Revenue Recognition: New Accounting Standard
A new accounting standard has been issued by the Financial Accounting Standards Board (FASB) that will impact how entities, including homeowners associations, condominiums and housing cooperatives (Common Interest Realty Associations or CIRAs), recognize revenue in their financial statements. The standard is effective for December 31, 2019 calendar year-ends and fiscal 2020 year-ends.
Under the current standard, revenues are recognized when earned, not necessarily when received or paid. Under the new standard, there is a five-step approach to determining when revenue should be recognized:
- Identify the contract with the customer.
- Identify the separate performance obligations in the contract.
- Determine the transaction price.
- Allocate the transaction price to the separate performance obligations.
- Recognize revenue when (or as) each performance obligation is satisfied.
With the exception of two areas, CIRAs will continue to recognize assessments in the same manner. The CIRA has a right to collect assessments from its members in return for providing services (contract), such as common area maintenance, management, and general repairs and replacements of common property (performance obligations). The members are assessed based on the annual budget (transaction price). Most of the services provided by the CIRA can be bundled into one performance obligation, which would satisfy Step 4 above. For Step 5, the CIRA would continue to recognize the revenue as the members are assessed.
The two areas where changes exist between the current accounting standard and the new accounting standard are uncollectable assessments and special or further assessments. CIRAs and their management agents will need to apply new procedures to these two areas.
Uncollectable Assessments
In Step 1 above, a valid contract does not exist if the revenue is not collectable. Therefore, CIRAs should not recognize revenue from a member if it is determined that the assessment from the member is uncollectable. The CIRA should evaluate at the beginning of the year if there are any members whose assessments are not collectable. The CIRA should record a contra-asset account and a contra-revenue account for the current period assessments that are uncollectable and should maintain a schedule of the balances in these accounts. If these members subsequently pay, the CIRA should recognize the revenue. This procedure does not eliminate the need to evaluate the allowance for doubtful assessments.
Special or Further Assessments
Special or further assessments need to be analyzed carefully in connection with Steps 4 and 5 above. CIRAs may levy special or further assessments for a variety of reasons, such as to fund operating deficits or replacement reserve shortfalls, to fund specific replacement reserve projects, or to fund the repayment of loans. In each of these cases, the CIRA needs to identify the performance obligation and determine when the performance obligation is met before recognizing revenue. For example, if the purpose of the special assessment is to fund an operating deficit, the special assessment would be recognized when billed to the members. If the purpose of the special assessment is to fund a specific replacement reserve project, the special assessment would need to be recognized as the work is completed, and any special assessment payments received in advance would be recorded as a liability (deferred revenue) until recognized as revenue as the project is completed. In addition, the CIRA should continue to evaluate the collectability of the special or further assessment before recognizing the revenue.
New guidance is expected on implementing this accounting standard. Our firm is available to help answer questions as you navigate the changes related to this new accounting standard.
