In August 2017, the Financial Accounting Standards Board (“FASB”) issued a proposed Accounting Standard Update (Update) to clarify existing guidance on revenue recognition of grants and contracts by nonprofit organizations.1
The changes in this proposed Update provide a more robust framework to determine when a transaction should be accounted for as a contribution under Subtopic 958-605 or as an exchange transaction accounted for under other guidance (for example, Topic 606). The proposed Update also provides important guidelines on whether a contribution is conditional or unconditional, which would help reduce diversity in practice and simplify the application of judgment, since current guidance is open to differences in interpretation.
To distinguish whether grants and contracts are either a i) nonreciprocal (contributions) or ii) reciprocal (an exchange) transaction, an organization evaluates whether the resource provider is receiving commensurate value in return for the resources transferred by considering the following:
- A resource provider, including private foundations and governmental agencies, are not synonymous with the general public. Indirect benefits received by the public as a result of the assets transferred is not equivalent to commensurate value received by the resource provider2.
- Execution of the resource providers’ mission or the positive sentiment from acting as a donor would not constitute commensurate value received by the resource provider for the purpose of determining whether a transfer of assets is an exchange or a contribution.
The proposed Update also requires that an entity determine whether a contribution is conditional on the basis of whether an agreement includes a barrier that must be overcome and either a right of return of assets transferred or right of release of a promisor’s obligation to transfer assets. The presence of both a barrier and the right of return or a right of release indicates that a recipient is not entitled to the transferred assets until it has overcome the barrier and the right of return or release has lapsed.
In determining whether an agreement contains a barrier, the proposed Update provides the following list of indicators to consider in the assessment process, with no single indicator being determinative:
- The inclusion of a measurable performance-related barrier.
- Whether the stipulation is related to the purpose of the agreement. (This indicator would generally exclude administrative tasks and trivial stipulations.)
- The extent to which a stipulation limits discretion by the recipient.
- The extent to which a stipulation requires additional actions.
It is expected that the changes in the Update will result in more grants and contracts being accounted for as contributions (often as conditional contributions) than under the current GAAP. For this reason, clarifying whether the contribution is conditional or unconditional is important because classification affects the timing of contribution revenue recognition.
This proposed Update would apply to both a recipient of contributions received and a resource provider of contributions made, and the requirements would be applied to financial statements on a modified prospective basis. The majority of nonprofit entities would apply the provisions in this proposed Update to annual periods beginning after December 15, 2018. If you have any additional questions about the proposed Update, please reach out to our Nonprofit Group.
In addition, we will be hosting a complimentary seminar to discuss these updates on July 26, 2018, for details and to register, click here.