The Financial Accounting Standards Board (FASB) recently issued a proposed accounting standards update, Not-for-Profit Entities (Topic 958) Clarifying the Scope and the Accounting Guidance for Contributions Received and Contributions Made. This proposed update is designed to clarify revenue recognition related to grants and contracts and contributions. Released in early August, the proposed changes would help not-for-profits evaluate whether grants and contracts meet the definition of nonreciprocal transactions, or contributions. If transactions meet this definition, they would be excluded from ASU 2014-09 Revenue from Contracts with Customers, referred to as the new revenue recognition standard, and therefore require following of the contribution guidance. Alternatively, if a transaction meets the definition of a reciprocal transaction, or an exchange transaction similar to a contract with a customer, then the new revenue recognition standard would apply.
Although the update is designed for not-for-profit organizations, the changes would also apply to business entities that make or receive contributions of cash and other assets. Both contributions received and contributions made would be impacted by the proposed accounting standards update.
Determining whether grants and contracts meet the definition of a contribution or an exchange transaction has been notoriously difficult for not-for-profit organizations and therefore caused diversity of practice in the sector. The new revenue recognition standard brings the contribution or exchange transaction question into sharp focus thereby causing the need for further guidance.
Stakeholders also raised concerns about the challenge in distinguishing between conditional contributions and unconditional contributions, which has also produced diversity in accounting. Many times grants may come with conditions, but they may not have clear policies on what happens if the entity does not meet those conditions.
The proposed accounting standards update clarifies the process entities follow to determine whether they received a contribution or an exchange transaction. They would evaluate whether the resource provider is receiving commensurate value in return for the resources transferred on the basis of the following:
- A resource provider (private foundation, government agency, etc.) is not synonymous with the general public. Any indirect benefit the public receives as a result of the asset transferred is not enough to be considered “commensurate value” to the resource provider.
- Execution of the resource provider’s mission or positive sentiment from acting as the donor is not commensurate value received by the resource provider for the purpose of determining whether a transfer of assets is a contribution or an exchange transaction.
Consistent with current U.S. generally accepted accounting principles (GAAP), in instances where the resource provider does not receive commensurate value for resources provided, the recipient entity would need to evaluate 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 it is, the entity would apply the guidance in the new revenue recognition standard.
The proposed update also clarifies the process entities would use to determine whether a contribution is conditional. Entities would evaluate whether the contribution agreement includes a barrier that must be overcome. Indicators would be used to determine whether a barrier exists, including:
- The inclusion of a measurable performance-related barrier or other type of measurable barrier, including the requirement that transferred assets would be used to achieve a certain level of service, an identified number of units of output or a specific outcome. Another type of measurable barrier would be a stipulation that the recipient entity is only entitled to the assets upon the occurrence of an identifiable event, such as, a matching requirement.
- Whether a stipulation is related to the purpose of the agreement (excluding administrative tasks)
- The extent to which a stipulation limits discretion by the asset recipient, excluding situations where the only requirement is that the assets be used for general operating expenses or something equally broad
- The extent to which a stipulation requires additional action or actions the recipient entity would otherwise not have undertaken
Entities would also evaluate whether there is a right of return of assets transferred or a right of release of a promisor’s obligation to transfer assets. The presence of both a barrier and a right of return/release indicates that the contribution is conditional. If the contribution is unconditional, the entity would then determine whether the contribution has a donor-imposed restriction
If passed, the proposed accounting standards update would likely mean more grants and contracts qualifying as conditional contributions than under current GAAP.
Adopting the New Guidance
Comments on the proposed ASU are due to the FASB by Nov. 1, 2017. Entities would adopt the new guidance on a modified prospective basis for the first financial statement issued after the effective date. Agreements to be modified would be those not completed as of the effective date or agreements that were entered into after the effective date. No prior period results would need to be restated, and there would be no cumulative-effect adjustment to the opening balance of net assets. Additional disclosures would be required, and retrospective application would be permitted.
For More Information
If you have specific comments, questions or concerns about how the proposed ASU would affect your organization, please contact us.
Michelle Spriggs is a Shareholder in the Not-For-Profit & Education Practice. She can be reached at 774.206.8336 or MSpriggs@cbiztofias.com.
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