Revenue Recognition and the Non-Profit

Revenue recognition has been a hot topic in the accounting world for what seems like a decade now.  In various contract arrangements and sales, it is possible to manipulate earnings pretty dramatically through the timing of recording revenues.

Fortunately, when you work with non-profit organizations, a lot of that hubbub can go largely ignored.  Non-profits deal with (and manipulate) revenue in their own manner, primarily through the application of FASB 116 and 117 or under the codification 958-605.

As with anything, there are complicated issues in non-profit revenue recognition, especially when dealing with split interest agreements, but there is a concept that underlies all of the standards that is easy to grasp.  And once a person knows what to expect, they can move forward from there.

Exchange vs. Non-Exchange Transactions

Arguably, the most important step in recognizing revenue in a non-profit organization is determining whether or not the transaction is an exchange or a non-exchange transaction.

Exchange transactions are very similar to a sale in the for profit world.  You provide a product or service in exchange for a fee or revenue.  The revenues are recognized when they are earned and realizable.  Many program service revenues, like a concert or clinical services, fall in this category.

Earned is generally defined as the exchange has occurred and realizable means that you are likely to be paid for it.

An example would be in the case of a mental health organization where a clinician meets with a client for 30 minutes.  The exchange has occurred, so the revenue can be recorded.  The amount realizable, however, has to be limited to the extent of the insurance contract rate.  So, if your rate is $45 for a half hour, but insurance or the state only allows $36, then you would record net revenue of $36.  The receivable for that service can come from a combination of sources and would be analyzed for collectibility in a separate accounting task.

Pretty easy, right?  Okay, not so easy, but at least familiar to those who work in for profit industries.

Non-exchange transactions are where things get goofy.  Most contributions and support are considered to be non-exchange transactions.  Basically, the person contributing the money gets no service or product in return for giving you these funds.

I can hear Executive Director's and accountants and program manager's everywhere saying, "Wait a minute!  We provide a service!  We are making the community a better place!  Plus, in the case of that one grant from United Way, we have to spend it on a specific program, so that is an exchange."

I hear you, but that is not exactly the right way to look at it.  The fact is that United Way could give you money and tell you exactly how they want you to spend it, but United Way is not the one receiving a benefit.  They have restricted the use of the funds, but they will get no exchange in return for giving you this money.

And because there is no exchange, GAAP (in the U.S.) says you need to record receipt of the funds immediately upon notification that you received it.  And that is where people get grouchy around non-profit accounting.

Most grants are applied for and awarded for future fiscal years or projects. And when you record the revenue upon receipt (notification of the award), the expenses are not there to match it.  This is going to cause a revenue/expense mismatch in your financial reporting that is non-intuitive to those who work primarily in for profit accounting models.

The required handling of this mismatch is to show that award or contribution as a temporarily restricted revenue.  This means that you record the grant, but you do it in a different bucket.  You say, we got this money this year, but it can not be used until either time or purpose restrictions have been satisfied.

If the grant is used in the following period in the manner the donor required, then those funds would be released from restriction to match with the expenses of the program.

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This particular post is not meant to be a comprehensive explanation of how we show all these transactions (I hope to cover that in more detail and smaller chunks at a later time) - it is merely an introduction to the concepts needed to record revenue in a non-profit.  As, such here is a quick review:

Non-exchange revenues:  When you receive revenue for which the grantor or contributor receives no direct services or products.   Recorded upon notification.

Temporarily restricted:  A way of recording non-exchange revenue to show that it relates to a future period and/or a specific purpose.  Note:  ONLY  a donor can impose a restriction.  If a board or management wishes to set aside funds for a future purpose, that is generally a designation and remains in the unrestricted bucket.

Release of restrictions:  The moving of a temporarily restricted item to unrestricted revenue to match the expenses and satisfaction of the restriction.  Note:  Expenses are always unrestricted.

As I mentioned above, this gets even more complicated when dealing with split-interest agreements and reimbursement grants, but that is beyond the scope of this post.  If you can approach the influx of funds with the question of whether or not they are exchange or non-exchange and if non-exchange, whether or not the funds are unrestricted or restricted, you will be on the right path to correct revenue recognition procedures.

Write. It. Down.

One of the very first blogs I ever posted was 10 Rules to Surviving Your First Year in Public Accounting.  I wrote it six years ago and while I am not positive it is still relevant to a first year in public accounting, I do know there are things in there that are still relevant to me - a 12th year CPA.

** Attribution for Picture is listed below.

The part that I am currently thinking about specifically is found in rules 8 and 10 - write it down.  Write it down immediately.

The idea that you will remember things at a later date without making a note is one that I have completely given up on as I get older.  But, now and again, I still think I can do it.  Remember what I was thinking.  I am usually wrong.

Other than documenting events and thoughts as they occur, physically writing things down has also been very helpful in strategic planning and goal setting.  If you think about what you really want out of life - tangible or not - and you write it down, I believe that you are more likely to make it happen.

I don't remember where I read this, but I once read that it takes eighteen months to change your life. Google that phrase and note that all the first page items seem to start with "18 months ago, I..."   If you decide that you want something different, you can work towards making different happen in 18 months!  This is enough time to allow you to meet your current responsibilities and at the same time shift towards your new direction.

If you are honest with yourself about your weaknesses during this planning period, you can use the time to shore up those weaknesses and to begin to showcase your strengths.

By giving yourself a reasonable time frame combined with making a plan (writing it down) you can stop thinking I have to change and start the process of making the change.

I know it worked for me:  six and a half years ago, I decided I was going to be my own boss.  I am now in my fifth year of running Romano P.C.

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Are you sad that this post is not about accounting today?  Actually, it is - it is about managing your career  and yourself to get a great return on life.  Which is especially important for accountants.

**The picture used above is from an article that relates to the title of the post - Just Write It Down And Take Control Of Your Money.  I recommend reading this article for a look into writing things down and personal finances.

How Much Should I Pay for a Bookkeeper? Redux

Almost two and a half years ago, I wrote a post called How Much Should You Pay For Bookkeeping? and it is consistently the most viewed post on this blog.  If I was a blogging genius, I couldn't have named it any better as traffic comes here from that very search term.  I am not a blogging genius - I am just a gal who likes to write and sometimes I indulge that need through this professional outlet.

Anyway, I thought I would come back to this subject today.  That post is longer than I thought and not everyone has that kind of time.  Unfortunately, even two and a half years later - the answer is no easier.  More goes into setting a billing rate than just trying to make as much money as possible.

For those who don't like to contemplate things like I do, here's the short answer:  You get what you pay for.  And sometimes, you pay too much for what you get.

For the rest of us, I am reminded of an illustrative conversation I just had with a client regarding maximum allowable rates on grant agreements.

The grantor will let them source out a deliverable as long the source does not exceed $X per hour.  And they will not allow you to pay a premium from another source over that amount.  My rate is over that amount.

So, like all good accounting consultants, I batted around a few ideas with the client on how to bill to this grant if I was going to help with this deliverable.

In the end, we decided not to do it.  And here is why:

1 - It isn't fair to my other clients.  I bill everyone the same.  It is always nice to get a deal, but it is never nice to be the one paying more - so it is better to be consistent.

2 - My billing rate is a stretch for most when they hire me.  And before too long, they know they are getting more than they even knew to expect.  This isn't hubris - often an organization is going from a bookkeeper to a full service accounting system and the change is valuable.

This client I was working with is still going to have me help with the deliverable, we just will put that part of the grant money towards the salary of the employee I will be working with.  She gets the value.

3 - My actual rate of pay works out to $10 less than $X.  Trust me, I do the math.

The reason I set my rate where I do is because I do aspects of bookkeeping (that you can get for $35 an hour) all the way up through CFO-ing (that would cost you $150 per hour, or more), so I am in a blended area between that.

I am also a CPA and I have extensive experience in one industry, both of which gives me a premium in the marketplace.  One thing I know to be true - if you bill too low, you are treated accordingly.  So, you have to pay attention to the marketplace.  (And if you don't think that is true - tell me, is there a price that you think is too little to pay for a hotel in New York City?  I mean really, if you get a hotel there for under $100, you know there are going to be bed bugs.)

And finally, I think I have a better working relationship with my clients because I don't bill for travel time, or for random phone calls (I want you to tell me that stuff is going to hell in a hand basket before it is too late), or even for a lot of quick e-mail exchanges.  And if I am only visiting a Board once a year, I don't charge for that either.

I don't even charge for random calls and e-mails from the auditor.  My clock really starts when I open Excel and start putting something together or when we spend an hour reviewing a tangible item.  Or when I walk in the door to work for you and only for you.

I could charge a lower rate and I could track all that stuff and I could spend two days putting together a monthly invoice and my client could spend two hours reviewing it and begrudgingly pay it and I would probably make more money, but life is too short for me to run my business that way.

I know how much I work.  And I do track a lot of that stuff that I mentioned above, even though I don't bill it and I know that my actual working rate comes out to $25 less per hour than I bill for my major clients.  And knowing all that, I know that my rate can't change for one strange grant request.

And my client, who is smart, knows that too.  (I try to only work with smart people.)

So when you are trying to figure out how much you are willing to pay for a bookkeeper, maybe some of the points I mention above should be in your consideration.  Billing rates are not really apples to apples and you should not take a number at straight face value.

Speaking of face value, since it is your finances - please meet them before hiring them to make sure you are not paying too much for what you are getting.