Contributions and Exchanges Made to Nonprofits: A Quick UpdateBy John D'Amico | September 4, 2019
There is welcomed new guidance from FASB’s issuance of Clarifying the Scope and Accounting Guidance for Contributions Received and Made (ASU 2018-08) that will help organizations determine if revenue transactions should be accounted for as contributions or as exchange transactions.
A grant can either be an exchange transaction or a contribution depending on the grant agreement. The distinction between the two depends on the following: in an exchange transaction, both parties receive something of approximately equal value (a reciprocal transaction), whereas the recipient of a contribution does not have to do anything to earn it (a nonreciprocal transaction).
The distinction is important because it determines when and how the revenue will be recorded. For a more detailed look at how grant and exchange revenues are recorded and recognized, please see my article, “Is it a Grant or a Contribution? FASB has Now Made it Clearer.” This post will cover how to spot the differences between exchange transactions and contributions.
An exchange transaction is when the grantor directly receives something in exchange for the funds provided of approximate equal value, such as goods or services that the grantor directly receives. In other words, there is an element of reciprocity.
A contribution is when the grantor/contributor makes an unconditional transfer of cash or other assets, or a reduction, settlement or cancellation of its liabilities to an entity in a voluntary nonreciprocal transfer and does not directly receive something of approximate equal value for the funds provided.
The issue is: who is directly receiving the benefit? If it is not the grantor directly, then the transaction is a contribution.
Example 1 – A city governmental agency gives a grant to a nonprofit to provide temporary housing to homeless persons. This would not be considered an exchange transaction, because the city agency is not receiving anything of value in exchange for their grant. Therefore, it would be considered a conditional contribution. It is conditional because FASB is now defining a conditional contribution as having both a barrier to overcome and a right of return or release of the obligation. The barrier to overcome is actually providing the service, and if the nonprofit does not provide the service, then the governmental agency has the right to have the funds returned to them or they would be released from their obligation to make payments under the grant.
Example 2 – A city governmental agency gives a grant to a nonprofit to perform a study of homeless people in their city in order to devise a plan on how to better serve them, for which the study will be submitted back to the city governmental agency. This would be considered an exchange transaction, as the city agency is receiving the homeless study for them to now act upon.
But before an organization starts to record government and foundation grants as contributions immediately upon receiving the funds or becoming aware of the grant, please continue reading.
How This Will Work: Defining Reciprocal v. Nonreciprocal, and Conditional v. Unconditional
To make this work for government/foundation grants, FASB had to change the definition of conditional contribution by revising it to be a contribution where there is a right of return/release from obligation and a measurable barrier to overcome. An organization must consider the following:
Reciprocal (exchange) transaction versus nonreciprocal (contribution)
If both parties of the transaction receive commensurate value, then it is an exchange transaction and the organization should follow guidance in ASC Topic 606 as amended by ASU 2014-09.
If not, it is nonreciprocal (contribution)— see consideration #2.
Let’s assume a contribution. Is it conditional or unconditional?
Organizations must determine whether a contribution is conditional or not. It is conditional if the agreement includes a barrier(s) that must be overcome and either a right of return of assets transferred or a right of release of a promisor’s obligation to transfer assets.
Indicators are used to determine if the agreement contains a barrier:
- Measurable performance-related barrier or other measurable barrier, such as providing the services required in the agreement
- The extent to which a stipulation limits discretion by the recipient on the conduct of the activity, such as a requirement to follow specific guidelines about or qualifying allowable expenses, or a specific protocol that must be adhered to
- A limited discretion stipulation and whether a stipulation is related to the purpose of the agreement – this indicator excludes administrative tasks and trivial stipulations.
Conclusion and further reading:
FASB’s Clarifying the Scope and Accounting Guidance for Contributions Received and Made is important to read and understand not only for its helpful definitions, but also for its guidance on how revenues are recorded and when they are recognized.
Importantly, the Standard also requires new footnote disclosures pertaining to classifying government grants as conditional or unconditional promises. For more information on these new footnote requirements, I again refer you to my article, “Is it a Grant or a Contribution? FASB has Now Made it Clearer.”
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 +