During 2018, the Financial Accounting Standards Board (FASB) issued Accounting Standards Update (ASU) No. 2018-08 Clarifying the Scope and the Accounting Guidance for Contributions Received and Contributions Made to clarify and improve the scope and accounting guidance for contributions received and contributions made. These amendments provide a more robust framework for determining whether a transaction should be accounted for as a contribution or as an exchange transaction. This determination clarifies the applicable accounting guidance for a not-for-profit (NFP) entity as contributions would follow ASC Topic 958, while exchange transactions will follow ASC Topic 606 or other guidance. ASU 2018-08 does not apply to transfers of assets from governmental entities to business entities.
Specifically, the amendments clarify how an entity determines if the resource provider is participating in an exchange transaction by evaluating whether the resource provider has received “commensurate value” in return for the resources transferred to the recipient organization. The presence of commensurate value suggests exchange transaction. The amendments specifically indicate that a resource provider (including a foundation or a government agency) is not synonymous with the general public. A benefit received by the public as a result of the assets transferred is not equivalent to commensurate value received by the resource provider. Consistent with existing guidance, in instances in which a resource provider is not itself receiving commensurate value for the resources provided, an NFP entity must determine whether a transfer of assets represents a payment from a third-party payer on behalf of an existing exchange transaction between the recipient and an identified customer. If so, other guidance (for example, Topic 606) applies.
In addition, ASU 2018-08 requires that an NFP entity determine whether a contribution is conditional on the basis of whether an agreement includes “barriers” that must be overcome and either right of return of assets or a right of release of a promisor’s obligation to transfer the assets. Indicators are used to guide the assessment of whether an agreement contains a barrier. The presence of both a barrier and right to return or right to release indicates a recipient is not entitled to the transferred assets until it has overcome the barrier listed in the agreement. After the contribution has been deemed unconditional, the NFP entity would consider whether the contribution includes donor-imposed restrictions.
Finally, ASU 2018-08 amends the “simultaneous release accounting policy” to allow an NFP entity to recognize a restricted contribution directly in unrestricted net assets/net assets without donor restrictions if the restriction is met in the same period that revenue is recognized. The amendments in ASU 2018-08 will likely result in more grants and contracts being accounted for as either contributions or conditional contributions than observed in current practice.
ASU 2018-08 should be applied on modified prospective basis in which the amendments are applied to agreements that are not completed as of the effective date or entered into after the effective date. A completed agreement is an agreement for which all the revenue (of a recipient) or expense (of a resource provider) has been recognized before the effective date in accordance with current guidance. No prior-period results would be restated, and there should not be a cumulative-effect accounting adjustment. ASU 2018-08 applies to both resources received by a recipient and resources given by resource provider. However, the effective date differs depending on whether the role is resource recipient or resource provider.
For transactions in which an NFP entity has issued, or is a conduit bond obligor for, securities that are traded, listed, or quoted on an exchange or an over-the-counter market and serves as a resource recipient, the NFP entity should apply the amendments on contributions received to annual periods beginning after June 15, 2018, including interim periods within those annual periods. All other entities should apply the amendments for transactions in which the entity serves as the resource recipient to annual periods beginning after December 15, 2018, and interim periods within annual periods beginning after December 15, 2019.
For transactions in which an entity is an NFP entity that has issued, or is a conduit bond obligor for, securities that are traded, listed, or quoted on an exchange or an over-the-counter market and serves as a resource provider, the entity should apply the amendments on contributions made to annual periods beginning after December 15, 2018, including interim periods within those annual periods. All other entities should apply the amendments for transactions in which the entity serves as the resource provider to annual periods beginning after December 15, 2019, and interim periods within annual periods beginning after December 15, 2020.
Early adoption of the amendments is permitted.
In the meantime, we encourage organizations to begin working on implementation issues by:
- Assigning individuals to be responsible for understanding and implementing the standards;
- Compiling a detailed list of all organizational revenues;
- Beginning to apply the five-step process to each revenue stream involving exchange transactions;
- Analyze agreements to determine if resource providers or other third parties have received commensurate value that support exchange transaction treatment and whether barriers exist that would suggest that contributions are conditional;
- Determining the potential effects on contract language and accounting systems and processes.