The FASB issued ASU 2018-081 to clarify the accounting guidance related to contributions made or received. This guidance primarily affects not-for-profit (NFP) entities, although it also applies to businesses to the extent that they make or receive contributions, including grants. The ASU will likely result in more grants and contracts being accounted for as unconditional or conditional contributions rather than exchange transactions compared to current guidance. The new ASU is available here, and has various effective dates beginning after June 15, 2018 with specific transition guidance. Early adoption is permitted.
The implementation of ASC Topic 6062 brought to light diversity in practice in how NFP organizations classify grants and contracts in the financial statements from federal, state and local governments and other funding sources such as foundations as either contributions (nonreciprocal) or exchange (reciprocal) transactions. Contributions, defined as an unconditional transfer of cash or assets in a voluntary non-reciprocal transfer, are scoped out of Topic 606 whereas exchange transactions, a reciprocal transaction in which two parties exchange items of commensurate value, are within the scope of Topic 606 and must be accounted for following the new revenue recognition guidance.
Diversity also exists in assessments of restrictive conditions specified in the contribution arrangement, including whether the likelihood of failing to meet a condition is remote and whether and how remote provisions affect the timing of when a contribution is recognized. Differences in these conclusions can affect the timing of revenue recognition.
The FASB issued ASU 2018-08 to reduce this diversity by clarifying (1) whether transactions should be accounted for as contributions within the scope of Topic 9583 or as exchange transactions subject to other guidance and (2) whether a contribution is conditional.
Characterizing Grants and Similar Contracts as Reciprocal Exchanges or Contributions
The ASU clarifies and improves the scope and accounting guidance for both contributions received and made in order to assist entities in evaluating if those transactions should be accounted for as contributions under the scope of Topic 958, or as an exchange transaction subject to other guidance. For purposes of assessing potential contributions, examples of the transactions in question include contributions of cash and other assets, including promises to give, or reductions, settlements, or cancellation of liabilities. Examples of resource providers include a government agency, a foundation, a corporation, or other entity. However, the type of resource provider is not determinative of whether a transaction is reciprocal or nonreciprocal.
The amendments clarify how an entity determines whether a resource provider is participating in an exchange transaction by evaluating whether the resource provider receives comparable value in return for the assets transferred, based on consideration of the following:
- The resource provider is not one and the same with the general public. That is, a benefit received by the public as a result of the assets transferred is not equivalent to comparable 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 provider isn’t considered to have received comparable value in return.
- Execution of the resource provider’s mission or the positive sentiment from acting as a donor doesn’t constitute comparable value received by the resource provider for purposes of determining whether the transfer of assets is a contribution or an exchange.
Paragraph 958-605-15-5A provides additional indicators:
Exchange Transaction Indicator:
- Expressed intent asserted by both the recipient and the resource provider is to exchange resources for goods or services that are of comparable 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.
- The recipient solicits assets from the resource provider without the intent of exchanging goods or services of comparable 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.
In instances in which a resource provider itself is not receiving comparable value for the resources provided, an 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.
Determining Whether a Contribution is Conditional
The amendments require an entity to determine whether a contribution is conditional based on whether an agreement includes a barrier that must be overcome and either a right of return of assets transferred or a right of release of a promisors’ obligation to transfer assets. If the agreement (or referenced document) includes both, the recipient is not entitled to the transferred assets (or future transfer of assets) until it has overcome the barriers in the agreement.
Paragraph 958-605-25-5D provides a list of indicators to consider in determining whether an agreement contains a barrier. The indicators include:
- 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.
After a contribution has been deemed unconditional, an entity should consider whether the contribution is restricted on the basis of the existing definition of the term donor-imposed restriction, which includes a consideration of how broad or narrow the purpose of the agreement is, and whether the resources are available for use only after a specified date.
Simultaneous Release Option
The new ASU provides a not-for-profit entity with the ability to elect a policy to report donor-restricted contributions whose restrictions are met in the same reporting period as the revenue is recognized as support within net assets without donor restrictions so long as the entity has a similar policy for reporting investment gains and income, reports consistently from period to period, and discloses its accounting policy. An entity electing this policy for donor-restricted contributions that were initially conditional contributions (where the condition has been met) may do so without also having to elect it for other donor-restricted contributions or investment gains and income provided that the entity reports consistently from period to period and discloses its accounting policy.
Implementation Guidance and Illustrations
The ASU includes implementation guidance and practical illustrations of the amendments. Refer to Appendix 1 for a diagram illustrating the framework for classifying transfers of assets.
Effective Date and Transition
Public entities 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 on contributions received to annual periods beginning after December 15, 2018, and interim periods within annual periods beginning after December 15, 2019.
Public entities4 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 on contributions made 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.
The guidance many be applied either through a modified prospective or a full retrospective approach.
Under the modified prospective approach, the amendments should be applied to agreements that are not completed as of the effective date and to all agreements entered into after the effective date. Additional clarifying transition guidance is provided for this approach.
Framework for Classifying Transfers of Assets
The following diagram excerpted from paragraph 958-605-55-1A illustrates the process for determining whether a transfer of assets to a recipient is a contribution, an exchange transaction, or another type of transaction and whether a contribution is conditional. The diagram also illustrates whether a contribution includes an associated donor restriction.
 Not-for-Profit Entities (Topic 958): Clarifying the Scope and the Accounting Guidance for Contributions Received and Contributions Made
 Revenue from Contracts with Customers
 Not-for-Profit Entities
 Defined for purposes of this ASU as a public business entity or an NFP 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 recipient.
This article originally appeared in BDO USA, LLP’s “Nonprofit Standard” newsletter (July, 2018). Copyright© 2018 BDO USA, LLP. All rights reserved. www.bdo.com