New Revenue Recognition Accounting for Nonprofits: Contribution or Exchange Transaction?

On June 21, 2018, the Financial Accounting Standards Board (FASB) issued a final 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. This ASU clarifies and reduces the current diversity in practice in accounting for grants and contributions, particularly for grants and contracts from governmental entities.  We outlined the main provisions of ASU 2018-08 in a blog published last year.>>

AAFCPAs has provided guidance and illustrative examples below to help nonprofits determine:

  • How to distinguish between contributions and exchange transactions, and
  • Which revenue recognition guidance is to be applied?

Reciprocal vs. Nonreciprocal

The primary determinant of whether a grant or contract is a contribution (nonreciprocal) or an exchange (reciprocal) is if the two parties receive and sacrifice commensurate value.  If the resource provider (e.g. a government agency) receives commensurate value in return for the cash or other resources transferred, the transaction will be accounted for as an exchange transaction and both parties will follow guidance in ASC Topic 606 or other applicable guidance.  If commensurate value is not received, the transaction will be accounted for as a contribution and the guidance in ASC Subtopic 958-605 will be applied.

The key for the evaluation is to focus on the terms of an agreement or contract, not type of resource provider.  In addition, the term used in the presentation of financial statements to label revenue (i.e. contracts, grants, contribution, or donations) is not a factor for determining whether an agreement is within the scope of ASC Topic 606 or ASC Subtopic 958-605. Under the new guidance in ASU 2018-08, a resource provider is not synonymous with the general public, even a governmental entity.  When a value received by the resource provider is incidental to the potential public benefit, the transaction is not considered commensurate value received in return.  The resource provider must receive direct and primary benefit for the resources transferred to be considered a reciprocal transaction.  The new guidance further clarifies that execution of the resource provider’s mission or the positive sentiment from acting as a donor shall not constitute commensurate value received by the resource provider.  As a result, we expect most government contracts and grants will be accounted for as contributions—unless the governmental entity receives the direct commensurate value in return for the cash or other resources transferred.

Transactions Involving Third Parties

Transactions involving a specified third party may present a challenge for nonprofits in determining if the transaction is reciprocal or nonreciprocal.  Nonprofits must use judgment to make the determination based on review of the substance of the contract or grant agreements.  In general, if a contract or grant is made by a donor on behalf of an identified customer for an existing exchange transaction, the contract or grant is simply a third-party payment to the exchange transaction.  If a contract or grant is made by a donor for a group of beneficiaries with eligibility criteria, the grant is a contribution since there are no identified customer(s) at the time the grant is awarded.  AAFCPAs has provided examples below to assist clients in evaluating transactions where there are specified third parties involved.

Examples of third-party payments for exchange transactions:

  • Healthcare Entity A provides medical services to Patient X and receives a payment from a governmental entity on behalf of the patient. The governmental entity is a third-party payer since the payment is made to Healthcare Entity A on behalf of Patient X (an identified customer) to an existing exchange transaction between Healthcare Entity A and Patient X.
  • Student Y is enrolled at College B and the total tuition charged for the semester is $25,000.  Student Y has received a $5,000 grant to use toward the tuition fee, which is paid directly by the grantor to College B.  The grant received by College B is awarded to Student Y to be used for the existing exchange transaction between College B and Student Y.  It’s not a contribution from the grantor to College B.
  • Affordable Housing NFP receives rent subsidies associated with individual residents from a housing authority agency.  The housing authority agency is a third-party payer for the rental transactions between Affordable Housing NFP and specified residents since the rent subsidies are awarded directly to the residents, not Affordable Housing NFP.

Examples of contributions:

  • Social Service Agency C provides drug rehabilitation services to eligible individuals. Individuals sign up and go through Agency C’s intake process to receive the service but payment for the service is made under a government contract.  Agency C determines who qualifies for the program.  The payment is accounted for as a contribution, that is restricted for eligible individuals, as commensurate value is not exchanged between Agency C and any identified customers.
  • College B receives a grant from the City of Boston that is to be used for scholarship for students who are residents of the City of Boston.  College B determines the specific students to award scholarships.  Student Y qualifies for the scholarship and receives $3,000 towards tuition.  The grant was awarded to College B, not any identified students (i.e. Student Y) and therefore, the transaction is a contribution.
  • Affordable Housing NFP receives an operating support grant for housing individuals that meet income criteria.  The operating support grant is considered a contribution since it is not applied directly as payment to rents owed by residents.

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.

If you have any questions please contact: Hui-Ting Grady, CPA at 774.512.4106,; Matt Hutt, CPA, CGMA at 774.512.4043,; or your AAFCPAs Partner.

About the Authors

Hui-Ting Grady
Hui-Ting has extensive experience providing assurance solutions to diverse nonprofit organizations, including: affordable housing development projects with HUD requirements, multi-service human & social services providers, and behavioral health agencies. She delivers audits in accordance with Uniform Guidance/Single Audit and Government Auditing Standards, as well as Uniform Financial Report (UFR) and other funding source regulations. Hui-Ting is a member of AAF’s Accounting and Assurance (A&A) Committee, and Revenue Recognition Task Force. She is dedicated to keeping the firm and clients apprised of regulatory changes and new pronouncements in a proactive and timely manner, as well as providing best practice recommendations for efficient and effective implementations of new accounting standards.
Matthew Hutt CPA
Matt leads AAFCPAs’ Healthcare Division, providing assurance, tax and advisory solutions for Federally Qualified Health Centers (FQHCs), behavioral health providers, home care agencies and hospices, nursing homes, and senior care living centers. Matt advises healthcare providers on consolidation and coordination of care, including the integration of behavioral health into the primary care delivery system. He also provides consulting solutions for providers transitioning to new value-based reimbursement models, and data driven patient care, including: developing business process and controls for collecting and advantaging data to provide analysis on: provider activity, delivery of care, and analysis of efficiency & cost effectiveness. Matt is also highly-sought after for his knowledge on issues related to affordable housing developers with requirements related to the US Department of Housing and Urban Development, MassHousing, Low Income Housing Tax Credits, Historical Tax Credits and New Markets Tax Credits.