When the Financial Accounting Standards Board (FASB) released new rules for revenue recognition in 2014, contributions were specifically excluded. Now the FASB is offering further guidance in its Accounting Standards Update (ASU) No. 2018-08, Not-for-Profit Entities (Topic 958): Clarifying the Scope and Accounting Guidance for Contributions Received and Contributions Made.
The new rules likely will result in more grants and similar contracts being accounted for as contributions than have been under current Generally Accepted Accounting Principles (GAAP). So, if you haven’t learned the new rules yet, now is the time!
What prompted the new rules?
The new rules reflect the FASB’s stance that nonprofits have taken inconsistent approaches when characterizing some grants and contracts as exchange transactions (reciprocal) rather than contributions (nonreciprocal transactions). And organizations also have acted inconsistently when distinguishing between conditional and unconditional contributions, according to the standard-setting agency. For example, some nonprofits account for government grants as contributions while other organizations account for them as exchange transactions.
These issues came into the spotlight in the wake of the FASB’s new revenue recognition standard. Contributions generally are reported in the period the pledge or commitment to donate the funds is received. But exchange transactions will be subject to the revenue recognition rules, including robust disclosure requirements.
Is it a contribution?
When characterizing a grant or similar contract, a nonprofit must evaluate whether the “provider” (the grantor or other party to a contract) receives commensurate value in return for the assets transferred. If so, the transaction is an exchange transaction.
The ASU makes clear that “the provider” isn’t synonymous with the general public. Thus, indirect benefit to the public because of the asset transfer doesn’t constitute “commensurate value received.” Execution of the provider’s mission or the positive sentiment from acting as a donor also doesn’t equate to commensurate value received.
If the provider doesn’t receive commensurate value, the nonprofit must then determine if the asset transfer represents a payment from a third party for an existing transaction between the nonprofit and an identified customer (for example, Medicare or a Pell Grant). If so, the transaction isn’t a contribution and other accounting guidance would apply. If not, it’s a contribution.
Is it conditional?
Whether a contribution is conditional affects when the revenue is recognized. This ASU explains that a conditional contribution comes with 1) a barrier the nonprofit must overcome to receive the contribution, and 2) either a right of return of assets transferred or a right of release of the promisor’s obligation to transfer assets if the condition is not met. An unconditional contribution is recognized when promised or received. However, a conditional contribution isn’t recognized until the barriers to entitlement are overcome.
To assess whether the nonprofit must overcome a barrier to receive the contribution, it should consider the following indicators:
- The inclusion of a measurable performance-related barrier or other measurable barrier (for example, raising a certain amount of matching funds),
- Limits on the nonprofit’s discretion over how to conduct an activity (for instance, a requirement to hire specific individuals to run a new program), and
- A stipulation that relates to the purpose of the agreement (excluding administrative tasks and trivial stipulations, such as producing an annual report).
Depending on the circumstances, some indicators might prove more important than others. No single indicator will determine the outcome.
The new rules impact agreements for most nonprofits who are resource recipients for annual reporting periods starting after December 15, 2018. For organizations who are resource providers the new rules apply one year later. Early adoption is permitted. Check with your financial advisor to determine the best course forward for your organization.
Sidebar: Guidance expands accounting policy election
The new FASB guidance on grants and contributions also modifies the simultaneous release option currently included in Generally Accepted Accounting Principles.
The current option allows a nonprofit to adopt an accounting policy that recognizes an unconditional donor-restricted contribution directly in “net assets without donor restrictions” if the restriction is met in the same period that revenue is recognized. The organization also must have a similar policy for reporting investment gains and income.
Nonprofits may now make this election for all donor-restricted contributions initially classified as conditional — where the condition has been met — without needing to elect it for all other restricted contributions and investment gains and income. In other words, a nonprofit can elect the simultaneous release option for conditional restricted contributions separately from unconditional restricted contributions. The only requirements are that the organization report consistently from period to period and disclose its accounting policy.