One of the challenges many not-for-profit organizations face is determining whether or not revenue falls under the category of a contribution or exchange transaction. In some cases, it’s a pretty straight forward determination, but the waters can occasionally become a bit murky.
In June 2018, the Financial Accounting Standards Board (the FASB) issued the Accounting Standards Update (ASU) 2018-08, Clarifying the Scope and the Accounting Guidance for Contributions Received and Contributions Made.
It might be helpful to clarify the definitions of the main categories that revenue can fall into and provide some additional insight as to when they are recognized.
- FASB defines a contribution as “an unconditional transfer of cash or other assets to an entity or a settlement or cancellation of its liabilities in a voluntary nonreciprocal transfer by another entity acting other than as an owner.”
- Not-for-profits recognize them at the time they are received.
- Exchange Transaction:
- An exchange transaction is defined by FASB as “a reciprocal transfer between two entities that results in one of the entities acquiring assets or services or satisfying liabilities by surrendering other assets or services or incurring other assets or services or incurring other obligations.”
- Exchange transactions can be recognized upon receipt or over a duration of time, depending on how the obligation for this type of donation is structured.
It is important to distinguish between the two because it comes down to how the revenue is recorded on your books.
Treatment of Grants under new FASB Rules
When a donor provides a contribution that has a condition attached, FASB Accounting Standards Codification (ASC) Section 958-605-25 states that not-for-profits must wait to recognize that contribution until the conditions of that contribution are met.
The FASB ASU update has placed a renewed focus on how grants are recorded and provided additional clarifications to determine the nature of the grant. It becomes important for a not-for-profit to be clear about the grant and any conditions that must be met to satisfy grant requirements.
Two questions have been provided by FASB to determine the conditional nature of a grant. Both must be answered ‘yes’ for a grant to be considered transactional and to affect the recognition of contribution in the books.
- Does the contributor retain either a right of return to the resources provided or a right of release of promisor from its obligation to transfer resources?
- Is there a barrier the not-for-profit organization must overcome to be entitled to the resources provided?
The second question is the more difficult one to answer. FASB’s amendments provide the following criteria that may show an existing barrier.
- The not-for-profit is required to achieve a measurable outcome (e.g., help a specific number of beneficiaries or produce a certain number of units).
- The not-for-profit is required to overcome a barrier related to the primary purpose of the agreement. (Note: This excludes trivial or administrative requirements.)
- The not-for-profit has limited discretion over how the resources are spent (e.g., a requirement to follow specific guidelines about incurring qualifying expenses).
Transactional contributions are recognized as liabilities if assets are transferred in advance of the contribution or not recognized at all until conditions have been met or waived by the donor. Unconditional contributions are recognized immediately and classified as revenue.
FASB revenue recognition is a complex area. If you are unsure whether your grants are conditional, consult with a not-for-profit accounting advisor to determine the answers to the questions above and to help you fully understand how to record your grant.
Determining how the recognition of contribution should be recorded can be a simple process in some cases, but it can also pose a few challenges for organizations. It’s important to consult with an auditor that specializes in not-for-profit accounting and advisory to make the decision that is right for you, especially when the intent or exchange associated with the contribution isn’t obvious.
As with any financial strategies, you need to consider the impact to your not-for-profit. Be sure to speak with your financial advisor to determine the best approach for your organization.
Lindquist, von Husen & Joyce provides recognition of contribution and multi-year grant revenue recognition guidance for not-for-profits and affordable housing audit and compliance requirements. Contact your engagement partner at LvHJ.
You may also be interested in this whitepaper: The Power of Financial Statement Footnote Disclosures