When the Financial Accounting Standards Board (FASB) updated its rules for recognizing revenue from contracts in 2014, it only added to the confusion that nonprofits already had about accounting for grants and similar contracts.
\nFortunately, last year, 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. Calendar-year nonprofits must follow this guidance when preparing their 2019 year-end financial statements.
\nComplicated rules
\nNonprofits traditionally have taken varying approaches when they:
\nCharacterize grants and similar contracts as exchange transactions (also known as reciprocal transactions) or contributions (nonreciprocal transactions), and
\nDistinguish between conditional and unconditional contributions.
\nThe FASB\u2019s updated revenue recognition guidance \u2014 ASU 2014-09, Revenue from Contracts with Customers \u2014 eliminated some of the previous guidance for nonprofits and imposed extensive disclosure requirements that didn\u2019t seem relevant to contributions. ASU 2018-08 clarifies matters by laying out rules that will help nonprofits determine whether a grant or similar contract is indeed a contribution \u2014 and, if so, when they should recognize the revenue associated with it.
\nExchange vs. contribution
\nTo determine how to treat a grant or similar contract, you must assess whether the \u201cprovider\u201d receives commensurate value for the assets it\u2019s transferring. If it does, you should treat the grant or contract as an exchange transaction. ASU 2018-08 stresses that the provider (the grantor or other party) in a transaction isn\u2019t synonymous with the general public. So, indirect benefit to the public doesn\u2019t represent commensurate value received. Execution of the provider\u2019s mission or positive sentiment received from donating also doesn\u2019t constitute commensurate value received.
\nWhat if the provider doesn\u2019t receive commensurate value? You then must determine if the asset transfer is a payment from a third-party payer for an existing transaction between you and an identified customer (for example, payments made under Medicare or a Pell Grant). If it is such a payment, the transaction won\u2019t be considered a contribution under the ASU, and other accounting guidance would apply. If it isn\u2019t such a payment, the transaction is accounted for as a contribution.
\nConditional terms
\nAccording to ASU 2018-08, a conditional contribution includes:
\nA barrier the nonprofit must overcome to receive the contribution, and
\nEither a right of return of assets transferred or a right of release of the promisor\u2019s obligation to transfer assets.
\nUnconditional contributions are recognized when received. However, conditional contributions aren\u2019t recognized until you overcome the barriers to entitlement.
\nIs there a barrier to overcome before your organization can receive a contribution? Consider the inclusion of a measurable performance-related barrier, limits on your nonprofit\u2019s discretion over how to conduct an activity or a stipulation that relates to the purpose of the agreement (not including administrative tasks and trivial stipulations such as production of an annual report). Some indicators might prove more important than others, depending on circumstances. And no single indicator is determinative.
\nNet effect
\nAs a result of the updated guidance, nonprofits will likely account for more grants and similar contracts as contributions than they did under the previous rules. Check with your CPA to determine what that means for your financial statements, loan covenants and other matters.
\n\u00a9 2019<\/p>\n","protected":false},"excerpt":{"rendered":"
When the Financial Accounting Standards Board (FASB) updated its rules for recognizing revenue from contracts in 2014, it only added to the confusion that nonprofits already had about accounting for grants and similar contracts. Fortunately, last year, the FASB provided some much-needed clarification with Accounting Standards Update (ASU) No. 2018-08, Not-for-Profit Entities (Topic 958): Clarifying […]<\/p>\n","protected":false},"author":3,"featured_media":0,"comment_status":"closed","ping_status":"closed","sticky":false,"template":"","format":"standard","meta":{"footnotes":""},"categories":[13],"tags":[],"class_list":["post-14271","post","type-post","status-publish","format-standard","hentry","category-aa"],"_links":{"self":[{"href":"https:\/\/www.sfw.cpa\/news-and-guides\/wp-json\/wp\/v2\/posts\/14271","targetHints":{"allow":["GET"]}}],"collection":[{"href":"https:\/\/www.sfw.cpa\/news-and-guides\/wp-json\/wp\/v2\/posts"}],"about":[{"href":"https:\/\/www.sfw.cpa\/news-and-guides\/wp-json\/wp\/v2\/types\/post"}],"author":[{"embeddable":true,"href":"https:\/\/www.sfw.cpa\/news-and-guides\/wp-json\/wp\/v2\/users\/3"}],"replies":[{"embeddable":true,"href":"https:\/\/www.sfw.cpa\/news-and-guides\/wp-json\/wp\/v2\/comments?post=14271"}],"version-history":[{"count":0,"href":"https:\/\/www.sfw.cpa\/news-and-guides\/wp-json\/wp\/v2\/posts\/14271\/revisions"}],"wp:attachment":[{"href":"https:\/\/www.sfw.cpa\/news-and-guides\/wp-json\/wp\/v2\/media?parent=14271"}],"wp:term":[{"taxonomy":"category","embeddable":true,"href":"https:\/\/www.sfw.cpa\/news-and-guides\/wp-json\/wp\/v2\/categories?post=14271"},{"taxonomy":"post_tag","embeddable":true,"href":"https:\/\/www.sfw.cpa\/news-and-guides\/wp-json\/wp\/v2\/tags?post=14271"}],"curies":[{"name":"wp","href":"https:\/\/api.w.org\/{rel}","templated":true}]}}