Accounting Standards Update #2018-08: Accounting for Contributions
The Financial Accounting Standards Board (FASB) recently 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. The purpose of this ASU is to assist entities in determining whether transactions should be accounted for as contributions (nonreciprocal) or as exchange transactions (reciprocal), as well as determining whether a contribution is conditional.
Under current Generally Accepted Accounting Principles (GAAP) in the United States, many have difficulty, and there is diversity in practice, in characterizing grants and similar contracts as either exchange transactions or contributions, particularly with governmental grants. Given the new revenue recognition standard (ASU 2014-09), FASB determined that this was an area that needed clarification. This ASU aims to help eliminate this diversity in practice and applies to all entities that receive or make contributions, including business entities. How an entity labels contribution revenue in its financial statements (e.g., grants, donations) is not a factor in determining whether an agreement is in the scope of this guidance.
The reason it is important to distinguish between the two types of transactions is because different guidance is applied to each type. For contributions, an entity would follow the guidance in Subtopic 958-605, Not-for-Profit Entities – Revenue Recognition. For exchange transactions, an entity would follow the guidance in Topic 606 – Revenue from Contracts with Customers. As such, the accounting may be different depending on which guidance is applicable to the transaction.
Entities will continue to determine whether to account for a transfer of assets as an exchange transaction by evaluating whether the resource provider receives commensurate value in exchange for the assets transferred. However, the amendments in this ASU clarify how an entity determines whether a resource provider is participating in an exchange transaction by evaluating whether the resource provider is receiving commensurate value in return for the resources transferred. It does so based on the following:
- A resource provider is not synonymous with the general public. A benefit received by the public as a result of the assets transferred is not the same as the resource provider receiving that benefit.
- Execution of the resource provider’s missions does not constitute commensurate value received by a resource provider for purposes of determining whether a transfer of assets is a contribution or an exchange.
If a transaction is determined to be a contribution, the ASU further goes on to clarify the criteria for evaluating if a contribution is conditional. There is currently diversity in practice in determining this, which can affect the timing of revenue recognized. For example, if a contribution is considered unconditional, contribution revenue is recognized immediately (in the appropriate net asset class based on restrictions), whereas revenue recognition for a conditional contribution is deferred until such time the barriers to entitlement are overcome.
The amendments in this ASU require 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 a right of release of a promisor’s obligation to transfer assets. These rights must be determinable from the agreement. The existence of both a barrier and a right of return or right of release indicates that a recipient is not entitled to the transferred assets until such barrier is overcome and thus would be considered a conditional contribution. An agreement that omits one or both of these criteria is considered unconditional.
To assist with the evaluation, the ASU provides updated examples of barriers. No single barrier is determinative and entities will need to exercise judgment in determining whether a barrier exists. Such barriers include:
- Measurable performance requirements: For example, does the agreement require that a recipient’s right to the transferred assets is dependent upon achievement of a certain level of output?
- Limited discretion by the recipient related to the conduct of an activity: For example, does the agreement include a requirement to only hire specific individuals or other specific protocol that must be adhered to?
- Whether a stipulation is related to the purpose of the agreement: This indicator would typically exclude administrative tasks and trivial stipulations.
The ASU clarifies that this guidance does not apply to the transfers of assets (typically from a governmental entity) that are part of an existing exchange transaction between a recipient and an identified customer. Some examples of this include payments under Medicare and Medicaid programs and Pell Grants (or similar state or local government tuition assistance programs).
In summary, the amendments in this ASU provide more clarification for entities to determine whether a transaction should be accounted for as a contribution or as an exchange transaction and should provide for greater consistency in accounting for such transactions. The amendments in this update will likely result in more grants and contracts being accounted for as contributions rather than as exchange transactions (the prevalent practice today), which impacts the timing of revenue recognition.
The amendments in this ASU should be applied on a modified prospective basis, although retrospective application is permitted. Under the modified prospective basis, the guidance should be applied to all agreements that are either not completed as of the effective date or entered into after the effective date.
For public business entities or not-for-profits that have issued, or are a conduit bond obligor for securities that are traded, listed, or quoted on an exchange or an over-the-counter market, the entity should apply the amendments in this ASU on contributions received or made to annual periods beginning after June 15, 2018 (including interim periods within those annual periods) for resource recipients and December 15, 2018 (including interim periods within those annual periods) for resource providers. All other entities should apply the amendments for transactions in which the entity serves as the resource recipient to annual periods beginning after December 15, 2018 (and interim periods beginning after December 15, 2019) and as the resource provider to annual periods beginning after December 15, 2019 (and interim periods beginning after December 15, 2020). Early adoption is permitted.
If you have any questions regarding ASU 2018-08, please contact Tiffany Cavanaugh or your BNN advisor at 800.244.7444.
Disclaimer of Liability: This publication is intended to provide general information to our clients and friends. It does not constitute accounting, tax, investment, or legal advice; nor is it intended to convey a thorough treatment of the subject matter.