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When the Financial Accounting Standards Board (FASB) updated its rules for recognizing contract revenue in 2014, it created additional confusion and questions that nonprofit organizations already had about accounting standards for grants and similar contracts.
Fortunately, in 2019, the FASB 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. This information is now critical for calendar-year nonprofits as they prepare their 2019 year-end financial statements.
Pay attention to these complicated rules:
In the past, nonprofits have had a variety of 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 updated revenue recognition guidance — ASU 2014-09, Revenue from Contracts with Customers — confused the issues by retracting some of the previous advice for nonprofits while creating extensive and excessive disclosure requirements that didn’t seem relevant to contributions. Thankfully, ASU 2018-08 clarifies the situation in two important ways:
1) by defining rules and guidelines that will help nonprofits determine whether a grant or similar contract qualifies as a contribution — and,
2) if it does qualify, when nonprofits should recognize the revenue associated with the contribution.
What is the difference between an exchange or a contribution?
To determine how to handle a grant or similar contract, each nonprofit must assess whether the “provider” receives commensurate value for the assets it’s transferring. If that is determined to be true, the grant or contract should be treated as an exchange transaction. ASU 2018-08 stresses that the provider (the grantor or other party) in a transaction isn’t synonymous with the general public. So, despite previous standards, an indirect benefit to the public doesn’t represent commensurate value received. In addition, contributions in which delivery 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? It then becomes essential to determine if the asset transfer is a payment from a third-party payer for an existing transaction between the nonprofit organization and an identified customer (for example, payments made under Medicare or a Pell Grant). If it is determined to be a payment, the transaction won’t be considered a contribution under the ASU, and other accounting guidance rules would apply. If it isn’t a payment, the transaction can then be accounted for as a contribution.
What are the conditional terms?
According to ASU 2018-08, a conditional contribution includes:
- A barrier the nonprofit must overcome to receive the contribution, and
- 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.
Is there a barrier to overcome before your organization can receive a contribution? Consider the following when looking at barriers:
1) inclusion of a measurable performance-related barrier
2) limits on your nonprofit’s preference over how to conduct an activity or
3) a requirement that relates to the purpose of the agreement (not including administrative tasks and trivial stipulations such as the production of an annual report).
It is important to realize that some indicators might prove more important than others, depending on circumstances. Also, consider that no single indicator is determinative.
What is the net effect of the new guidelines?
As a result of the updated guidance, nonprofits will likely be able to account for more grants and similar contracts as contributions than they did under the previous rules.
Check with the CPAs at JLK Rosenberger to determine what that means for your financial statements, loan covenants, and other matters. Contact us at 949-860-9890 for help determining your nonprofit contributions. We look forward to speaking with you soon.