08, aimed specifically at not-for-profit entities. This update addresses issues related to grants and contributions, and provides updated guidance on how to properly recognize revenue from these sources.

The original ASU, ASU 2014-09, pertains to revenue recognition for contracts with customers and is a significant update that requires businesses to recognize revenue as performance obligations are met. This standard was implemented to reduce confusion and provide consistency across industries.

Research has shown that ASC 606, the new revenue recognition model, has had a significant impact on the franchise industry and the way franchise fees are recognized. In addition, ASC 606 affects natural gas processors, who must now evaluate variable consideration and make estimates accordingly.

Not-for-profit entities must also pay attention to the new revenue recognition standard. The key change for these entities is the requirement to identify and allocate transaction price to performance obligations, which can be challenging. Proper implementation of the standard is crucial for accurate financial reporting.

In summary, the revenue recognition standard is an important aspect of accounting that businesses must consider. Updates and changes to the standard, such as the FASB's ASU 2018-08 and ASC 606, have a significant impact on various industries and require careful consideration and implementation to ensure accurate financial reporting.