FASB Update - Revenue Recognition Guidance for Grants and Contracts Impacting Nonprofits

In June 2018, the Financial Accounting Standards Board (FASB) issued Accounting Standards Update (ASU) No. 2018-08, Clarifying the Scope and the Accounting Guidance for Contributions Received and Contributions Made.

This standard is intended to address questions stemming from FASB ASU No. 2014-09, Revenue from Contracts with Customers, regarding its implications for recognizing revenue from grants and contracts to not-for-profit organizations. Specifically, do not-for-profit grants and contracts fit the definition of a contract with a customer, such that the new revenue standard would apply? Or are they more appropriately classified as contributions, which would exclude them from the scope of ASU 2014-09 and instead require the application of contribution guidance?

This question raised the disparity of practice in the way nonprofit organizations classify grants and contracts from federal, state and local governments versus private funders such as foundations.

The primary goal of ASU 2018-08 is to provide consistent recording of grant revenue regardless if the funding source is government or private.

Historically, most nonprofits reported government funding as an exchange transaction, meaning each party directly receives a benefit. The argument was that the resource provider (the government agency) was synonymous with the general public. The new ASU 2018-08 explicitly states that societal benefit is not considered a direct benefit to the government agency. So what does this mean? In future, many government grants will most likely be accounted for as “conditional contributions” as opposed to “exchange transactions”.

Beginning in 2019, nonprofits who issue financial statements in accordance with U.S. Generally Accepted Accounting Principles will be required to apply FASB’s new revenue recognition standards.

Stay tuned for further guidance from your Whittlesey Advisors.