Update published on June 5, 2020: FASB issued Accounting Standards Update (ASU) 2020-05, Revenue from Contracts with Customers (ASC 606) and Leases (ASC 842) Effective Dates for Certain Entities, as part of its efforts to support and assist stakeholders as they cope with the many challenges and hardships related to the COVID-19 pandemic.
In 2018, the Financial Accounting Standards Board (FASB) released Accounting Standards Update (ASU) 2018-08, Not-for-Profit Entities (Topic 958): Clarifying the Scope and the Accounting Guidance for Contributions Received and Contributions Made. The effective date of this ASU corresponds to the implementation of ASU 2014-09, Revenue from Contracts with Customers (Topic 606), both of which are effective for fiscal years beginning after December 15, 2018, and interim periods within fiscal years beginning after December 15, 2019. The end of 2019 is quickly approaching, and while most not-for-profit (NFP) organizations have discussed the effects the implementation of these standards will have on the organization’s accounting, now is a good time to revisit both topics to ensure your NFP is properly prepared for implementation.
ASU 2018-08 was released to provide additional guidance for contributions received and contributions made. The two primary objectives of the ASU 2018-08 is to provide assistance to organizations in 1) determining if a donation should be provided as a contribution (nonreciprocal transaction) or as an exchange transaction, and 2) determining whether it is a conditional or unconditional contribution.
Contribution vs. Exchange Transaction
Evaluating if a donation is a contribution or exchange transaction determines which accounting guidance is applied to the transaction. A contribution is an unconditional, non-reciprocal transfer of cash or other assets compared to an exchange transaction, which is a reciprocal transaction in which two parties exchange items of commensurate value. Contributions fall under the guidance in Topic 958, whereas, exchange transactions fall under other guidance, such as Topic 606.
Paragraph 958-605-15-5A provides additional considerations in evaluating if commensurate value is exchanged. If it is determined that commensurate value has been received by a resource provider (government, corporation, or foundation), the transaction would be accounted for as an exchange transaction.
- A benefit received by the public as a result of the assets transferred is not equivalent to commensurate value received by the resource provider. Therefore, if the resource provider receives indirect value in exchange for the assets transferred or if the value received by the resource provider is incidental to the potential public benefit from using the assets transferred, the transaction shall not be considered commensurate value received in return.
- Execution of the resource provider’s mission or the positive sentiment from acting as a donor shall not constitute commensurate value received by the resource provider.
- The recipient solicits assets from the resource provider without the intent of exchanging goods or services of commensurate value.
- The resource provider has full discretion in determining the amount of the transferred assets.
- The penalties assessed on the recipient for failure to comply with the terms of the agreement are limited to the delivery of assets or services already provided and the return of the unspent amount.
Exchange Transaction Indicators:
- The expressed intent asserted by both the recipient and the resource provider is to exchange resources for goods or services that are of commensurate value.
- Both the recipient and the resource provider agree on the amount of assets transferred in exchange for goods and services that are of commensurate value.
- The existence of contractual provisions for economic forfeiture beyond the amount of assets transferred by the resource provider to penalize the recipient for nonperformance generally indicates that the transaction is an exchange of commensurate value.
Conditional vs. Unconditional
If a donation is determined to be a contribution, determining if the contribution is conditional or unconditional will determine when the revenue is recognized. A conditional determination is based on if the transaction includes a barrier to overcome and either a right of return of assets or right of release of the promisor’s obligation to transfer the assets. ASU 2018-08 provides indicators to assist in the determination of whether an agreement contains a barrier. If a contribution is determined to be conditional, revenue can be recognized when the condition(s) on which they depend are substantially met, or when the condition becomes unconditional.
If during your evaluation, it is determined a donation meets the criteria of an exchange transaction and both parties benefit from the transaction; the typical accounting treatment for exchanges will fall under Topic 606 and the revenue will be recognized as the related performance obligations are satisfied. ASU 2014-09 outlines a 5 step process for each exchange transaction for which “an entity should recognize revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services.”
- Identify the contract with a customer
- Identify the performance obligations in the contract
- Determine the transaction price
- Allocate the transaction price to the performance obligations in the contract
- Recognize revenue when or as the entity satisfies a performance obligation
As NFPs will need to exercise reasonable judgement in applying the new requirements listed above, a thorough understanding of these standards will assist in interpreting how the standards apply to the revenue sources within your organization. If you have questions or would like to learn more, please contact your local Blue & Co. advisor today.
Not-for-Profit Entities (Topic 958): Clarifying the Scope and the Accounting Guidance for Contributions Received and Contributions Made