On August 3, 2017, the Financial Accounting Standards Board (FASB) issued a proposed Accounting Standards Update (ASU) intended to clarify and improve the scope and accounting guidance for contributions received and contributions made, primarily as it relates to not-for-profit entities (NFPs). The proposed ASU covers two significant topics:

  1. Helps organizations decide if a transaction should be accounted for as a contribution (nonreciprocal transaction) or as exchange (reciprocal) transaction.
  2. Provides an improved framework to determine whether a contribution is conditional or unconditional, and to better distinguish a donor-imposed condition from a donor imposed restriction.

This proposed ASU is intended to address questions and confusion stemming from the most recent revenue recognition standard (ASU 2014-09) regarding the difficulty in characterizing grants and similar contracts with resource providers as either exchange transactions or contributions and in distinguishing between conditional contributions and unconditional contributions. Some of these questions were:

  • Do contributions and grants received by a NFP meet the definition of a contract with a customer, in which case the new revenue standard would be applicable?
  • Or are they more fittingly classified as contributions, and therefore excluding them from the scope of ASU 2014-09?

The first part of the proposed ASU focuses on clarifying exchange transactions vs contributions. It provides clarification for NFPs to determine whether a resource provider is participating in an exchange transaction by evaluating whether the resource provider is receiving commensurate value in return for the resources transferred on the basis of the following:

  • A resource provider (including a private foundation, a government agency, or other) is not synonymous with the general public. Any indirect benefit received by the public as a result of the assets transferred is not equivalent to commensurate value received by the resource provider. If the benefits ultimately flow to the general public, rather than the funder, the ASU would require that the arrangement be accounted for as a contribution.
  • Execution of a resource providers’ mission or the positive sentiment from acting as a donor, would not constitute commensurate value received by a resource provider for purposes of determining whether a transfer of assets is a contribution or an exchange. Therefore, a contribution.

The second part of the proposed ASU redefines and provides clarification on conditional contributions and grants. A conditional contribution or grant is one that specifies in the agreement that a barrier must be overcome to be entitled to the promised funds, along with a requirement that the funds be returned if the barrier is not overcome. Below are indicators a barrier may exist:

  • The NFP is required to achieve a measureable performance-related outcome
  • Whether a stipulation exists as to the purpose of the agreement (this would generally exclude administrative tasks and trivial stipulations)
  • The NFP has limited discretion as to how the resources are spent
  • The NFP is required to take significant additional actions that otherwise would not have been taken

Unless a contribution or grant includes the existence of these restrictions (or barriers), contributions or grants deemed to be conditional today would likely no longer qualify as conditional. As a result, NFPs would recognize both contribution income and grant expenses earlier than they do currently.

As you read this you’re probably wondering “What are the transition requirements and when would the ASU be effective?” The proposed effective dates follow the same effective dates as the revenue recognition standard, i.e. for reporting periods beginning after December 15, 2018 (or one year earlier if the NFP has issued public debt). In closing, these are just two of the most significant proposed changes. The full exposure draft can be found here with the comment period closing November 1, 2017.