Contribution Accounting Under U.S. GAAP
In June 2018, the Financial Accounting Standards Board (FASB) issued Accounting Standards Update (ASU) 2018-08, Not-for Profit Entities (Topic 958): Clarifying the Scope and Accounting Guidance for Contributions Received and Contributions Made. The ASU was issued to improve the accounting guidance for nonprofits with the ultimate goal of minimizing the diversity that existed under previous GAAP related to the classification and accounting for grants and contracts.
Historically, organizations have expressed difficulties in determining whether grants or similar contracts are contributions (nonreciprocal) within the scope of Accounting Standards Codification (ASC) Topic 958, Not-for-Profit Entities, or exchange (reciprocal) transactions within the scope of other guidance, such as ASC Topic 606, Revenue from Contracts with Customers. Many also noted challenges in determining, once a transaction is deemed to be a contribution, whether the contribution is conditional. This resulted in variance in practice when characterizing grants and contracts of a similar nature and is what ASU 2018-08 was designed to address.
ASC 958-605-55-1A includes the following diagram to illustrate the process for determining if a transaction is a contribution, an exchange transaction, or another type of transaction, and also whether a contribution is conditional or unconditional:
Exchange or Contribution
The first step in the flowchart is determining whether the transaction is reciprocal (exchange) or nonreciprocal (contributions) based on whether or not the resource provider (i.e. grantor) receives commensurate value in return for the transferred assets. The guidance states that benefits received by the general public do not equate to commensurate value being received by the resource provider. It also clarifies that executing the resource provider’s mission does not mean commensurate value is received. These types of transactions would generally be considered nonreciprocal under the guidance of ASC 958-605. Further, if penalties assessed on a recipient for noncompliance with terms of an agreement are limited to the delivery of assets or services already provided and/or the return of the unspent funds, the transaction would generally be indicative of a contribution (nonreciprocal).
Conditional or Unconditional Contributions
Once the organization has determined a transaction falls within the contribution guidance in ASC 958-605, the next step requires organizations to assess whether the contribution is unconditional (with the full amount recognized in revenue immediately) or conditional (with revenue recognition being deferred until the conditions are substantially met). A contribution is considered conditional if the agreement contains both of the following: (1) a barrier the recipient must overcome to be entitled to the assets transferred or promised, and (2) a right of return to the contributor for assets transferred or a right of release of the promisor from its obligation to transfer assets. These both must be determinable from the agreement.
The following are potential indicators and examples of barriers or conditions:
- Measurable performance-related barrier or other measurable barrier: agreement includes outcomes to be achieved within a specific time frame; recipient’s entitlement to resources is contingent upon a specified level of service, an identified number of units of output, or a specific outcome; recipient’s entitlement to resources is contingent upon an identified event (i.e. a matching requirement).
- Limited discretion by the recipient on the conduct of an activity: agreement includes requirements to follow specific guidelines about incurring qualifying or allowable expenses, requirements to hire specific individuals, or a specific protocol that must be followed. It should be more specific than a limitation on the general activity being conducted or the time frame in which the contribution must be used.
- Stipulations related to the purpose of the agreement: agreement includes a requirement for a homeless shelter to provide a certain number of meals or an animal shelter to expand its facility to accommodate a certain number of additional animals. It is worth noting that stipulations unrelated to the purpose of the agreement are not indicative of a barrier (i.e. administrative or trivial stipulations, such as an annual reporting requirement or performance reporting requirement to demonstrate the organization took action to meet barriers listed in the agreement).
Conditional contributions where funds or other assets are received prior to conditions being substantially met are recorded as a refundable advance liability. The refundable advance liability is relieved and recognized in revenue when or as the conditions are substantially met.
When a contribution is determined to be unconditional, the last step of the process is to determine if there are any donor-imposed restrictions and to recognize the revenue within the appropriate net asset class (i.e. net assets with donor restrictions or net assets without donor restrictions).
Distinguishing between a donor-imposed condition and a donor-imposed restriction may require management to exercise judgment. Donor-imposed restrictions limit the use of the contribution to a specific activity or time period, but they do not affect whether the recipient is entitled to the contribution and generally do not place limitations on how the activity is performed.
Understanding the contribution accounting guidance in ASU 2018-08 is essential to ensure proper recognition of revenue transactions in order to provide accurate financial information to stakeholders. We recommend not-for-profit organizations build the elements of ASU 2018-08 into accounting/fiscal policies and carefully review transactions to ensure the guidance is applied correctly.
Source: FASB Accounting Standards Update 2018-18, FASB ASC 958-605
