Our first blog in this series, “Accounting for Grants and Contributions (ASU 2018-08) – Part I”, explained the guidance related to determining a contribution from an exchange transaction. In Part 2 below, we will cover guidance regarding conditional vs unconditional contributions.
Distinguishing Conditional Contributions from Unconditional Contributions
Once you have determined a transaction is a contribution rather than an exchange transaction, the next question remains: “Is this contribution conditional or unconditional?” A conditional contribution is a contribution that contains a donor-imposed condition. Under the amendments in this ASU, a donor-imposed condition is defined as follows:
“A donor stipulation that represents a barrier that must be overcome before the recipient is entitled to the assets transferred or promised. Failure to overcome the barrier gives the contributor a right of return of the assets it has transferred or gives the promisor a right of release from its obligation to transfer the assets.”
If the condition above exists, the recipient is only entitled to the assets once the barrier has been overcome. The presence of both a barrier and right of return/right of release must be determinable from the agreement, and the agreement should clearly indicate when the recipient is entitled to the assets.
Below is a list of indicators that may be helpful in determining whether an agreement contains a barrier:
- The agreement contains a measurable performance-related barrier. For example:
- A time limitation (housing 500 homeless people by year end)
- A specific level of service/units of output (1000 meals per week for a soup kitchen)
- A specific outcome (students achieving a minimum standardized test score)
- A matching requirement
- The agreement provides limited discretion by the recipient on the conduct of an activity. This is more specific than a donor-imposed restriction. Restrictions limit the use of a contribution to a specific activity, but do not place limitations on how the activity is performed. For example:
- Specific guidelines about incurring qualifying expenses
- Requirement to hire specific individuals to conduct the activity
- Other specific protocol that must be adhered to
- Stipulations that are related to the purpose of the agreement.
- If a stipulation is not related to the purpose of the agreement, it most likely would not be indicative of a barrier. For example, many agreements contain administrative task requirements, such as producing an annual report. Generally, reports are administrative in nature and are intended to provide the resource provider with proof that the transferred assets were used in accordance with the purpose of the agreement. Trivial or administrative stipulations are generally not related to the purpose of the agreement and would not be indicative of a barrier.
It is important to note that the guidance clearly states, “A probable assessment about whether the recipient is likely to meet the stipulation is not a factor when determining whether an agreement contains a barrier.” For example, if a donor promises they will give a contribution to a homeless shelter if they provide 500 meals, even if it is highly likely the shelter will meet that condition, they cannot recognize the revenue until the 500 meals have been served.
The guidance indicates that if donor stipulations are vague and not clearly unconditional, a conservative approach should be taken and the contribution should be assumed to be conditional. If a not-for-profit organization receives cash from a conditional contribution, it should be recorded as a refundable advance (liability) until the conditions have been substantially met. In some cases, an agreement may not contain barriers that must be achieved, but may contain a right of return of assets/release from obligation. In this case, the contribution would be considered unconditional and the revenue would be recognized immediately. Remember, the agreement must have both in order to be considered a conditional contribution. Just because an agreement states that unused funds must be returned does not mean it is a conditional contribution.
The Financial Accounting Standards Board believes this ASU will likely result in more grants and contracts being accounted for as either contributions or conditional contributions than under the prior guidance.
The effective dates for this ASU, as well as a helpful diagram, is detailed in Part I of this blog series, which you can find here. Be sure to read our next blog, “Accounting for Grants and Contributions (ASU 2018-08) – Part 3,” for detailed guidance regarding restricted vs unrestricted contributions, as well as transition information.