FASB Clarifies Scope and Accounting Guidance for Contributions Received and Contributions Made
The Financial Accounting Standards Board (FASB) recently issued 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 (ASU 2018-08) that clarifies and improves the scope and accounting guidance around contributions of cash and other assets received and made by not-for-profit organizations (NFPs) and business entities.
While ASU 2018-08 also applies to business entities that make or receive contributions, it will primarily impact NFPs.
Currently, there is diversity in practice regarding the classification of grants and similar contracts with resource providers as exchange transactions and contributions. Diversity in practice is most common for government grants and contracts, which currently are often classified as exchange transactions. This issue was further amplified upon the issuance of ASU 2014-09, Revenue from Contracts with Customers (Topic 606), which revised revenue recognition guidance for exchange transactions.
Diversity in practice also exists for determining whether a contribution is conditional or unconditional. In relation to the determination of whether a contribution is conditional or unconditional, NFPs had difficulty in concluding whether a stipulation meets the definition of a condition, as well as if the possibility that a condition will not be met is remote. This issue resulted in differences in the timing of the recognition of contributions with similar characteristics.
Distinguishing Contributions From Exchange Transactions
The primary question here is “who receives the benefit?” of the transaction. If a resource provider is receiving commensurate value for the resources provided, then the transaction is an exchange transaction and would not be in the scope of the ASU 2018-08. Non-exchange transactions would include transactions in which the beneficiary is the general public.
Transactions where the beneficiary is a specified third party will need to be analyzed to determine whether the transaction is reciprocal or nonreciprocal in nature. Reciprocal transactions would be accounted for as exchange transactions while nonreciprocal transactions would be considered contributions.
Keep in mind that the type of resource provider should not override the substance of the transaction and societal benefit is not considered commensurate value received. Also, the execution of a resource provider’s mission or the positive sentiment form acting as a donor does not constitute commensurate value.
Conditional Versus Unconditional Contributions
Once the NFP has determined the transaction is a contribution, the next step is to determine whether the contribution is conditional or unconditional. A contribution is considered conditional under ASU 2018-08 if the agreement includes: (1) a barrier that must be overcome, and (2) either a right of return of the assets transferred or a right of release of a promisor’s obligation to transfer assets.
Indicators of a barrier include:
- A measureable performance-related barrier or other measurable barrier – for example, a requirement to provide a certain level of service or the occurrence of an identified event, such as a matching funds requirement
- A stipulation limiting the discretion of the recipient on the conduct of an activity – for example, a requirement to follow specific guidelines about qualifying allowable expenses
- Whether the stipulation is related to the purpose of the agreement (this would exclude administrative tasks and trivial stipulations in the agreements)
Conditional contributions will be recognized as revenue as the conditions are met. If the contribution is considered unconditional, it is recognized into revenue immediately.
Once a contribution has been determined to be unconditional, the NFP would consider whether the contribution is restricted. The definition of a donor-imposed restriction has not changed from the current guidance and may relate to a restriction of purpose or time. The expectation is that more transactions will be recognized as conditional contributions instead of exchange transactions under the clarified guidance in ASU 2018-08. There are no additional disclosure requirements in ASU 2018-08; however, current guidance requires recipients of conditional contributions to disclose the total amounts promised and a description and amount for each group of promises having similar characteristics. As more transactions are expected to be classified as conditional contributions, this disclosure is expected to become more frequent in NFP financial statements.
A current accounting policy option exists which allows recipients to recognize restricted contributions directly into unrestricted support if the restriction is met in the same period that revenue is recognized. Under the current guidance, this election must be made for all donor-restricted resources.
ASU 2018-08 amends the accounting policy option, allowing a NFP to elect the policy for donor-restricted contributions that were initially conditional contributions without having to also elect the policy for other donor-restricted contributions or investment gains and income, provided that the NFP uses the policy consistently and discloses its accounting policy.
Implementation and Effective Dates
The amendments in ASU 2018-08 should be applied on a modified prospective basis. Retrospective application is permitted. Under a modified prospective basis, in the first set of financial statements following the effective date, the amendments should be applied to agreements that are either (1) not completed as of the effective date, or (2) entered into after the effective date. A completed agreement is an agreement for which all the revenue (of a recipient) or expense (of a resource provider) has been recognized before the effective date in accordance with current guidance.
The amendments in the ASU should be applied only to the portion of revenue or expense that has not yet been recognized before the effective date in accordance with current guidance. No prior-period results should be restated, and there should be no cumulative-effect adjustment to the opening balance of net assets or retained earnings at the beginning of the year of adoption.
Under this approach, an entity is required to disclose both of the following:
- The nature of and reason for the accounting change
- An explanation of the reasons for significant changes in each financial statement line item in the current annual or interim period resulting from applying the amendments instead of the previous guidance.
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 the amendments to annual periods beginning after June 15, 2018. All other entities should apply the amendments for transactions in which the entity serves as the resource recipient to annual periods beginning after Dec. 15, 2018.
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 the amendments in ASU No. 2018-08 on contributions made to annual periods beginning after Dec. 15, 2018. All other entities should apply the amendments for transactions in which the entity serves as the resource provider to annual periods beginning after Dec. 15, 2019.
Early adoption is permitted.
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