Applying FASB’s New Guidance for Contributions Received and Contributions Made
By Mark Piszko, CPA, CGMA, Partner
Last year 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 (Subtopic 958-605). For many organizations, the requirements contained in this ASU are now in effect. (See effective dates below.) As a reminder, the ASU includes the following within its scope:
- Applies to all entities (not-for-profit and business entities) that receive or make contributions (unless otherwise noted)
- Applies to both contributions received by a recipient and contributions made by a resource provider
- Excludes transfers of assets from the government to business entities
- Precludes the use of terms in the financial statements to describe revenue — such as contributions, grants, and donations that are accounted for under Subtopic 958-605 — from determining whether an agreement is within the scope of that guidance.
The FASB issued the ASU to eliminate the diversity in practice in recognizing grants received, particularly those from governmental sources, as either exchange transactions or contributions, and in distinguishing between conditional and unconditional contributions. The FASB also sought to clarify that grants or contracts determined to be exchange transactions fall under the scope of ASU 2014-09, Revenue from Contracts with Customers (Subtopic 958-606).
Guidance for the treatment of contributions received and contributions made includes the following:
- The resource provider is not synonymous with the general public, even a governmental entity. If a resource provider receives value indirectly by providing a societal benefit, this is considered a nonreciprocal transaction. In other words, it is entirely possible that payment received by an organization to operate certain of its programs from which the general public derives benefit could be reported as a contribution rather than an exchange transaction.
- If the primary beneficiary of a grant or contract is a third party (e.g., a named scholarship recipient), a not-for-profit must use judgment to determine if the transaction is reciprocal or nonreciprocal.
- Two important questions are:
- Who receives the benefit of the resource? and
- Does the resource provider receive direct commensurate value?
- Furthering a resource provider’s mission or “feel good” sentiment does not constitute commensurate value received.
- The type of resource provider should not override the substance of the transaction.
Conditional Contributions: Indicators to Determine a Barrier
Entities would have to determine whether a contribution is conditional based on whether an agreement includes a barrier that must be overcome and either a right of return of assets or a right of release of a promisor’s obligation to transfer assets exists. The FASB developed indicators that would be used by entities to make this determination.
Some indicators may be more significant than others, but no single indicator would be determinative. The indicators include the following:
- A measurable performance-related barrier or other measurable barrier
- The extent to which a stipulation limits discretion by the recipient on the conduct of an activity
- The extent to which a stipulation is related to the purpose of the agreement.
Contributions Made by a Resource Provider
The FASB concluded that the guidance for distinguishing between conditional and unconditional contributions should be the same for both recipients and resource providers.
Required Disclosures by Recipients
The new ASU confirms that current existing disclosure requirements about conditional promises to give should remain. Paragraph 958-310-51-4 requires recipients of conditional promises to give to disclose the following:
- The total of amounts promised
- A description and amount for each group of promises having similar characteristics, such as amounts of promises conditioned on establishing new programs, completing a new building, and raising matching gifts by a specified date.
Simultaneous Release of a Condition and a Restriction
Under current generally accepted accounting principles, an option exists that allows organizations to report donor-restricted contributions directly to the unrestricted net assets category if the donor restriction was satisfied in the same reporting period as the receipt of the restricted contribution as long as the organization has a similar policy for reporting investment income.
The new ASU will allow a simultaneous release option for restricted contributions by creating two “buckets” into which amounts will be released:
- Restricted contributions that were initially conditional, and
- All other restricted contributions.
The FASB affirmed that the ASU should be applied on a modified prospective basis following the effective date of the ASU to donor agreements that are either existing but incomplete as of the effective date (would apply only to the portion of revenue or expense that has not yet been recognized before the effective date of the ASU), or are entered into after the effective date. No prior year restatements are necessary; however, retrospective application will be allowed.
An entity will be required to disclose the following:
- The nature and reason for the accounting change.
- An explanation of the reasons for significant changes in each financial statement line item in the current annual or interim reporting period resulting from applying the proposed amendments compared with current guidance.
- For non-public entities, the ASU is effective for annual reporting periods beginning after December 15, 2018 and interim reporting periods beginning after December 15, 2019.
- For public business entities and not-for-profits that have issued or are a conduit bond obligor for securities that are traded, listed or quoted on an exchange or market, the ASU is effective for fiscal periods beginning after June 15, 2018, including interim periods.
For Resource Providers
- For public business entities and not-for-profits that have issued or are a conduit bond obligor for securities that are traded, listed or quoted on an exchange or market, the ASU is effective for fiscal periods beginning after December 15, 2018, including interim periods.
- For non-public entities, the effective date will be delayed by one year.
The FASB confirmed that early adoption will be permitted.
If you have any questions about grant and contribution accounting — or not-for-profit accounting and auditing matters in general — please contact Mark Piszko, CPA, CGMA, Partner-in-Charge, Not-for Profit Services, at [email protected] or 646.449.6316 or the partner in charge of your account.