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New Revenue Recognition Standards Could Put Private Club Initiation Fees in a Hazard

October 3, 2019 By PWB CPAs

By Bryan A. Ekern, CPA

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.

Filed Under: Accounting & Auditing, Audit

Employers: Avoid These Mistakes on Your Form 5500 Filing

September 5, 2019 By PWB CPAs

By Bryan A. Ekern, CPA

For most Minnesotans, summer is the season of cabin weekends, meals enjoyed al fresco, and garden harvests. For employee benefit plan auditors like myself, it’s also the season of IRS Form 5500 filings. [Read more…]

Filed Under: Accounting & Auditing, Audit

What Do the New Revenue Recognition Rules Mean for Franchisors?

February 21, 2019 By PWB CPAs

By Bryan A. Ekern, CPA

As usual, there’s much to think about at the start of a new year. If you’re a franchisor, revenue recognition should be top of mind as you plan for 2019. That’s because on January 1, 2019, the Financial Accounting Standards Board’s new revenue recognition rules went into effect for private companies (the rules went into effect for public companies on January 1, 2018). Technically known as “FASB ASC Topic 606, Revenue from Contracts with Customers,” these new rules could significantly alter how you recognize initial franchise fees.

What changes can franchisors expect?

The previous FASB rules required franchisors to recognize initial franchise fees upon substantial performance of their obligations to the franchisee, which generally resulted in recognition upon the opening of the unit. The new rules, however, may require franchisors to recognize these fees over the term of the franchise agreement, or when certain performance obligations are met. For instance, instead of recognizing a $50,000 increase in revenue at a new store’s opening, the franchisor must now recognize the amount over a period of what could potentially be several years.

What about performance obligations?

A performance obligation is a contracted agreement to provide a distinct good or service to a customer. In the event of a franchise unit opening, performance obligations might include site selection, equipment, manuals, training, and, of course, the use of the franchisor’s intellectual property (e.g., its trade name).

Theoretically, a franchisor could recognize a portion of the initial franchise fee upon the completion of each activity—in accordance with the franchise agreement, of course. But this is where it gets tricky. Other than equipment, performance obligations related to opening a unit will not likely be considered distinct. This is because they provide little or no benefit without intellectual property.

What should you do now?

First, be sure you understand the aforementioned FASB rules. Then, it’s a good idea to review your contracts to identify any performance obligations related to the initial opening of a unit. Next, determine which performance obligations are distinct and when each distinct performance obligation is typically completed. Generally, performance obligations are either completed at a point in time or over the course of time, the latter of which will likely be the case if the performance obligation involves the use of intellectual property.

Act now to start 2019 off on the right foot.

As you can see, the new revenue recognition rules could dramatically change the way you recognize your initial franchisee fees. Taking time to get acquainted with the rules and the details of your contracts as soon as possible could help you avoid unnecessary process changes and headaches. If you have questions about how you might be impacted, please give us a call, and we’ll help you sort it out.

Contact your PWB advisor today.

763-550-1100

Filed Under: Audit, Business Tax

New Study Reveals Costs, Means and Ways to Stop Fraud

May 29, 2018 By PWB CPAs

Would you leave the front door unlocked to your business or not-for-profit organization?

Of course not. That would give thieves easy access to your assets. Yet a surprising number of organizations don’t have strong antifraud controls in place to protect against dishonest people inside their organizations. And theft from insiders — also referred to as “occupational fraud” — can be costly. [Read more…]

Filed Under: Audit

Making the Most of Year-End Physical Inventory Counts

December 21, 2015 By PWB

For retailers, manufacturers and many other businesses, a significant amount of working capital is tied up in inventory. But how accurate is the amount reported on the balance sheet? To best answer that question, a physical count of raw materials, work-in-progress and finished goods is essential at year end. For calendar-year entities, your year end is fast approaching on December 31.

[Read more…]

Filed Under: Audit, Business Advisory Consulting, Business Tax

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Recent Blog Posts

  • Plan For 2020 To Be Your Best Year Yet! December 10, 2019
  • The Truth About Equity Compensation: Employee Stock Option Plans November 20, 2019
  • Financial Statement Preparation, Compilation, Review, or Audit: Which Is Right for You? October 28, 2019
  • New Revenue Recognition Standards Could Put Private Club Initiation Fees in a Hazard October 3, 2019

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