In 2014, the Financial Accounting Standards Board (FASB) issued a new standard on revenue recognition (ASU 2014-09). The ASU was intended to clarify and standardize across various sectors revenue reporting. But many nonprofits found the new standard confusing because it didn’t account for the unique nature of revenue sources such as contributions and grants. Now, with the release of ASU 2018-08, Not-for-Profit Entities (Topic 958): Clarifying the Scope and the Accounting Guidance for Contributions Received and Contributions Made, the FASB attempts to resolve some of the questions that have arisen.
The 2014 standard applies only to revenue from “reciprocal” (otherwise known as “exchange”) transactions. But nonprofits characterize certain revenue items such as grants differently. Some organizations may treat a government grant as a reciprocal transaction and others may treat a similar grant as a “nonreciprocal” transaction.
There’s also some inconsistency in how nonprofits distinguish between conditional and unconditional contributions. Contributions are considered nonreciprocal, meaning they don’t fall within the rules of the standard. Instead, nonprofits generally report promised contributions in the period they receive the pledge. Donor restrictions on how or when the funds may be used don’t change the timing of recognition. But when the donor’s gift is available only after certain requirements are met by the organization, the timing may be different. Nonprofits shouldn’t recognize a conditional promise to give as revenue until the conditions are substantially satisfied.
The new ASU first addresses the issue of when a grant or similar contract should be characterized as a reciprocal exchange and when it should be considered a contribution. The critical question is whether the “resource provider” (generally, a grantmaker) receives value in return for the resource provided (grant). If so, the transaction is an exchange.
But most transactions of this type are, in fact, contributions. Indirect benefits to the public or execution of the resource provider’s mission shouldn’t be considered exchanges of commensurate value. Note, however, that payments from third parties as part of an existing exchange transaction (such as those with Medicare) may follow different rules.
The FASB’s guidance also tackles conditional contributions. It instructs nonprofits to ask whether a contribution agreement:
- Stipulates barriers that must be overcome, such as a performance-related hurdle or rules that the organization must follow when using the contribution, and
- Releases the donor from the obligation to transfer the assets or provides the donor with the right to demand their return if the barriers aren’t overcome.
If your agreement contains these items, your nonprofit isn’t entitled to the transferred assets until it has met the contributor’s conditions.
Finally, a simultaneous release option would allow nonprofits that receive and use grants within the same period to report them as unrestricted net assets. A similar option has been available, but now your nonprofit may elect it for all restricted contributions that were initially classified as conditional without electing it for all other restricted contributions and investment returns.
More contributions likely
The FASB speculates that ASU 2018-08 will result in more grants being characterized as contributions — often conditional contributions — rather than exchanges. For most organizations, the guidance applies to annual reporting periods beginning after December 15, 2018.