The guidance clearly states that the type of entity providing the funds should not override the substance of the transaction and furthering the entity’s mission or “feel good” sentiment does not constitute commensurate value. The guidance also specifically spells out that providing services to the general public is a nonreciprocal transaction, which may be different from how organizations are currently treating these transactions.
For example, if a nonprofit provides medical treatment to a patient and then receives payment from Medicaid for the treatment, this is most likely a reciprocal transaction. The underlying transaction – providing medical services to the patient – would be accounted for as patient revenue under Topic 606, and the payment from Medicaid would be payments on behalf of the patient.
On the flip side, if a nonprofit entity received a grant to provide medical services to individuals in a specific area during the current calendar year, which sets out certain eligibility criteria, this may be considered a contribution and accounted for under Topic 958.
Although in both situations, the organization is providing medical services and are paid for by a governmental agency, a review of the facts and circumstances, as well as consideration of the substance of the transaction is required to determine whether a specific grant or contract is a reciprocal or nonreciprocal transaction.
The second issue ASU 2018-08 addresses is determining whether a nonreciprocal transaction is conditional or restricted. Many funders stipulate how and when funds can be utilized, and there is judgement involved to determine whether the stipulations make the contribution conditional or restricted.
Since only unconditional contributions are recorded as revenue, the distinction will determine whether revenue is recorded at the time the grant is received or not and the types of disclosures required. ASU 2018-08 states for a contribution to be conditional, a right of return or release exists, and there is a barrier that must be overcome. A right of return can be said in many ways in an agreement, but the intent should indicate that the entity’s obligation to provide funds can be extinguished or the funds returned under certain circumstances.