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Business and Policy Areas
Business and Policy Areas
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FASB Issues Revenue Recognition Standard

May 28, 2014

On May 28, the Financial Accounting Standards Board (FASB) and the International Accounting Standards Board (IASB) issued their converged standard on the recognition of revenue from contracts with customers. The project spanned more than five years and the Boards received more than 1,500 comment letters in response to their work.

The standard affects all entities (public, nonpublic, and not-for-profit) that report under FASB or IASB standards. It applies to contracts entered into with customers that result in a transfer of goods or services or a transfer of nonfinancial assets, unless those contracts are within the scope of other standards (e.g., insurance contracts or lease contracts). The core principle of the standard is for organizations to recognize revenue in a way that depicts the transfer of goods or services to customers in amounts that reflect the consideration (payment) to which the company expects to be entitled.

The standard also will result in enhanced disclosures about revenue, provide guidance for transactions that were not previously addressed comprehensively (e.g., service revenue and contract modifications) and improve guidance for multiple-element arrangements. The overall objective of the new disclosures is to allow users to understand the nature, amount, timing, and uncertainty of revenue and cash flows from contracts with customers. Certain practical expedients are provided with regard to the disclosure requirements, including the exclusion of certain disclosures for contracts with durations of one year or less.

The standard will be effective for public companies (including not-for-profit organizations that are conduit bond obligors or that have other publicly traded debt) for fiscal years beginning after December 15, 2016 (FY18 for most colleges and universities). Nonpublic companies must apply the standard for fiscal years beginning after December 15, 2017 (FY19).

Impact on Higher Education

The impact of the new standard on independent higher education institutions is not expected to be significant. Many of the contracts that institutions enter into are relatively short-term, such as those with students for tuition and fees. In addition, many sponsored research agreements may not be considered contracts with customers. The standard defines a customer as "a party that has contracted with a company to obtain a good or service that is an output of the company's ordinary activities in exchange for consideration." It states that the guidance in the standard applies only if the counterparty to the contract is a customer. It goes on to say that a counterparty to the contract would not be a customer if, for example, the counterparty contracted with the entity to participate in an activity or process in which the parties share in the risks and benefits that result from the activity or process (such as in a collaboration arrangement) rather than to obtain the output of the entity's ordinary activities. This is often the case with sponsored research agreements. Grants from governmental entities (and other sponsors) are typically arrangements under which funds are provided to the institution to fulfill mutually agreeable goals that are in keeping with the institution's mission. The objective of these arrangements is the performance of the research, not the creation of an output with commercial value.

It will take some time to fully digest the entire contents of the new standard (just over 700 pages in length) and its implications to higher education. NACUBO will be reviewing the standard, assisting an AICPA committee with implementation guidance, and providing independent institutions with additional guidance as deemed necessary. More information about the standard can be accessed on FASB's Web site. In addition, on Thursday, June 5 at 10:00 a.m. EDT, FASB and IASB will host a one-hour joint webcast, IN FOCUS: Revenue from Contracts with Customers, which will provide a high-level overview of the new standard with the opportunity for participants to submit questions. Those interested in participating must register in advance. 

Contact

Sue Menditto
Director, Accounting Policy
202.861.2542
E-mail