Accounting Rule Change Will Result in More Contributions for Not-for-Profits

In response to widespread diversity on how not-for-profits characterize grants and similar contracts as either exchange transactions or contributions with conditions, the Financial Accounting Standards Board (FASB) has issued new guidance (ASU 2018-08) on June 21, 2018 to aid not-for-profits in making this determination.

Accounting guidance for recognizing revenue from contributions and exchange transactions are covered by different sections of the FASB codification.  For contributions, an entity should follow the guidance in Subtopic 958-605, whereas for exchange transactions, an entity should follow other guidance (i.e.: Topic 606, Revenue from Contracts with Customers).  Thus, the accounting may be different depending on the guidance applied.  In order to follow the appropriate guidance, not-for-profits must first determine what type of revenue they have.

Guidance Clarification

The amendments in ASU 2018-08 clarify and improve current guidance about whether a transfer of assets (or the reduction, settlement, or cancellation of liabilities) is a contribution or an exchange transaction. The amendments clarify how an entity determines whether a resource provider is participating in an exchange transaction by evaluating whether the resource provider is receiving commensurate value in return for the resources transferred.

The new guidance clarifies that a benefit received by the public as a result of the assets transferred (from a foundation, a government agency, or other to a not-for-profit) is not equivalent to commensurate value received by the resource provider.  The clarified guidance also stipulates that the execution of a resource provider’s mission or the positive sentiment from acting as a donor does not constitute commensurate value received by a resource provider for purposes of determining whether a transfer of assets is a contribution or an exchange transaction.

The amendments in this update will likely result in more grants and other funding contracts being accounted for as either contributions or conditional contributions than observed in practice under current guidance.  For this reason, clarifying the guidance about whether a contribution is conditional is important because such classification affects the timing of when contribution revenue should be recognized.

For more information on the new FASB guidance, or questions on the not-for-profit industry overall, please reach out to Al Traverso at [email protected].