Accounting for contributions and grants has often proven complicated for nonprofits, especially when they come with donor-imposed conditions. New revenue recognition standards released by the Financial Accounting Standards Board (FASB) in 2014 only muddied the issues for some organizations.Now the FASB has provided some much-needed clarification with Accounting Standards Update (ASU) No. 2018-08, Not-for-Profit Entities (Topic 958): Clarifying the Scope and the Accounting Guidance for Contributions Received and Contributions Made. The ASU lays out rules that will help nonprofits determine whether a grant or similar contract is indeed a contribution — and, if so, when they should recognize the revenue associated with it.
Origin of the update
Nonprofits traditionally have taken varying approaches when they:
- Characterize grants and similar contracts as exchange transactions (also known as reciprocal transactions) or contributions (nonreciprocal transactions), and
- Distinguish between conditional and unconditional contributions.
The FASB’s new revenue recognition rules exacerbated this problem. (See “Soon to take effect: The revenue recognition rules.”) The rules eliminate some of the previous guidance and impose extensive disclosure requirements that don’t seem relevant to contributions.
ASU 2018-08 takes effect for most nonprofits that are recipients of funds for annual reporting periods starting after December 15, 2018, and interim periods within annual periods beginning after December 15, 2019. These rules generally take effect one year later for organizations that are resource providers. Early adoption is permitted.
The “provider” factor
To determine how to treat a grant or similar contract, you must assess whether the “provider” receives commensurate value for the assets it’s transferring. If so, you should treat the grant or contract as an exchange transaction. The ASU stresses that the provider (the grantor or other party) in a transaction isn’t synonymous with the general public — so indirect benefit to the public doesn’t represent commensurate value received. Execution of the provider’s mission or positive sentiment received from donating also doesn’t constitute commensurate value received.
What if the provider doesn’t receive commensurate value? You then must determine if the asset transfer is a payment from a third-party payer for an existing transaction between you and an identified customer (for example, payments made under Medicare). If it is, the transaction isn’t a contribution under the ASU, and other accounting guidance would apply. If it isn’t, the transaction is accounted for as a contribution.
According to the ASU, a conditional contribution includes 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. Unconditional contributions are recognized when received. However, conditional contributions aren’t recognized until you overcome the barriers to entitlement.
To determine whether you must overcome a barrier to receive a contribution, consider the following indicators:
- The inclusion of a measurable performance-related or other measurable barrier (for instance, a matching requirement),
- Limits on your nonprofit’s discretion over how to conduct an activity (for example, specific requirements on allowable expenses), and
- A stipulation that relates to the purpose of the agreement (not including administrative tasks and trivial stipulations such as production of an annual report).
Some indicators might prove more important than others, depending on circumstances. And no single indicator is determinative.
The ASU also modifies the simultaneous release option, which allows a nonprofit to classify an unconditional donor-restricted contribution directly in “net assets without donor restrictions” if the restriction is satisfied in the same period that the revenue is recognized. Formerly all donor-restricted gifts and investment revenues must have been treated in the same manner. Under this ASU, nonprofits can adopt this method for all donor-restricted contributions initially classified as conditional once the condition is met.
The bottom line
The ASU likely will result in nonprofits accounting for more grants and similar contracts as contributions than they do under current Generally Accepted Accounting Principles. Check with your financial advisor to determine what that means for your financial statements, loan covenants and other matters.
Soon to take effect: The revenue recognition rules
The new revenue recognition rules in the FASB’s Accounting Standards Update (ASU) No. 2014-09, Revenue from Contracts with Customers, take effect for most nonprofits for annual reporting periods starting after December 15, 2018. While the total revenue you recognize over time won’t change, the timing and information you now must disclose might.
As discussed in the main article, ASU 2014-09 doesn’t apply to revenue from contributions. But it does apply to many other types of nonprofit revenue, including membership dues, sales of goods and services, conference and seminar fees, subscriptions and sponsorships. For multicomponent transactions (for example, membership dues that cover both a contribution and fees for membership benefits), you’ll need to separate out the contribution and recognize the other revenue under the rules in ASU 2014-09.
Nonprofits also must now share both quantitative and qualitative information about their contracts with customers, including judgments made about the nature, amount, timing and uncertainty of related revenue and cash flows.