On June 21, 2018, the Financial Accounting Standards Board (FASB) issued an Accounting Standards Update (ASU) 2018-08, Not-for-Profit Entities (Topic 958): Clarifying the Scope and the Accounting Guidance for Contributions Received and Contribution Made intended to address the diversity in practice among not-for-profit organizations for grant and contribution accounting. ASU 2018-08 applies primarily to nonprofits, but also applies to business entities that receive or make contributions of cash and other assets. The ASU does not apply to transfers of assets from government entities to business entities.
AAFCPAs has outlined for your convenience the main provisions of ASU 2018-08:
Evaluating Whether Transactions should be accounted for as Contributions or as Exchange Transactions
Distinguishing between contributions and exchange transactions determines which revenue recognition guidance is to be applied. In an exchange (reciprocal) transaction, the resource provider (i.e. a government agency, foundation, corporation, or other entity) receives commensurate value in return for the resources transferred (i.e. cash or other assets), and it will be accounted for within the scope of ASC Topic 606, Revenue from Contracts with Customers, or other applicable guidance. In a contribution (nonreciprocal) transaction, the resource provider may receive value indirectly by providing a societal benefit, although that benefit is not considered to be of commensurate value. Contribution transactions will be accounted for using the guidance in Subtopic 958-605, Not-for-Profit Entities – Revenue Recognition – Contributions.
The key to evaluating whether a transaction should be accounted for as a contribution or as an exchange transaction is: who receives the benefit? Under the new guidance, a resource provider (i.e. a government agency) is not synonymous with the general public. A benefit received by the general public as a result of the assets transferred is not equivalent to commensurate value received by the resource provider. Therefore, if the resource provider receives no direct value in exchange for the assets transferred, the transaction should not be considered commensurate value received in return.
Determining Whether a Promise is Conditional or Unconditional
As mentioned above, nonprofits must follow the guidance included in Subtopic 958-605 to account for contribution transactions. Once a transaction is deemed to be a contribution, nonprofits must determine whether a contribution (or promise to give) is conditional or unconditional when assets transferred are accompanied by certain stipulations. According to ASU 2018-08, an entity is required to overcome a barrier before it is entitled to the assets transferred or promised. Otherwise, the resource provider has a right of return for the assets transferred, or a right of release of its obligation to transfer the assets. ASU 2018-08 provides further guidance and examples in determining whether an agreement contains a barrier.
When identifying a barrier, nonprofits should consider indicators, including but not limited to:
- The inclusion of a measurable performance-related barrier or other measurable barrier. For example, a defined number of meals to be delivered to homeless people, or matching requirements.
- A stipulation limits discretion by the recipient on the conduct of an activity. Limited discretion of the recipient is more specific than a donor’s imposed restriction. For example, a requirement to follow specific guidelines about incurring qualifying expenses, or a requirement to hire specific individuals as part of the workforce conducting the activity.
- Stipulations that are related to the purpose of the agreement. Administrative and trivial stipulations are not indicative of a barrier. For example, a requirement to submit annual audited financial statements.
Determining Whether an Unconditional Promise Contains Donor-Imposed Restrictions
Donor-imposed conditions, i.e. donor stipulations, should be substantially met by the recipient before the receipt of assets is recognized as a contribution. In order to properly account for a contribution in appropriate net asset classes, nonprofits should also determine if an agreement contains donor-imposed restriction. Sometimes, distinguishing a donor-imposed condition from a donor-imposed restriction may be difficult. Unlike the donor-imposed conditions that affect whether the recipient is entitled to the contribution, the purpose of donor-imposed restrictions is to limit the use of the contribution (i.e. time or purpose restrictions).
Effective Date and Transition Method
The effective date for transactions in which an entity serves as the resource recipient is as follows:
- For public businesses and nonprofits that are conduit bond obligors or with publicly-traded securities, the ASU is effective for fiscal years beginning after June 15, 2018
- For all other entities, the ASU is effective for fiscal years beginning after December 15, 2018.
The effective date for transactions in which an entity serves as the resource provider is as follows:
- For public businesses and nonprofits that are conduit bond obligors or with publicly-traded securities, the ASU is effective for fiscal years beginning after December 15, 2018
- For all other entities, the ASU is effective for fiscal years beginning after December 15, 2019.
The ASU should be applied on a modified prospective basis. Under modified prospective basis, the ASU will only apply to agreements existing at the effective date not previously recognized. No prior-period results should be restated. However, retrospective application is permitted.
If you have any additional questions about how the new ASU will impact you, please contact: your AAFCPAs Partner; Matt Hutt, CPA, CGMA, at 774.512.4043, firstname.lastname@example.org; or Hui-Ting Grady, CPA, at 774.512.4106, email@example.com.
AAFCPAs’ Revenue Recognition Task Force
AAFCPAs’ Revenue Recognition Task Force includes senior level professionals devoted to understanding and interpreting these ASUs since the Financial Accounting Standards Board (FASB) announced the project.
Technical Accounting Advisory
Understanding and implementing accounting standards can be complex, time-consuming, and often require requisite skills and expertise not found on your internal finance team. AAFCPAs provides financial management assistance on these complex technical accounting issues, allowing clients to confidently apply the standard with greater efficiency and ease. Learn more about how AAFCPAs can help you implement Revenue Recognition Standards. >>