Recently, CohnReznick’s Not-for-Profit and Education industry practice hosted a webinar titled, FASB Update for Not-for-Profit Organizations. The webinar is part of our ongoing Not-For-Profit Industry Governance & Financial Management Webinar Series.

The following are a few highlights from the webinar about ASU 2018-08, “Clarifying the Scope and the Accounting Guidance for Contributions Received and Contributions Made” (the ASU).

The ASU is effective for most Not-For-Profit (NFP) organizations for calendar year 2019 and provides guidance to assist them in determining:

• Whether grants and similar contracts should be accounted for as contributions (nonreciprocal transactions) or as exchanges (reciprocal transactions); and
• Whether a contribution is conditional or unconditional.

The following distinctions addressed in the ASU are important because they determine what accounting guidance to use and when revenue should be recognized.

• Reciprocal vs. Nonreciprocal / Commensurate value;
• Donor-Imposed Conditions vs. Donor-Imposed Restrictions; and
• Conditional vs. Unconditional

Reciprocal vs. Nonreciprocal / commensurate value

Is the resource provider receiving commensurate value in return?

• If yes, then it is a reciprocal (or exchange) transaction and the organization should follow ASU 2016-10 “Revenue from Contracts with Customers” (Topic 606) or other relevant guidance.

• If no, then it is a contribution and the recipient should follow FASB Accounting Standards Codification 958-605, “Not-for Profit Entities – Revenue Recognition”.

The ASU clarifies that a resource provider (even a government agency) is not synonymous with the public. In most instances, the government is not getting something in return. A benefit received by the public, because of the assets transferred or services provided, is not equivalent to commensurate value received by the governmental agency. The NFP needs to focus on the underlying transaction rather than the type of resource provider. Is the governmental agency itself (or other resource provider) receiving commensurate value in return? If the answer is no, then it is a contribution.

Donor-imposed conditions vs. Donor-imposed restrictions

If the transaction is deemed to be a contribution, then a NFP must determine if it is conditional or unconditional and/or restricted or unrestricted. Distinguishing between a condition stipulated by a donor and a restriction on the use of a contribution requires judgment.
A donor-imposed condition should be substantially met before the receipt of the assets (including a contribution receivable) is recognized as a contribution. In contrast, donor imposed restrictions limit the use of the contribution, but they do not affect whether the recipient is entitled to the contribution.

Conditional vs. Unconditional:

For a donor-imposed condition to exist, there must be both:

• A barrier that must be overcome; and

• A right of return of assets transferred or a right of release.

A barrier is what the NFP committed to do. The ASU gives examples of indicators of a barrier:

• A specified level of service (e.g., # of units of output);
• A specific outcome;
• A specific event occurs (e.g., a matching requirement); and
• Limited discretion over how to spend the funds (e.g., incurring certain qualifying expense in accordance with the Office of Management and Budget rules and regulations)

Administrative requirements (e.g., audit requirement or program report) are typically not a barrier because they are not related to the purpose of the agreement.

A right of return means there must be some consequence if the NFP does not meet its performance obligations. The most common example of a consequence would be the return of the funds. The right of return must be in the wording of the agreement or another document referenced in the agreement.

This new guidance may result in more grants or contributions recorded as contributions rather than exchange transactions. Of those contributions, many may be conditional. The ASU may cause significant changes in the timing of your revenue and financial statement disclosures. Keep in mind, if a grant or contribution is deemed an exchange transaction, revenue is deferred until expenses are incurred providing a match of revenues to expenses. However, if a grant is a contribution, the entire grant is recorded as revenue when the grant is awarded or any donor-imposed condition is met. This may result in revenue being recognized prior to recognition of the related expenses. In addition, conditional grants will need to be disclosed in the notes to your financial statements.

The ASU offers many specific examples that NFP organizations may find helpful in determining the appropriate accounting treatment of grants, contracts and contributions.

What next?

Every organization needs to evaluate the types of contributions and grants it receives and document their conclusion regarding revenue recognition. The ASU contains a flow chart that can be used to help support your conclusions.

All organizations (especially those with significant government funding and/or deferred revenue), will need to update revenue recognition policies and procedures based on this new guidance. The financial team should quantify the expected changes to determine the impact on the organizational budget and provide appropriate education to users of the financial statements including management and the board of directors or its finance committee.

Gain insight

For more information, please contact your CohnReznick engagement team or Patricia McGowan, CPA, Partner, CohnReznick Not-for-Profit & Education Industry Practice at 959.200.7007 or [email protected]. Or contact, Catherine Syslo, CPA, Director, CohnReznick Not-for-Profit & Education Practice at 862.245.5024 or [email protected].

If you missed the FASB Update for Not-for-Profits webcast, or would like to experience it again, you may do so via this on-demand link.