Clarifying Accounting for Contributions Received and Contributions Made
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, which amends the Accounting Standards Codification (ASC) Topic 958-605.
Commencing with fiscal years beginning in 2019, nonprofits who issue financial statements in accordance with U.S. Generally Accepted Accounting Principles will be required to apply this new standard.
After the issuance of FASB ASU No. 2014-09, Revenue from Contracts with Customers (ASC Topic 606), questions arose regarding its implications to recognizing revenue from grants and contracts to not-for-profit organizations. Specifically, do 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 government agencies versus private funders such as foundations.
The primary goal of ASU 2018-08 is to clarify existing guidance to address these diversities in practice.
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 the future, many government grants will most likely be accounted for as “conditional contributions” as opposed to “exchange transactions.”
This article covers:
- Step 1: Distinguishing an exchange transaction from a contribution
- Step 2: Determining if a contribution is conditional or unconditional
- Step 3: Determining if an unconditional contribution is restricted or unrestricted
- Understanding disclosure requirements
- Understanding effective dates and transition requirements.
Step 1: Exchange Transaction vs. Contribution
The basic approach to distinguishing between an exchange transaction and a contribution remains essentially unchanged. You must evaluate whether the resource provider (i.e., funder such as a government agency, foundation, or corporation) is receiving commensurate value in return for the resources transferred. In other words, is the transaction reciprocal in nature, or nonreciprocal.
Reciprocal = Exchange (FASB ASC Topic 606)
Nonreciprocal = Contribution (FASB ASC 958-605)
To aid in ensuring this evaluation is applied on a more consistent basis, ASU 2018-08 adds the following guidance:
- Societal benefit achieved as a result of the grant is NOT equivalent to commensurate value received by the resource provider. For example, if a state or federal grant is intended to benefit the general public (and not the government agency), the grant is considered a contribution.
- Execution of a resource provider’s mission or the positive sentiment from acting as a donor is not equivalent to commensurate value. Determining whether a transaction is an exchange should focus on whether reciprocal benefits flow between two parties to an agreement and not on the resource provider’s role, mission, or obligation.
- The type of resource provider does not dictate whether a transfer is accounted for as an exchange transaction or a contribution. Regardless of whether a grant or contract is from a government agency, a foundation, a corporation, or another entity does not bear on the determination of whether a transfer is an exchange or contribution.
- Reiterates that the terminology used for the transfer – donation, gift, grant, award, or sponsorship – does not have any bearing on the decision of whether the transaction is a contribution or an exchange. Determining whether a transaction is a contribution depends on whether commensurate value was received, not upon the terminology used.
Step 2: Conditional vs. Unconditional Contribution
Once you have determined that the transaction is a contribution, you need to next decide if it is conditional or unconditional. A donor-imposed condition is a donor stipulation that represents a barrier that must be overcome before the recipient is entitled to the assets transferred or promised.
If the answer is “yes” to both of the following questions, then the transaction is conditional.
- Is there a Right of Return/Release? – Funds will be refunded/returned if specific requirements are not met.
- Is there a Barrier to Overcome?
- Is there a measurable performance-related outcome? Ex: identified number of units of output, or achievement of a certain level of service.
- Does the nonprofit have limited discretion over how the resources are spent? Ex: requirement to follow specific guidelines about qualifying allowable expenses, or a requirement to hire specific individuals as part of the workforce conducting the activity.
- Are there stipulations related to the purpose of the agreement? For example, a requirement for an animal shelter to expand its facility to accommodate a specified number of additional animals or a research report that must summarize the findings from a grant on gluten allergies.
Conditional contributions are recognized as a liability if cash is transferred in advance or not recognized at all until the conditions have been substantially met.
Unconditional contributions are recognized immediately and classified as net assets with or without donor restrictions.
Therefore, determining the existence or absence of donor-imposed restrictions is the final point to consider.
Step 3: With or Without Donor Restrictions
It is important to define “Restriction.” Some donors impose restrictions that are temporary in nature. For example, some donors stipulate the resources be used after a specified date, for particular programs or services, or to acquire buildings or equipment. Other donors impose restrictions that are perpetual in nature, for example, stipulating that resources be maintained in perpetuity.
As noted above, failure to overcome a barrier gives a resource provider a right of return of the assets it has transferred or releases the resource provider from its obligation to transfer its assets – therefore the contribution is conditional in nature and revenue cannot be recognized until the barrier is overcome. Conversely, a donor-imposed restriction specifies a use for the transferred asset, but does not impact the resource provider’s obligation to transfer the promised resources to the nonprofit organization.
So how do we distinguish between a “barrier” and a “restriction”?
In order to provide clarification on making this determination, the FASB has added the following guidance within ASU 2018-08:
- A donor-imposed condition must have (1) one or more barriers that must be overcome before the recipient is entitled to the assets promised or transferred AND (2) a right of return of funds to the resource provider or release of liability of the resource provider in the event the nonprofit fail to overcome the stated barriers.
- Removal of the phrase “specifies a future and uncertain event” from the FASB’s definition of a donor-imposed condition. This would have required a probability assessment of whether it is likely a recipient will fulfill the stipulations when determining whether to recognize revenue.
- If an agreement includes a right-of-return or a right-of-release clause, but imposes no barriers that must be met, the contribution would be considered unconditional and revenue would be recognized immediately.
- If an agreement includes multiple barriers that must be overcome before a nonprofit is entitled to the transfer of assets, the organization must consider facts and circumstances and use judgment to determine which stipulations, if any, of an agreement are deemed to be a barrier that must be overcome before the nonprofit is entitled to recognize revenue.
- Existence of a barrier should be determined on the basis of indicators, which are intended to provide additional guidance while allowing preparers to exercise judgment on the basis of individual facts and circumstances. FASB ASC 958-605-25-5D provides a table that contains a new list of indicators that are useful in determining if an agreement contains a barrier.
No additional recurring disclosures have been added in the guidance. However, the implementation of the new guidance in ASU 2018-08 will likely result in more agreements being classified as conditional contributions. These agreements will therefore be subject to the existing disclosure requirements found in FASB ASC 958-310-50-2.
For conditional promises to give, recipients are required to disclose:
- The total of amounts promised
- Description and amount for each group of promises having similar characteristics
In addition, donors such as grant-making foundations are required by FASB ASC 450 Contingencies and FASB ASC 470 Debt to provide information about the conditional and unconditional promises to give that they make.
Effective Date and Transition
Nonprofits who are recipients will apply the guidance of ASU 2018-08 for annual periods beginning after December 51, 2018. For example, it is applicable for fiscal years ending December 31, 2019 and for June 30, 2020.
For organizations, such as foundations, which are resource providers, the new guidance is effective for annual periods beginning after December 15, 2019. Therefore, a one-year delayed implementation is given for resource providers.
The amendments in the ASU should be applied on a modified prospective basis. This means that no prior-period results should be restated -- there will be no adjustment to opening net assets in the year of adoption. For multi-year agreements that are in existence at the effective date, only apply the new guidance to the portion of the agreement not previously recognized in revenue.
Contact your Whittlesey Advisor for further assistance.
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