Nearly every private club in the U.S. has an established process for admitting new members. Some of these processes have been in place for decades. But now, thanks to the Financial Accounting Standards Board’s (FASB’s) new revenue recognition guidance, known officially as Accounting Standards Update No. 2014-19, Revenue from Contracts with Customers (Topic 606), private clubs may have to change their member-admitting processes.
The new revenue recognition guidance applies to annual reporting periods beginning after December 15, 2018. Generally speaking, it provides an updated, more robust framework for recognizing revenue from contracts with customers, and is meant to streamline the preparation and comparability of financial statements across different entity types and industries. Because the new guidance applies to contracts with customers, it may significantly impact how member-owned private clubs, as well as privately owned clubs, recognize revenue—and admit new members.
To comply, entities must follow a five-step process for determining when and how much revenue to recognize. Here’s an example of how private clubs might apply the five-step process when admitting a new member:
Step 1: Identify the contract with a customer.
This is the contract between the member and the club outlining the member’s access to the club’s facilities.
Step 2: Identify the performance obligations in the contract.
The performance obligation, in this case, is for the club to provide access to club facilities. Club management will need to determine if there are other performance obligations that are distinct and separately identifiable from providing access to the facilities.
Step 3: Determine the transaction price.
The transaction price is the amount of consideration the club receives in exchange for transferring the goods or services (i.e., access to its facilities) to the customer (i.e., member). When admitting a new member, this would typically be an initiation fee and monthly dues.
Step 4: Allocate the transaction price to the performance obligations in the contract.
A club should allocate the transaction price (i.e., initiation fee and monthly dues) to the performance obligations identified in Step 2. The club should base the allocations on the amount of consideration it expects to be entitled to in exchange for satisfying each performance obligation.
Step 5: Recognize revenue when (or as) the entity satisfies a performance obligation.
A performance obligation is satisfied when a club transfers promised goods or services to a member. A good or service is transferred when (or as) the customer obtains control of that good or service. Most clubs bill their members monthly for access to the club; the dues should be recognized monthly. When and how much revenue to recognize from initiation fees will depend on the club’s identification of additional performance obligations in Step 2 and when those performance obligations are satisfied.
What should you do to avoid a potential hazard?
A good first step is to review your club’s membership agreements and by-laws to determine how the new revenue recognition guidance applies. Keep in mind: the changes from this new guidance could result in drastic changes to your club’s current revenue recognition policies. It’s wise to start this process in advance of year-end to avoid possible adjustments during the audit and tax preparation process. PWB’s experts are available to answer any questions you may have about the new guidance or to help you navigate this change.
