FASB Proposes Improvements to Nonprofit Grant and Contribution Accounting
By John D'Amico | August 11, 2017
The Financial Accounting Standards Board (FASB) has issued a proposed Accounting Standards Update (ASU) intended to clarify and improve the accounting guidance for contributions and grants. There has always been some “gray area” in determining whether a grant is an exchange transaction or a contribution – depending on whether the contributor/grantor (the resource provider) received something of approximate equal value in exchange for the resources transferred. Distinguishing between contributions and exchange transactions determines which accounting guidance to follow.
This has resulted in difficulties and diverse reporting practices among nonprofit organizations – and is notable because it affects the timing of when the revenue is recognized, as follows:
- A grant that is determined to be a non-exchange transaction (contribution) is recorded as revenue when received or known.
- A grant that is determined to be an exchange transaction is recorded as revenue when earned (when the exchange of goods and services takes place)
For contributions, an organization should follow the guidance in the Accounting Standards Codification (ASC) Subtopic 958-605 Not-for-Profit Entities – Revenue Recognition; whereas, for exchange transactions, an organization should follow the guidance in ASU 2014-09, Revenue from Contracts with Customers (Topic 606).
This proposed ASU provides clarifying guidance to help organizations evaluate whether the resource provider is receiving value in return for the resources provided. It will also provide better guidance on whether a contribution is conditional or unconditional, and help better distinguish between donor-imposed conditions and donor-imposed restrictions.
The ASU states that the resource provider (a private foundation, a government agency or other) is NOT synonymous with the general public. Indirect benefit received by the public as a result of the assets transferred is NOT equivalent to commensurate value received by the resource provider. Therefore, FASB is now making it clear that government grants/contracts should be considered contributions – and not exchange transactions. This is a significant change for most nonprofits – who have considered government grants and contracts exchange transactions since the government indirectly benefits from them.
FASB states that these government grants/contracts are conditional contributions. The proposed ASU amends the definition of a Donor-Imposed condition to mean “a stipulation that represents a barrier that must be overcome before the recipient is entitled to the assets transferred or promised.”
Therefore, when qualifying expenditures are made on a government grant/contract, the barrier would be overcome and revenue can be recognized. This is not different from the current practice of recording revenue when there are qualifying expenses incurred. FASB’s determination that these grants/contracts are conditional contributions will therefore exclude them from the guidance and additional disclosures in ASU 2014-09, Revenue from Contracts with Customers (Topic 606).
Once a contribution has been deemed unconditional, an entity would then consider whether the contribution is restricted on the basis of the current definition of the term donor-imposed restriction, which includes a consideration of how broad or narrow the purpose of the agreement is, and whether the resources are available for use only after a specified date.
The amendments in this proposed ASU will result in more grants and contracts being accounted for as contributions (often conditional contributions) than currently under GAAP. For this reason, clarifying the guidance as to whether a contribution is conditional or unconditional is important since such classification affects the timing of contribution revenue recognition. Recipients of conditional promises to give would be required to comply with current disclosure requirements in paragraph 958-310-50-4.
The proposed ASU can be downloaded here.
Effective Date
The effective date of the amendments in the proposed ASU would be the same as the effective date of the amendments in Update 2014-09. The amendments in Accounting Standards Update No. 2015-14, Revenue from Contracts with Customers (Topic 606): Deferral of the Effective Date, defer the effective date of the amendments in Update 2014-09 by one year.
A public business entity or a nonprofit organization that has issued, or is a conduit bond obligor for, securities that are traded, listed, or quoted on an exchange or an over-the-counter market would apply the amendments in this proposed ASU to annual periods beginning after December 15, 2017, including interim periods within that annual period.
All other entities would apply the amendments in this proposed ASU to annual periods beginning after December 15, 2018, and interim periods within annual periods beginning after December 15, 2019.
Early adoption of the amendments in this proposed ASU would be permitted irrespective of the early adoption of the amendments in ASU 2014-09.
For More Information
If you have questions about how this proposed FASB ASU would affect your organization and its financial reporting processes – if implemented, please contact John D’Amico, CPA, Director with our Professional Standards Group at 212.710.1808 or via email; or any of our nonprofit professionals.
About John D'Amico
John D'Amico, CPA, is a Partner within the Professional Standards Group at Marks Paneth LLP, which is responsible for monitoring quality control in the firm as mandated by professional standards. He specializes in pre-issuance reviews and inspections of nonprofit organizations, governments and Single Audits. Mr. D’Amico also provides consultation on accounting and attestation matters and tests and monitors the firm's quality review policies and procedures. He teaches continuing education classes for the firm and on... READ MORE +