New Nonprofit Grant and Contribution Accounting Expectations Are Here
In a surprising turn of events this spring, the Financial Accounting Standards Board (FASB) pushed back the implementation deadline for nonpublic entities recognizing revenue under Accounting Standard Codification (ASC) 606. Nonpublic entities – both for-profit and not-for-profit – were initially expected to comply with the new revenue recognition standard on reports for fiscal years beginning after December 15, 2018. The FASB’s delay pushed this deadline back by one year for those organizations that did not issue financial statements before the announcement of the deferral
Unfortunately, that is where nonprofits’ luck runs out. The FASB chose not to delay the implementation deadline for ASC 606’s counterpart, Accounting Standards Update (ASU) 2018-08. ASU 2018-08 clarifies how contribution and grant revenue are classified and reported. This means that nonprofits need to reassess how they classify and recognize revenue on grants and contracts, and they must do so on this year’s financial statements.
ASU 2018-08, Clarifying the Scope and the Accounting Guidance for Contributions Received and Contributions Made, was released by the FASB in response to the new revenue recognition standard. It was meant to clarify how nonprofits could apply the principles of ASC 606 to the grants and contributions they received. The deadline mismatch between general revenue recognition and the grant and contribution reporting guidelines could pose some issues for nonprofit leaders. It places a reporting burden on nonprofits when many are struggling under the coronavirus pandemic’s financial stressors.
Background on ASU 2018-08
ASU 2018-08 does not apply to all nonprofit transactions; it only applies to nonreciprocal transactions.
- Reciprocal Transactions (Exchange Transactions) – Reciprocal transactions exist when a commensurate value is exchanged between two parties and should be accounted for using relevant revenue recognition principles (soon to be ASC 606). Nonprofit Example: A nonprofit organization has a coffee shop in its lobby selling items at fair value to the public.
- Nonreciprocal Transactions (Nonexchange Transactions) – Nonreciprocal transactions are when nonprofits receive a donation but provide nothing of value – or something only nominal in value – in return. Nonreciprocal transactions are considered contributions and fall under the purview of ASC 2018-08. Nonprofit Example: A University receives a grant to perform a research study. The University must submit its findings to the grantor, but the University retains rights to its findings. This is a nonreciprocal transaction because the grantor receives nothing of value in exchange for its financial support.
Recognizing Revenue Under ASC 2018-08
With nonreciprocal transactions identified, nonprofit leaders must then determine how and when to recognize the associated revenues. To make that determination, they must ask themselves two questions:
Is the Transaction Conditional?
Contributions or grants that have no conditions or stipulations can be recognized as revenue immediately. But it’s a different story when conditions are present. A conditional contribution has (1) a barrier the nonprofit must overcome before they can use the funds, and (2) a right of return that the donor can exercise until a particular milestone has been met. This means that a condition may exist in any of the following scenarios:
- The nonprofit is prohibited from using the funds freely (i.e., their discretion is limited).
- The funds cannot be utilized until a specific event occurs.
- The donor imposes stipulations related to the grant’s purpose, other than administrative requirements such as expense reports or a summary of program accomplishments.
Let’s bring back our nonreciprocal transaction example from above, where a University received a grant to perform a research study. However, suppose the donor promises the grant with the stipulation that a matching amount must be raised from other contributors. In this case, the funds are conditional because the grantor stipulated that a match was required. In this instance, the University could accept the grant and record the cash but could not report revenues until it received matching donations.
Conditional contributions should be recorded to the balance sheet as a liability, and only when the conditions have been met can the liability be released and the revenue recognized.
Are There Any Donor-Imposed Restrictions?
If the contribution or grant has donor-imposed restrictions, the revenue should be reported to Net Assets with Donor Restrictions. As those restrictions are lifted (if they get lifted at all), the revenues can be reclassified as Net Assets without Donor Restrictions.
Donor restrictions are different than conditions, and it can be difficult to distinguish the two. Conditions often dictate how the activity is performed (by requiring the nonprofit to surpass a barrier), while restrictions dictate when or how the contribution is used.
The “if this, then that” structure of ASC 2018-08 can be simplified with a flowchart* like the one below.
Nonprofits Must Get to Work
It is unlikely the FASB sought to burden nonprofits by failing to defer the implementation date for ASU 2018-08, but burden them they did. The FASB concluded that implementing ASU 2018-08 benefits nonprofits by clarifying the treatment of grants and contributions. ASU 2018-08 provides clear guidance and will most likely shift many government grants from an exchange to a contribution classification, relieving nonprofits of the complex disclosures under the revenue recognition standards. However, many nonprofit leaders wish they could spend their year combating coronavirus-related business disruptions rather than implementing a new accounting standard. Nonprofits (and for-profit entities reporting grants and contributions) must comply with ASU 2018-08 on reports for fiscal years beginning after December 15, 2018.
If you have any questions about how this accounting standard could affect your organization or how to apply the ASU 2018-08 guidelines irrespective of ASC 606, Klatzkin can help. For additional information, click here to contact us. We look forward to speaking with you soon
©2020 Klatzkin & Company LLP. The above represents our best understanding and interpretation of the material covered as of this post’s date. The content should not be construed as accounting, tax, or financial advice.