In May 2014, the Financial Accounting Standards Board (FASB) issued Accounting Standards Update (ASU) 2014-09, Revenue from Contracts with Customers (Topic 606). This ASU affected predominantly all revenue streams for all industries except for recognition of revenue from contributions to not-for-profit (NFP) organizations. The FASB vowed to return one day and finish what they started by addressing how NFPs should account for contributions, and four years later they did. ASU 2018-08, Clarifying the Scope and the Accounting Guidance for Contributions Received and Contributions Made, was issued in June 2018 to tackle diversity in practice regarding recording contributions, to clarify the steps a NFP organization should consider in determining whether a transaction is a contribution or an exchange, and to refocus attention on what constitutes a donor restriction and a donor condition.
The FASB recognizes that NFP organizations had, over the years, interpreted the existing guidance in ways that lead to diversity in comparing sets of financial statements, particularly with respect to organizations that receive federal and state government grants. Some organizations accounted for the funds as contributions with donor restrictions while others considered them to be exchange transactions for reimbursement. The divergent interpretations led to the application of different codification sections of accounting standards; contributions followed Accounting Standard Codification (ASC) 985-605 while exchange transactions followed the new guidance flowing from ASU 2014-09 in ASC 985-606. For organizations that received a significant amount in grants, the effects on financial statements within the same industry could be material.
ASU 2018-08 begins by suggesting a two-part test in determining how to classify and record the funds received by a NFP. First is to determine whether the resource provider is receiving anything of commensurate value for what they give. There are a few caveats though:
If a NFP determines that commensurate value is given by the NFP to the resource provider, then the transaction is an exchange transaction, and the NFP should follow the guidance in ASC 985-606. If the NFP determines that commensurate value is not given by the NFP, then the transaction is a contribution following the guidance in ASC 958-605, and the NFP moves to the second consideration: Are there conditions to the contribution?
For a contribution to be conditional, the transaction must meet two requirements. The first is that the transaction must have a barrier to overcome, and the second is that the transaction must include a right-of-return/release. Barriers can take a variety of forms including performance-related measurements like a matching requirement for new funds, stipulations that limit the NFP’s discretion to operate like incurring only qualifying expenses, or requirements derived from the purpose of the agreement like the production of a report on the results of a study. A right-of-return/release is an aspect of the funding agreement indicating that a resource provider is entitled to receive any unspent funds (right-of-return) or that the resource provider is released from the obligation of providing funds (right-of-release) if the NFP does not meet the requirements of the agreement.
For most NFP recipient organizations, the amendments in ASU 2018-08 are effective for periods beginning after December 15, 2018. For resource providers, the effective date is one year later. The ASU affects all agreements not completed by the effective date and all agreements into which the NFP enters after the time of adoption. Enhanced disclosures regarding the change in accounting policies and a narrative disclosure for the reasons for significant changes to individual line items in the financial statements are required.
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