On June 21, 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 on the grants and contracts of 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? The answer is buried in the details of the grants and contracts themselves.
ASU 2018-08 applies to resource providers and resource recipients. It includes decision trees to assist in evaluating a transaction. The first decision for both parties to consider is whether each party directly receives commensurate value. If the transaction is reciprocal (i.e., an exchange), the recipient would follow ASU 2014-09, and the contributor would follow the guidance in Topic 720, Other Expenses, or other applicable topics. If the transaction is nonreciprocal (i.e., a contribution), the recipient would apply contribution guidance, and not-for-profit contributors would apply the guidance in ASC 958-720, Not-for-Profit Entities, Other Expenses (all other contributor entities would apply the guidance in ASC 720-25, Other Expenses, Contributions Made). It is important to note that ASU 2018-08 explicitly states that societal benefit—even if it furthers the resource provider’s charitable mission—is not commensurate reciprocal value. The standard does clarify that, consistent with current GAAP, if the transfer of assets represents a payment from a third-party payer (e.g., a department of education) on behalf of an existing transaction between the recipient and an identified customer (e.g., between a private college and a student eligible for financial aid), other existing guidance would apply.
For nonreciprocal transactions (contributions), the next point to consider for both parties is whether conditions have been placed on the resources provided. The presence of conditions affects the timing of revenue and expense recognition by the resource recipient and resource provider, respectively. For a contribution to be conditional, the answer to both of the following questions must be “yes.”
- Does the contributor retain either a right of return to the resources provided or a right of release of promisor from its obligation to transfer resources?
- Is there a barrier the not-for-profit organization must overcome to be entitled to the resources provided?
Because the second question is the more difficult one to answer, FASB’s amendments provide the following indicators that a barrier may exist:
- The not-for-profit is required to achieve a measurable outcome (e.g., help a specific number of beneficiaries or produce a certain number of units).
- The not-for-profit is required to overcome a barrier related to the primary purpose of the agreement. (Note: This excludes trivial or administrative requirements.)
- The not-for-profit has limited discretion over how the resources are spent (e.g., a requirement to follow specific guidelines about incurring qualifying expenses).
Conditional contributions are recognized as liabilities if assets are transferred in advance or not recognized at all until the conditions have been substantially met or explicitly waived by the donor, at which point the contributions are recognized as unconditional and classified as net assets with or without donor restrictions. Unconditional contributions are recognized immediately and classified as net assets with or without donor restrictions. Thus, after determining the presence of conditions, the existence of donor-imposed restrictions, if any, is the final key point to consider.
View the ASU to see the full decision trees that will walk you through this evaluation process.
For transactions in which an entity is either a public business entity or an NFP that has issued, or is a conduit bond obligor for, securities that are traded, listed, or quoted on an exchange or an over-the-counter market and serves as a resource recipient, the entity should apply ASU 2018-08 on contributions received to annual periods beginning after June 15, 2018, including interim periods within those annual periods. All other entities should apply the amendments for transactions in which the entity serves as the resource recipient to annual periods beginning after December 15, 2018, and interim periods within annual periods beginning after December 15, 2019.
For transactions in which an entity is either a public business entity or an NFP that has issued, or is a conduit bond obligor for, securities that are traded, listed, or quoted on an exchange or an over-the-counter market and serves as a resource provider, the entity should apply ASU 2018-08 on contributions made to annual periods beginning after December 15, 2018, including interim periods within those annual periods. All other entities should apply the amendments for transactions in which the entity serves as the resource provider to annual periods beginning after December 15, 2019, and interim periods within annual periods beginning after December 15, 2020.
Early adoption of the amendments is permitted.
Not-for-Profit Section members can view the 2-hour archived webcast, Accounting for Nonprofit Grants and Contracts, during which industry experts discuss when transactions are reciprocal and nonreciprocal under the new guidance and how the standard will affect NFPs. (Note: No CPE credit is available for viewing archived webcasts.)