Catch or No Catch: A Guide to Non-profit Revenue Recognition and the NFL

As we noted above, your journey to greater financial understanding starts with the NFL. Specifically, it starts by understanding (or trying to understand) the “catch rule.” And once you understand the issues with this rule, you are closer to understanding nonprofit revenue recognition and the unique challenges that it poses.

So, why is the catch rule problematic? Well, it all started with the NFL wanting to clarify what was (and what was not) a legal catch. And the modern saga of “catch or no catch” started in 1999 with Bert Emanuel.

If you don’t remember, Emanuel was playing for the Tampa Bay Buccaneers against the St. Louis Rams. With a minute left in the game and the Rams winning, Emanuel caught a pass from Shaun King and clutched the ball to his chest.

It was ruled a catch…at first. Later, it was ruled that he didn’t legally catch the ball because he used the ground to make the catch. While Emanuel was disappointed at the time, he had no way of knowing that he just helped kick off over two decades of NFL rules debates.

The NFL kept changing the rules and trying to make things clearer. Unfortunately, changing vocabulary (terminology like “process of the catch” morphed into the more perplexing “becoming a runner with the ball”) and seemingly inconsistent rulings (like with Calvin Johnson in 2010 and Dez Bryant in 2015) just made things more confusing than ever before.

Now you know more about the controversies surrounding the NFL’s catch rule. Before you can understand how this helps us understand nonprofit revenue recognition, we need to answer a more basic question: what is this recognition, and what is it all about?

On the most basic level, this type of recognition is straightforward enough. As the name implies, “revenue recognition” is the method by which a financial authority (in this case, the Financial Accounting Standards Board, “FASB”) defines how and when revenue is recognizable.

But things get more complicated when you are running a nonprofit. For example,  a nonprofit receives remuneration in a variety of ways that range from the contribution of cash, checks, stocks, goods, services, major grants to program service fees. It was already confusing figuring out which contributions were considered revenue and in some people’s eyes, things became even more confusing after FASB “simplified” the rules!

Now you know a bit more about the NFL catch rule controversy and the difficulties of properly recognizing revenue. Now, let’s get to the big question: just what the heck does one have to do with the other?

Before we answer the question, fun fact, the NFL was once considered a nonprofit organization. That is because the organization enjoyed a tax-exempt status since 1947 and was frequently criticized over how much money the NFL made. Eventually, the organization gave up its tax-exempt status back in 2015, so this was all much more recent than many fans realize.

Ok, so we get the NFL catch rule and revenue recognition don’t really have any clear similarities, but we figured this would be a fun way to discuss revenue recognition.  If we were forced to connect the two then we could argue the ongoing “catch vs no catch” debates have led to fans speculating about what might be a better system. And one of the suggestions a small group of fans came up with is that there should be a decision tree that referees could follow. This would go a long way towards eliminating confusion and helping fans and players alike sit back and enjoy the game.

And that leads us to some good news: while the NFL doesn’t yet have a decision tree to help them understand what is a fair catch and what is not, FASB developed a decision tree to help navigate the confusing world of revenue recognition for nonprofit organizations.

Unfortunately, methods of recognizing revenue have been hampered by subjective standards over the years. And if you ask the majority of football fans, they’d say the same to be true about the NFL’s catch rules!

Fortunately, FASB’s belief is that the standards updated (Accounting Standards Update 2018-08) make the decision very straightforward, eliminate subjectivity and create comparability between nonprofits. Step one of the decision tree starts with determining whether a contribution to your nonprofit counts as reciprocal or not.

In the eyes of the FASB, something is reciprocal if the resource provider receives something of commensurate value. For example, it’s not uncommon for nonprofits to receive a donation from an individual for the construction of a building in exchange for recognition in the nonprofit’s social media and tickets to the nonprofit’s annual dinner.  Since the value of the social media recognition and annual dinner tickets received by the resource provider (the individual donor) are not commensurate to the value of the donation this transaction would be considered nonreciprocal.      

To put this in NFL terms, this would definitely be a catch. But it’s important that we know how to determine whether or not this was a traditional pass or a shovel pass.

The next step is to figure out whether a contribution is conditional or unconditional. And this step is more complex than you might think!

What makes a contribution conditional? Generally speaking, it is conditional if the donor has some sort of barrier that must be overcome before entitlement is transferred to the nonprofit and a right of return/release exists. In other words, contributions that you only get when certain conditions are met are…well…conditional!

What if there are no barriers for you to receive and use the money? In that case, the contribution in question is unconditional.

Unconditional contributions would count as revenue right away. Meanwhile, a conditional contribution only counts as revenue after the conditions are met. 

In football terms, this is very similar to the controversies surrounding the catch rule. Some referees will see a catch as complete and others will not. Unfortunately, subjectivity is a part of nonprofits dealing with the FASB just like it is part of players dealing with different referees!

The final step in our decision tree is relatively simple. And this step involves determining whether a contribution you have received has a donor-imposed restriction or not.

When funds are unrestricted, that means your nonprofit is free to use them however you want to (assuming “however you want to” falls within the mission of your nonprofit). You do not have to abide by any restrictions or requests on the part of the contributor.

Meanwhile, restricted contributions are those where a donor requires the funds to be used for a very specific purpose. Additionally, these restrictions may require that the money be used for a particular purpose, used within a certain amount of time, or used both for a particular purpose and within a certain amount of time.

All such contributions count as revenue, but accurately classifying contributions as restricted can be very difficult. When in doubt, we recommend you speak with a trusted advisor.

In football terms, these kinds of contributions are most definitely catches. But just as it can be difficult to determine the exact ball placement, it can be difficult to properly determine whether a contribution is with or without restriction.

As you can tell, the finer points of revenue recognition and nonprofit paperwork can sometimes make your head spin. And at this point, you would be forgiven if you had one major, burning question: why is all of this so important to know?

Nonprofits must be able to adequately and accurately track contributions and grants to ensure proper usage of the donor funds, attract potential donors, and stay in the good graces of the dreaded IRS.  

Donors and potential donors are sophisticated and generally want to know exactly what to expect before they give anything to your nonprofit. And to maximize contributions, you need to streamline the process to retain existing donors, attract potential donors, and ensure all conditions and restrictions are properly met.

Keep in mind that revenue recognition is notoriously difficult to understand. But we’re here to guide you on the first steps of this long and complex journey.

Are you still confused about recognizing revenue and the challenges your nonprofit may face? Keep reading to discover additional info your organization may need!

In June 2018,  FASB adopted the new revenue recognition standard related to contributions received. The purpose of these standards was to clarify confusion over when and how to count a contribution as revenue. But much like the changing rules surrounding catches in the NFL, this “clarification” just made things more confusing for many nonprofits.

It doesn’t help that many nonprofits have been in operation long before these new rules went into place. Because of this, those who run nonprofits had to deal with major changes in how they record donations.

Once again, we recommend that you seek out a trusted advisor if there is any confusion over contributions. Such an advisor helps you avoid running afoul with donors and the IRS. 

Earlier, we reviewed some important nonprofit terms when it comes to receiving contributions. But if you need a refresher, or if your head is still spinning, we have a breakdown of important revenue terms you need to know.

For example, contributions include any grants, gifts, or donations that someone gives to your nonprofit. And to qualify as a contribution, the donation you receive must be reciprocal.

Reciprocal transactions, as we reviewed earlier, are transactions in which each party gives the other something of commensurate value. The most common version of this involves someone offering the nonprofit money for goods and services.

We have touched on a couple of instances where your nonprofit could benefit from a good trusted advisor. But do you fully understand everything that the right advisor can do for you?

The best advisors can help you understand the rules surrounding recognizing contribution within FASB guidelines. Additionally, the same advisor can help structure a contribution process as well as ensure compliance with the complexities of nonprofit tax within the IRS standards.

Additionally, a good advisor can help you with additional accounting needs you may have. With such an advisor, you never have to worry about “catch or no catch.” Instead, you can always count on them helping you make the touchdown!

Now you know how to start the conversation about nonprofit revenue recognition and its connections to the NFL. But do you know who can help you continue to navigate this strange and complex world in the future?

Here at SSC, we specialize in the kind of financial advice that can take your nonprofit to the next level. To discover how we can help transform your business, simply contact us today!