For not-for-profit organizations, correctly categorizing grants and donations for proper revenue recognition is not always straightforward. Updated guidance now provides some clarity.
In June 2018, the Financial Accounting Standards Board (FASB) issued the 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.” This update provides not-for-profit organizations with new guidance on characterizing grants and similar contracts as either reciprocal or nonreciprocal transactions, and it provides a framework for distinguishing between conditional and unconditional contributions.
The FASB indicated that not-for-profit organizations often have difficulty with these areas and that the new revenue recognition standard, Accounting Standards Codification (ASC) 606, “Revenue From Contracts With Customers,” has placed renewed focus on the need for clarity in this area. ASU 2018-08 applies to all entities, including not-for-profit organizations and business entities that receive or make contributions of cash and other assets. It covers both promises to give and those that are actually made. It excludes transfer of assets from government agencies to business entities.
Many not-for-profit organizations have expressed difficulty when applying guidance in Subtopic 958-605, “Not-for-Profit Entities – Revenue Recognition.” These challenges resulted in a range of approaches when applying current generally accepted accounting principles (GAAP) to their accounting and reporting. The amendments in ASC 606 place these issues in the spotlight because they add new disclosure requirements and eliminate certain limited exchange transaction guidance that was previously contained in Subtopic 958-605.
Exchange transactions vs. contributions
Discerning between exchange transactions and contributions determines which accounting guidance should be applied. A transaction is considered a contribution if the commensurate value is not reciprocated between the two parties. If commensurate value is reciprocated, then the transaction is considered an exchange transaction.
For example, consider the case of a not-for-profit university receiving a grant from the National Science Foundation (NSF) to conduct genome research. The university retains all the rights to the research and findings and thus receives the primary benefit of the findings. The grant would be considered a contribution. The NSF’s benefit is considered indirect because the research and findings serve the general public.
In another example, a university’s research institute receives $2 million grant from a pharmaceutical company to finance the costs of a clinical trial for an experimental blood pressure medicine the company has developed. The grant agreement specifies the protocol of the testing, including the number of participants tested, dosages, and frequency; and requires delivery of a detailed report of the test outcomes. In addition, the pharmaceutical company retains the rights to the study results. This transaction is considered an exchange transaction because the pharmaceutical company receives commensurate value as the resource provider because the results of the clinical trial have commercial value.
ASU 2018-08 clarifies existing guidance covered in Subtopic 958-605 and provides examples of how to discern between an exchange transaction, which is considered reciprocal, and a contribution, which is nonreciprocal. For contributions, an organization should follow the guidance in Subtopic 958-605. For an exchange transaction, organizations should follow other guidance such as ASC 606. Thus, the accounting might be different depending on the guidance applied.
A transfer of assets that is part of an existing exchange transaction between a recipient and an identified customer does not fall under Subtopic 958-605. Some examples are payments made under Medicare and Medicaid programs, provisions of healthcare education services by a government agency for its employees, and Pell grants or similar state or local government tuition assistance programs. In these examples, other guidance, such as ASC 606, should be used to account for such transactions.
Conditional vs. unconditional contributions
Another area of difficulty has been the determination of whether a contribution is conditional or unconditional. Subtopic 958-605 requires a recipient to make this determination, which affects the timing of the revenue recognized. Unconditional contributions are recognized immediately and classified as either net assets with donor restrictions, or net assets without donor restrictions. Conditional contributions are accounted for as a liability or are not recognized as revenue initially, until the barriers to entitlement are overcome, at which point a transaction is recognized as unconditional and classified as either a net asset with donor restrictions, or a net asset without donor restrictions.
For a donor-imposed condition to exist under ASU 2018-08, a right of return or release must be stated, and the agreement must include a performance-related condition or other measurement barrier. While no single indicator is determinative, indicators that a barrier exists include the following:
Simultaneous release option
One of the amendments in ASU 2018-08 is the simultaneous release option. It allows a not-for-profit organization to recognize a donor-restricted contribution as a net asset without donor restrictions, if the restriction is met in the same period that the revenue is recognized. The amendments allow a not-for-profit organization to elect such a policy for donor-restricted contributions that were initially conditional contributions without also having to elect the policy for other donor-restricted contributions. A not-for-profit may also elect a policy to report contributions with restrictions that are met in the same reporting period as revenue within net assets without donor restrictions This policy can be elected as long as the organization has a similar policy for reporting investment gains and income, reports consistently from period to period, and discloses its accounting policy.
For example, suppose a not-for-profit animal shelter with a calendar year-end is awarded a grant of $50,000 on Jan. 1, 2019, to be used specifically toward the construction of a new dog run. For the shelter to receive the funds, it must raise an additional $50,000 of funding from other sources, making this a conditional contribution. Once the match requirement is met, the grant becomes unconditional, and the shelter would recognize the contribution as revenue with donor restrictions, because the grant purpose is narrower than the shelter’s overall mission. Alternately, if construction of the dog run is completed in November 2019 and the shelter elects the simultaneous release option for contributions that were initially conditional, the shelter would recognize the grant as revenue without donor restrictions since the purpose restriction was satisfied in the same annual period as the revenue was recognized.
Effective date and transition
Resource providers that are not public business entities or conduit debt obligors have been given an additional year for implementation of ASU 2018-08 guidance (Exhibit). Some not-for-profit organizations are both grant recipients and resource providers, and they will need to determine whether to stagger implementation or to elect early adoption of the guidance for the grants they make, to coincide with implementation for grants they receive.
In June 2018, the Financial Accounting Standards Board (FASB) issued the 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.” This update provides not-for-profit organizations with new guidance on characterizing grants and similar contracts as either reciprocal or nonreciprocal transactions, and it provides a framework for distinguishing between conditional and unconditional contributions.
The FASB indicated that not-for-profit organizations often have difficulty with these areas and that the new revenue recognition standard, Accounting Standards Codification (ASC) 606, “Revenue From Contracts With Customers,” has placed renewed focus on the need for clarity in this area. ASU 2018-08 applies to all entities, including not-for-profit organizations and business entities that receive or make contributions of cash and other assets. It covers both promises to give and those that are actually made. It excludes transfer of assets from government agencies to business entities.
Many not-for-profit organizations have expressed difficulty when applying guidance in Subtopic 958-605, “Not-for-Profit Entities – Revenue Recognition.” These challenges resulted in a range of approaches when applying current generally accepted accounting principles (GAAP) to their accounting and reporting. The amendments in ASC 606 place these issues in the spotlight because they add new disclosure requirements and eliminate certain limited exchange transaction guidance that was previously contained in Subtopic 958-605.
Exchange transactions vs. contributions
Discerning between exchange transactions and contributions determines which accounting guidance should be applied. A transaction is considered a contribution if the commensurate value is not reciprocated between the two parties. If commensurate value is reciprocated, then the transaction is considered an exchange transaction.
For example, consider the case of a not-for-profit university receiving a grant from the National Science Foundation (NSF) to conduct genome research. The university retains all the rights to the research and findings and thus receives the primary benefit of the findings. The grant would be considered a contribution. The NSF’s benefit is considered indirect because the research and findings serve the general public.
In another example, a university’s research institute receives $2 million grant from a pharmaceutical company to finance the costs of a clinical trial for an experimental blood pressure medicine the company has developed. The grant agreement specifies the protocol of the testing, including the number of participants tested, dosages, and frequency; and requires delivery of a detailed report of the test outcomes. In addition, the pharmaceutical company retains the rights to the study results. This transaction is considered an exchange transaction because the pharmaceutical company receives commensurate value as the resource provider because the results of the clinical trial have commercial value.
ASU 2018-08 clarifies existing guidance covered in Subtopic 958-605 and provides examples of how to discern between an exchange transaction, which is considered reciprocal, and a contribution, which is nonreciprocal. For contributions, an organization should follow the guidance in Subtopic 958-605. For an exchange transaction, organizations should follow other guidance such as ASC 606. Thus, the accounting might be different depending on the guidance applied.
A transfer of assets that is part of an existing exchange transaction between a recipient and an identified customer does not fall under Subtopic 958-605. Some examples are payments made under Medicare and Medicaid programs, provisions of healthcare education services by a government agency for its employees, and Pell grants or similar state or local government tuition assistance programs. In these examples, other guidance, such as ASC 606, should be used to account for such transactions.
Conditional vs. unconditional contributions
Another area of difficulty has been the determination of whether a contribution is conditional or unconditional. Subtopic 958-605 requires a recipient to make this determination, which affects the timing of the revenue recognized. Unconditional contributions are recognized immediately and classified as either net assets with donor restrictions, or net assets without donor restrictions. Conditional contributions are accounted for as a liability or are not recognized as revenue initially, until the barriers to entitlement are overcome, at which point a transaction is recognized as unconditional and classified as either a net asset with donor restrictions, or a net asset without donor restrictions.
For a donor-imposed condition to exist under ASU 2018-08, a right of return or release must be stated, and the agreement must include a performance-related condition or other measurement barrier. While no single indicator is determinative, indicators that a barrier exists include the following:
- A performance-related or other measurable barrier that specifies a level of service, a specific output or outcome, a matching requirement, or an outside event, such as the donating organization’s net assets reaching a specified level.
- Limited discretion is allowed relating to the conduct of an activity. Examples of limited discretion include specific guidelines for allowable expenses, the hiring of specific individuals as part of the workforce that will conduct the activity, or the designation of a specified protocol to which the not-for-profit organization must adhere.
- A stipulation that is related to the purpose of the contribution. Administrative or incidental stipulations, such as an annual report or a requirement for an annual audit, would not be considered a barrier or condition for revenue recognition.
Simultaneous release option
One of the amendments in ASU 2018-08 is the simultaneous release option. It allows a not-for-profit organization to recognize a donor-restricted contribution as a net asset without donor restrictions, if the restriction is met in the same period that the revenue is recognized. The amendments allow a not-for-profit organization to elect such a policy for donor-restricted contributions that were initially conditional contributions without also having to elect the policy for other donor-restricted contributions. A not-for-profit may also elect a policy to report contributions with restrictions that are met in the same reporting period as revenue within net assets without donor restrictions This policy can be elected as long as the organization has a similar policy for reporting investment gains and income, reports consistently from period to period, and discloses its accounting policy.
For example, suppose a not-for-profit animal shelter with a calendar year-end is awarded a grant of $50,000 on Jan. 1, 2019, to be used specifically toward the construction of a new dog run. For the shelter to receive the funds, it must raise an additional $50,000 of funding from other sources, making this a conditional contribution. Once the match requirement is met, the grant becomes unconditional, and the shelter would recognize the contribution as revenue with donor restrictions, because the grant purpose is narrower than the shelter’s overall mission. Alternately, if construction of the dog run is completed in November 2019 and the shelter elects the simultaneous release option for contributions that were initially conditional, the shelter would recognize the grant as revenue without donor restrictions since the purpose restriction was satisfied in the same annual period as the revenue was recognized.
Effective date and transition
Resource providers that are not public business entities or conduit debt obligors have been given an additional year for implementation of ASU 2018-08 guidance (Exhibit). Some not-for-profit organizations are both grant recipients and resource providers, and they will need to determine whether to stagger implementation or to elect early adoption of the guidance for the grants they make, to coincide with implementation for grants they receive.
