FASB Topic ASC 606 is titled “Revenues from Contracts with Customers.” It was issued by the FASB (Financial Accounting Standards Board) as ASU (Accounting Standards Update) 2014-09 in May 2014 and applies to all US financial reporting entities. FASB is the organization that sets GAAP (Generally Accepted Accounting Principles) for all nonpublic entities in the US. The effective date of ASC 606 (after several pushbacks) was December 15, 2019 which was later again extended to December 15, 2020. ASC 606 is part of the FASB “Codification” which IS GAAP.
The Codification includes many rules-based standards that set forth specific guidance that leave no room for interpretation. In contrast ASC 606 is a principles-based standard that requires interpretation on how to implement the guidance contained in the standard. As a result it is arguably the most controversial standard issued by FASB because different interpretations have been made. Note that for internal use financial statements of an association the association is generally not required to apply this standard. However financial statements that are issued by a CPA at the audit, review, or compilation level are required to apply the standard, but may interpret how to apply the standard. Within the community association industry two divergent interpretations have evolved.
It should be pointed out that most CPA practitioners agree that a member may enter into a customer relationship with the association for services unrelated to assessments, such as fees charged for certain recreational activities, clubhouse rental, RV storage rental, etc. The point of disagreement is with respect to assessments, and generally only with respect to reserve assessments.
One group has interpreted ASC 606 to mean that association members are “customers” as defined in the standard and the declaration is the “contract.” Applying this interpretation of the standard means that assessments received by the association may be recognized as revenues only when the “performance obligation” is complete. For operating assessments this doesn’t represent any change from prior practice. For reserve assessments it means that revenues may be recognized only when reserve funds are expended. This means that reserve assessments received that have not yet been expended (what used to be reported as the reserve fund balance) are now reported as a liability on the association’s balance sheet. This is known as the “contract liability” approach. This impact on reserves is generally the only portion of this interpretation to which people object. This group generally maintain that this position is GAAP and everyone else is wrong.
A second group opposes the contract liability approach and generally offers one of two theories to support that position. The “stand ready” position was set forth in a FASB Staff Paper in January 2015 and uses an example of a fitness center that receives dues (similar to assessments) and by virtue of its contract with its members “stands ready” to always keep the facility in good condition by making repairs as necessary, often years in the future. This group points out that the example is virtually identical to a community association and that the “Stand Ready Performance Obligation” is the correct interpretation. This avoids the contract liability approach by allowing reserve assessment revenues to continue being recognized in the same manner used for the past 30 plus years.
The other theory offered by this group effectively states that association members are not “customers” as defined in ASC 606, that the association is merely the alter ego of the members and members cannot be both the “vendor” (association) and “customer” (member) in the same transaction. There are several variations of this position relating to definitions of customer and contract. A key aspect of this approach is that there is no choice by the member to either participate in the transaction or not participate – they are bound by a legal, recorded document that requires them to support the association. There is no comparable requirement in any other industry that makes participation in a transaction mandatory.
Another interpretation, a variation on the above position, is that the declaration is not a contract with customers but is a “collaboration agreement” that defines the actions that each party (association and members) are obligated to perform in “collaboration” to achieve a common goal - operation and maintenance of the common area property of the association. “Collaboration Agreements” are separately discussed in FASB Topic 808. That topic specifically describes arrangements where monies are transferred from one party to another to achieve a common goal that benefits both parties and is specific in stating that in a collaboration arrangement no customer relationship exists, therefor ASC 606 does not apply.
Visit website https://asc606-for-ciras.info/ to see a full discussion of this topic and all original FASB documents available for download. You can also see the survey results of the CAI webinar discussion on this topic that occurred February 19, 2020. The differing opinions are on full display.
Appreciate this one fact – despite the passionate arguments both groups make to support their position, there is no agreement on this subject, therefor there is no “general acceptance.” That means that neither of the opposing groups can claim to be “right” or that their position is “GAAP.” Their position simply represents their interpretation, nothing more.
Our CPA firm has taken the position (our position paper is available on the website indicated above) that we don’t decide for our clients, we accept whatever position THEY decide to adopt. We represent association clients in more than 30 states and many of our clients have CPAs within the management company, on the board of directors, or on the finance committee. In other words, the majority of our clients do have the Skills, Knowledge, and Experience (SKE) to understand the standard and to make a decision regarding how their association should interpret and implement it. We provide the information to them so that they can make an informed decision. And, no matter what decision they make, we believe it is in accordance with GAAP, at least until a formal clarification is issued by FASB or until “general acceptance” occurs. Our discussion with the individual at FASB responsible for the ASC 606 project informs us not to expect any clarification coming from FASB. Observing the strong opinions of many CPAs tells us that agreement between the opposing positions is not likely given the divergence that exists today.
As the primary technical author of the accounting and audit guide used by the majority of CPAs who work in the community association industry I have developed a wide network of CPA firms nationwide over the last three decades. Anecdotal information I have received informally from this group of firms over the last year and a half indicate to me that there are regional differences in interpretations of ASC 606. Florida appears to have a larger group adopting the contract liability approach versus other areas of the country where a majority appear to take the opposite position. I suspect the conversation on this topic will continue. We haven’t heard the last word on this subject.
