On June 21, 2018,
the Financial Accounting Standards Board (FASB) issued Accounting Standards Update (ASU) 2018-08, Not-for-Profit Entities (Topic 958): Clarifying the Scope and Accounting Guidance for Contributions Received and Contributions Made. While the
ASU applies to all types of organizations, it is most applicable to not-for-profit organizations.
The amendments in the ASU provide a framework for determining whether a transaction should be accounted for as a contribution or as an exchange transaction. Guidance previously had been available to make this determination, but there was diversity in
practice, especially for government grants and contracts.
According to the new guidance, a transaction is a contribution if the resource provider is not receiving commensurate value for the resources provided. Commensurate value does not include value that might be received by the general public. For transactions
where a resource provider is receiving commensurate value, the new revenue recognition standard would typically apply, including required disclosures.
When a transaction is determined to be a contribution, the underlying agreement must be reviewed to determine if there is a right of return of assets transferred or a release of the promisor’s obligation to transfer assets. If so, the agreement
should be reviewed to determine if there is evidence of a barrier that must be overcome. Contributions that included both a barrier and right of return/release are conditional contributions that are not recorded until the barrier is overcome.
Here are some indicators of a barrier:
- The inclusion of a measurable performance-related barrier or other measurable barrier
- The extent to which a stipulation limits discretion by the recipient on the conduct of an activity
- Whether a stipulation is related to the purpose of the agreement
The amendments in the ASU do not include administrative tasks and trivial stipulations as barriers. In addition, determining whether a contribution is conditional does not include making a judgment on the likelihood of meeting the condition.
The new guidance also makes a change to the simultaneous release option that currently exists in generally accepted accounting principles, allowing recognition of a restricted contribution directly in net assets without donor restrictions if the restriction
is met in the same period the revenue is recognized. The amendment allows an election to be made for all restricted contributions that were initially classified as conditional. When the election is made for conditional contributions, it does not need
to be elected for all other restricted contributions. This option should simplify recording contributions that are both restricted and conditional.
Not-for-profit organizations may currently combine contribution and exchange transactions into one general ledger account when a government is the payor. The transactions may need to be separated to implement the amendments. For government grants that
are considered federal financial assistance, the underlying transaction will typically be a conditional contribution. When a government entity transfers assets based on a fee-for-service arrangement, a determination will need to be made whether there
is an underlying contract to determine whether the transaction is a contribution or exchange transaction. If the transfer of assets is a payment from a third-party payer on behalf of an existing exchange transaction between the recipient and an identified
customer, the transaction would follow revenue recognition guidance. Examples of third-party payers include Medicaid and Medicare payments to clinics.
The new guidance should be applied on a modified prospective basis, but retrospective basis is allowed. In most cases, the modified prospective basis will be easier to implement. To adopt the modified prospective basis, the first set of financial statements
following the effective date should be applied to agreements that are either not completed as of the effective date or entered into afterward.
Careful attention is necessary to ensure compliance by the appropriate effective date. A public company or a not-for-profit organization that has issued, or is a conduit bond obligor for, securities that are traded, listed, or quoted on an over-the-counter
market would apply the ASU for transactions in which the entity serves as a resource recipient to annual reporting periods beginning after June 15, 2018. Otherwise, resource recipients would apply the standard to annual reporting periods beginning
after Dec. 15, 2018.
For transactions in which the entity serves as a resource provider, the ASU would apply to annual reporting periods beginning after Dec. 15, 2018. Otherwise, resource providers would apply the standard to annual reporting periods beginning after Dec.
There are several examples included in the ASU to assist in understanding how to implement the guidance. The AICPA Not-for-Profit section also contains helpful materials.
Lisa A. Ritter, CPA, CFE, CITP, is a partner with Maher Duessel in Harrisburg. She can be reached at email@example.com.