Accounting for contributions and grants has often proven complicated for not-for-profits, especially when they come with donor-imposed conditions.
But 2018 guidance from the Financial Accounting Standards Board (FASB) provided some much-needed clarification of earlier instructions.
Traditionally, not-for-profits have taken varying approaches to characterizing grants and similar contracts as exchange transactions (also known as reciprocal transactions) or contributions (nonreciprocal transactions). The new guidance makes the process relatively simple. To determine how to treat a grant or similar contract, assess whether the “provider” receives commensurate value for the assets it’s transferring. If so, treat the grant or contract as an exchange transaction.
If the provider doesn’t receive commensurate value, determine whether the asset transfer is a payment from a third-party payer for an existing transaction between you and an identified customer (for example, payments made under Medicare). If it is, the transaction isn’t a contribution, and other accounting guidance would apply. If it isn’t, the transaction is accounted for as a contribution.
Distinguishing between conditional and unconditional contributions has been the other main challenge for not-for-profits. But the new rules stipulate that a conditional contribution includes:
- A barrier the not-for-profit must overcome to receive the contribution, and
- Either a right of return of assets transferred or a right of release of the promisor’s obligation to transfer assets.
Unconditional contributions are recognized when received. However, conditional contributions aren’t recognized until you overcome the barriers to entitlement. To determine whether you must overcome a barrier to receive a contribution, consider:
- The inclusion of a measurable performance-related or other measurable barrier (for instance, a matching requirement),
- Limits on your not-for-profit’s discretion over how to conduct an activity (such as specific requirements on allowable expenses), and
- A stipulation that relates to the purpose of the agreement (not including administrative tasks and trivial stipulations such as production of an annual report).
The new rules also provide a simultaneous release option, which allows you to classify unconditional donor-restricted contributions directly in “net assets without donor restrictions” if the restriction is satisfied in the same period that the revenue is recognized.
Already in Effect
The FASB’s Accounting Standards Update No. 2018-08 already affects most not-for-profits. It takes effect for most organizations that are recipients of funds for annual reporting periods starting after December 15, 2018, and interim periods within annual periods beginning after December 15, 2019. The rules generally take effect one year later for organizations that are resource providers.
Note that, as a result of this guidance, you may find yourself accounting for more grants and similar contracts as contributions than you have in the past. If you aren’t sure what this means for your financial statements, loan covenants and other matters, contact your trusted advisor.