On June 21, 2018 the Financial Accounting Standards Board (FASB) issued Accounting Standards Update (ASU) 2018-08, Not-for-Profit Entities (Topic 958): Clarifying the Scope and the Accounting Guidance for Contributions received and Contributions Made, which provides accounting guidance around contributions of cash and other assets received and made by not-for-profit organizations and business enterprises.
In preparing for the upcoming implementation of ASU 2014-09, Revenue from Contracts with Customers (Topic 606), the AICPA received feedback from stakeholders regarding the significant diversity in the accounting for grants and contracts, and the differences in practices and the diversity of accounting for grants and contracts, related to the characterization of grants and contributions as reciprocal transactions (exchanges transaction) or nonreciprocal transactions (contributions). Within nonreciprocal transactions, there was diversity in determining a transaction as a conditional contribution vs. and unconditional contribution.
Who Is Affected by this ASU?
This ASU applies to all entities, including business entities, that receive or make contributions of cash and other assets, including promises to give within the scope of Subtopic 958-605 and contributions made within the scope of Subtopic 720-25, Other Expenses—Contributions Made. The guidance does not apply to transfers of assets from government entities to business entities.
What Are the Main Provisions?
Determination of Exchange Transaction vs. Non-Exchange Transaction (Contribution)
This ASU clarifies the determination of whether a resource provider is participating in an exchange transaction by evaluating if the resource provider is receiving commensurate value. If commensurate value is received, then Topic 606 should be applied. If commensurate value is not being received in the exchange, then the transaction is considered to be a non-exchange transaction and the receiving organization would record the transaction as a contribution, and determine if it is conditional or unconditional.
Evaluating whether commensurate value is exchanged requires judgement. The guidance clarifies that commensurate value is not received if the benefit is to the general public as a result of the assets transferred. The execution of a resource provider’s mission, or the positive sentiment from acting as a donor, does not constitute commensurate value received by a resource provider for purposes of determining whether a transfer of assets is a contribution or an exchange.
If the resource provider is not receiving commensurate value for the resources provided, an entity must determine whether a transfer of assets represents a payment from a third-party payer on behalf of an existing exchange transaction between the recipient and an identified customer. If so, other guidance (for example, Topic 606) applies.
Determination of Conditional vs. Unconditional Contributions
Not-for-profit organizations will now evaluate whether contributions are conditional or unconditional on the basis of whether a transaction includes a barrier to overcome and a right of return or a right of release. Indicators to use when assessing whether an agreement contains a barrier are as follows:
- The inclusion of a measurable performance-related barrier or other measurable barrier
- The extent to which a stipulation limits discretion by the recipient on the conduct of an activity
- Whether a stipulation is related to the purpose of the agreement
When a contribution is considered to be unconditional based on having met the required conditions, or due to it being unconditional at the time of contribution, then the organization will need to determine if there are any restrictions (time or purpose) present. This will ultimately determine how the organization records the transaction.
It should be noted that the FASB believes this ASU will likely will result in more grants and contracts being accounted for as either contributions or conditional contributions than observed in practice under current guidance.
Simultaneous Release of a Condition and a Restriction
This ASU allows for Not-for-Profit organizations to recognize a restricted contribution directly as an unrestricted net asset/assets without donor restrictions if the restriction is met in the same period that the contribution revenue is recognized. This could be elected for all restricted contributions that were initially classified as conditional contributions without having to elect it for all other restricted contributions and investment returns.
FASB aligned the effective date with Topic 606, Revenue from Contracts with Customers. 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 in this ASU 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 Dec. 15, 2018, and interim periods within annual periods beginning after Dec. 15, 2019. Resource providers have an additional year to implement this standard.
The standard should be applied on a modified prospective basis, however retrospective application is permitted. Under a modified prospective basis, in the first set of financial statements following the implementation date of the ASU should be applied to agreements that are either not completed as of the effective date or entered into after the effective date. 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.
NFPs that meet the definition of a public business entity need to work to consider the effects of these matters with relative urgency given the need to apply this standard shortly. This will be further complicated by the requirement to adopt the ASU 2016-14 Not-for-Profit Entities (Topic 958): Presentation of Financial Statements of Not-for-Profit Entities which will be required to be adopted for years ending December 31, 2018 and later and thus many NFP entities with June 30, 2019 fiscal year-ends who are considered public business entities will find themselves needing to implement all of these standards changes at the same time. Thus, the next reporting cycle will be notably more important and complex for many organizations than routine reporting year. Of course NFPs that do not meet the public business entity standard will be able to first digest the presentation standards with the revenue recognition changes coming in the following year which should make the process for those entities more digestible over time.
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Holly Perez is a Senior Manager in the Kansas City office. She specializes in not-for-profit organizations and helps clients understand their organization, procedures and internal policies.