In June 2018, the Financial Accounting Standards Board (FASB) issued Accounting Standards Update (ASU) 2018-08 to provide guidance about accounting for nonprofit organizations’ grants and contracts. This new ASU clarifies when to account for a transfer of assets as an exchange transaction versus as a contribution and how to determine whether a contribution is unconditional or conditional. The first determination is important because these two types of transactions are governed by different accounting standard codifications. Exchange transactions are covered by ASC 606, Revenue from Contracts with Customers, while contributions fall under ASC 958-605, Not-for-Profit Entities – Revenue Recognition.
If the transaction is considered a contribution, the new ASU also provides guidance on how to determine if the contribution is unconditional or conditional, which affects the timing of revenue and expense recognition. An unconditional contribution is recognized when it is received, while a conditional contribution is recognized when barriers restricting access to it are overcome.
Exchange Transaction vs. Contribution
The new ASU has a robust framework to determine whether a transaction is considered to be an “exchange transaction” or a “contribution.” In an exchange transaction, the donor transfers assets and receives commensurate value in return.
According to the ASU, nonprofit organizations must use two criteria to determine if the donor (resource provider) is receiving 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 doesn’t constitute commensurate value received by the resource provider.
- Furthering the resource provider’s mission or generating “positive sentiment” by acting as a donor doesn’t constitute commensurate value for the purposes of the ASU.
Note that, consistent with GAAP, if the resource provider is not itself receiving commensurate value, the nonprofit 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. If the nonprofit organization determines that the resource provider receives no commensurate value, the transaction is considered a contribution.
Conditional or Unconditional?
Next, the nonprofit organization must determine whether the contribution is conditional or unconditional.
A contribution is conditional if it satisfies both of the following criteria:
- Specific barriers are in place that the recipient must overcome to gain access to the contribution.
- If the barriers are not met, the donor is released from its obligation or the recipient must return any advanced assets.
“Barriers” include performance related or other measurable barriers such as a specific outcome, a matching requirement, or an achievement of a certain level of service or units of output. Limits on the recipient’s discretion about how to conduct an activity are also considered to be a barrier, as is a stipulation related to the purpose of the agreement.
Ask for Assistance
ASU 2018-08 will go into effect for resource recipients after December 15, 2019. Please contact your CPA to discuss your grants and contracts and how to implement this guidance.