In June 2018, the Financial Accounting Standards Board (FASB) issued Accounting Standards Update (ASU) 2018-08, Clarifying the Scope and Accounting Guidance for Contributions Received and Contributions Made, to provide needed guidance about accounting for nonprofit grants and contracts. More specifically, rather than change the existing rules, the new ASU clarifies when a transfer of cash or other assets received and made qualifies as a contribution or exchange transaction.
Understanding the new guidance and definitions is vital for ensuring you are performing best accounting practices. With additional parts of ASU 2018-08 taking effect at the end of 2019, the time is now to make sure your organization is on the right track.
What is ASU 2018-08?
FASB issued ASU 2018-08 with the intent of clarifying and improving the scope and accounting guidance for contributions of cash and other assets received and made by not-for-profit organizations. The new ASU further specifies whether a transfer of assets – or the reduction, settlement, or cancellation of liabilities – is a contribution or an exchange transaction. Additionally, it offers guidance as to how to determine whether a contribution is conditional or unconditional.
Differentiating between an exchange and a contribution is important because these two types of transactions follow separate accounting standard codifications. ASC 606, Revenue from Contracts with Customers governs exchange transactions, while contributions fall under ASC 958-605, Not-for-Profit Entities – Revenue Recognition.
Additionally, the new ASU provides more explicit guidance on how to determine if the contribution is conditional or unconditional. This classification is significant as it affects the timing of revenue and expense recognition. An unconditional contribution is recognized when received, while a conditional contribution is recognized when barriers restricting access to it are overcome.
Who does the updated standard affect?
The new accounting standard primarily impacts not-for-profit entities as contributions are a considerable source of revenue. However, the amendments within the update apply to all organizations that receive or make contributions of cash and other assets, including business enterprises. Note, though, that the changes do not apply to the transfer of asset from governments to businesses.
Furthermore, one of the primary goals of the new ASU is to standardize grant classification across various not-for-profit sectors, such as nonprofit colleges and universities. For some organizations, the new standards offer the potential to alleviate the administrative burden of implementing FASB’s revenue recognition standard, which has been one of the biggest accounting changes in recent years. Colleges, universities, research institutions, social service organizations, and other not-for-profits that rely heavily on grants and contracts could see the biggest relief.
What is the difference between an exchange and a contribution?
ASU 2018-08 provides a robust framework to determine whether a transaction is an exchange or contribution. Properly classifying transactions is critical to determine whether to follow Revenue Topic 606 or Nonprofit Contribution Topic 958-605.
In an exchange, there is a reciprocal transaction in which both the donor and the recipient sacrifice approximately commensurate value. According to the ASU, not-for-profit organizations must use two criteria to conclude if the donor, or resource provider, receives commensurate value:
- The resource provider – a private foundation, government agency, or other organization – is not synonymous with the general public. Indirect benefit received by the public as the result of the transaction does not constitute commensurate value received by the resource provider.
- Furthering the resource provider’s mission or generating “positive sentiment” by acting as a donor does not constitute commensurate value for the purposes of the ASU.
Consistent with generally accepted accounting principles (GAAP), if the resource provider is not itself receiving the commensurate value, the not-for-profit organization must determine whether the transfer 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 FASB guidance applies.
In contrast, a contribution transaction includes the transfer of cash or other assets without receiving commensurate value.
How do I know if a contribution is conditional or unconditional?
Once the not-for-profit clearly separates the contribution transactions from exchange transactions, the organization must establish whether a contribution is conditional or unconditional.
A contribution is conditional if it satisfies both criteria:
- Specific barriers are in place that the recipient must overcome to gain access to the contribution.
- If the recipient fails to overcome the barriers, there is no longer an obligation on behalf of the donor or the recipient must return any advanced assets.
To verify whether a barrier exists, ASU 2018-08 provides the following indicators:
- The not-for-profit must achieve a measurable outcome (e.g., help a specific number of beneficiaries or produce a certain number of units)
- The not-for-profit must overcome a barrier related to the primary purpose of the agreement. This excludes trivial or administrative requirements.
- The not-for-profit has limited discretion over how the resources are spent (e.g., a requirement to follow specific guidelines about incurring qualifying expenses; adhering to specific protocol; hiring certain individuals).
Assets received in a conditional contribution should be accounted for as a refundable advance until the conditions have been substantially met or explicitly waived by the donor. Revenue is recognized on the date the condition was met rather than the grant date.
When does ASU 2018-08 take effect?
The following effective dates are in place for ASU 2018-08:
For entities that are public business entities (PBEs) and not-for-profits that have issued, or are conduit bond obligors for, securities that are traded, listed or quoted on an exchange or an over-the-counter market (public NFPs), that are:
- Resource recipients: The ASU is applicable to contributions received for annual periods beginning after June 15, 2018, including interim periods therein.
- Resource providers: The ASU is applicable to contributions made for annual periods beginning after December 15, 2018, including interim periods therein.
For all other resource recipients, the ASU is applicable to contributions received for annual periods beginning after December 15, 2018, and interim periods within annual periods beginning after December 15, 2019.
For all other resource providers, the ASU is applicable to contributions made for annual periods beginning after December 15, 2019, and interim periods within annual periods beginning after December 15, 2020.
What can I do to prepare for ASU 2018-08
Implementing ASU 2018-08 will affect different not-for-profits in a variety of ways, mostly depending on the nature of their revenue sources. Although the measurement and timing of recognition of certain contributions may not change as a result of the update, not-for-profits need to apply the process described in the update to their agreements in order to determine the proper accounting method. But you and your not-for-profit organization do not have to figure this out on your own.
Squar Milner is here to help. We feature a robust not-for-profit industry practice comprised of tax and audit professionals with specific expertise working with not-for-profit organizations. If you are looking to hire accounting staff, we also offer outsourced accounting consultants ready to step in and help your organization stay on track.
Disclaimer: This material has been prepared for informational purposes only, and is not intended to substitute for obtaining accounting, tax, or financial advice from a professional tax planner or financial planner. All information is provided “as is,” with no guarantee of completeness, accuracy, timeliness or of the results obtained from the use of this information.