FASB Clarifies How Nonprofits Should Characterize Contributions
On August 3, the Financial Accounting Standards Board (FASB) issued a proposed Accounting Standards Update (ASU), “Clarifying the Scope and the Accounting Guidance for Contributions Received and Contributions Made
.” This topic was added to the agenda by FASB to help address issues raised by stakeholders trying to apply ASU 2015-09, “Revenue from Contracts with Customers
” (Topic 606) to revenue transactions in the nonprofit environment.
The ASU is intended to clarify and improve the scope and the accounting guidance for contributions received and made by organizations. This is an issue that primarily affects nonprofits because they often rely on contributions as a significant source of revenue. However, the proposed ASU does not apply to transfers of assets from the government to businesses.
Providing a Clarifying Framework for Nonprofits
According to FASB Chairman Russell Golden in a press release
, “Stakeholders indicated that there is difficulty and diversity in practice among not-for-profits with characterizing grants as exchanges or contributions, and in distinguishing between conditional and unconditional contributions.” Because of these discrepancies, “the proposed ASU provides not-for-profits with a more robust framework to evaluate and determine if a transaction should be accounted for as a contribution or an exchange.”
The diversity in practice that Golden refers to has been a problem ever since the original guidance for accounting for contributions was issued. The question at stake is how a grant or contract from the federal or state government should be treated compared to the same types of agreements from a nonprofit funding organization or private donor. It is the hope that once the new guidance is issued, nonprofit organizations will be able to more consistently apply the accounting guidance and make accounting for contributions more operable.
The proposed ASU is designed to help nonprofits decide whether a transaction should be accounted for as a contribution or an exchange transaction. Under the guidance, an asset transfer is an exchange transaction if the resource provider is receiving commensurate value in return for the resources provided. The guidance further clarifies that social benefit is not deemed to be commensurate reciprocal value, even if it furthers the resource provider’s charitable mission.
As mentioned by Golden, the proposed ASU also helps nonprofits by offering an improved framework that could help them determine whether a contribution is conditional or unconditional and differentiate between a donor-imposed condition and restriction.
A contribution would be considered conditional if the answers to the below questions is ‘yes’:
- Does the donor/grantor retain a right of return to the resources provided?
- Is there a barrier the nonprofit organization must overcome to gain rights to the resources provided?
To help nonprofits answer the second question, the proposed ASU provides the following indicators that a barrier may exist:
- The nonprofit is required to achieve a measurable outcome (e.g. incur certain qualified expenses, help a specific number of beneficiaries or produce a certain number of units).
- The nonprofit is required to overcome a barrier related to the primary purpose of the asset transfer agreement (this excludes trivial administrative requirements).
- The nonprofit has limited discretion over how the resources are spent.
- The nonprofit is required to take significant additional actions that it otherwise would not have taken.
If a contribution is deemed to meet these criteria, it would be considered a conditional contribution. Conditional contributions are either recognized as liabilities or not recognized at all until the barrier(s) are overcome. Once this occurs, the revenue would be recognized as net assets with or without restrictions, depending on whether the donor had imposed any restrictions.
Critical Timeline Dates
The proposed ASU follows the same effective dates as ASU 2015-09:
- A public company 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 new standard to annual reporting periods beginning after Dec. 15, 2017, including interim periods within that annual period.
- Other organizations would apply the standard to annual reporting periods beginning after Dec. 15, 2018, and interim periods within annual periods beginning after Dec. 15, 2019.
Early adoption of the amendments in the proposed ASU would be permitted irrespective of the early adoption of the amendments in the revenue recognition standard.
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This article was adapted from the Nonprofit Standard newsletter.