On June 21, 2018, the Financial Accounting Standards Board (FASB) issued ASU 2018-08, Clarifying the Scope and Accounting Guidance for Contributions Received and Made. The accounting standards update is intended to clarify the distinction between reciprocal transactions (exchange) and nonreciprocal transactions (contributions), to assist Not-for-Profits (NFPs) in determining whether a contribution is conditional, and to reduce diversity in practice among NFPs.
Determining Reciprocal Transactions and Exchange Transactions
Determining whether a transaction is reciprocal, or an exchange, depends on both parties to the transaction receiving something of equal or commensurate value in return. The ASU clarifies that a resource provider, including a private foundation or a government agency, is not synonymous with the general public. Many NFPs have previously interpreted a contract with a government agency to be an exchange transaction if the general public benefitted. ASU 2018-08 makes it clear that is not the case. The ASU states that indirect benefits received by the public is not equal to commensurate value received by the resource provider. While public benefits may result from the transaction, the government agency must receive equal value in return for the grant or contract to be an exchange transaction. If not, it would be considered a contribution.
There are certain cases in which the resource provider does not receive commensurate value in return for resources provided, but instead the resource provider is acting as a third-party payer. For example, Medicare payments provided by a resource provider represents the transfer of assets from a third-party payer on behalf of an existing exchange transaction between the recipient and an identified customer. In that instance, even though the transfer is nonreciprocal, other guidance (for example, the revenue recognition standard) would apply.
Once an NFP determines that a transaction is nonreciprocal, or a contribution, the NFP must determine whether any conditions exist that would preclude revenue recognition. The ASU dictates that in order for a contribution to be considered conditional, the following elements must be present:
- A barrier that must be overcome, and
- A right of return exists, or a right of release of the obligation to transfer assets.
The barrier could take the form of a measurable performance-related or other measurable barrier. In addition, the NFP should consider the extent of its discretion to conduct the activity related to the purpose of the agreement. If there are significant stipulations regarding the conduct of activities under the agreement, it is likely a barrier exists.
Stipulations noted in an agreement that are not related to the general purpose of the agreement are not indicative of a barrier. A common example of this is an administrative requirement such as providing semi-annual or annual reports to receive subsequent payment. It is typically the information presented in the required reports that would be indicative of a barrier rather than the administrative requirement to provide a report.
If a donor stipulation is not clear as to whether a right of return or release exists, and the agreement is not clearly unconditional, the contribution would then be considered conditional. Some agreements may contain a right of return or a right of release but no relating barriers. In this case, the contribution would be considered unconditional as the first element discussed above is not present.
NFPs are required to disclose the amounts of conditional contributions that have not yet been recognized and to record conditional contributions once all conditions are met.
Conditional and Unconditional Contributions
Conditions in contributions may take different forms. One common condition is a matching contribution. With a matching contribution the donor will not release funds to the recipient until the recipient has overcome the barrier of raising the specified funds.
The following are examples of contributions that are unconditional and conditional:
Example #1: Grant from a Private Foundation
NFP A received a grant from a Foundation for funding of a project in the amount of $10,000,000 over a five-year period. $2,000,000 is to be paid up front upon signing of the contract while the remainder is to be funded $2,000,000 per year if the NFP meets certain requirements. The requirements entail obtaining advance approval from the private foundation for any costs not spent on the approved project, annual reports that must be filed with the Foundation to describe the use of the funds and status of the project, and a final report at the end of the project. The Foundation has the discretion to determine whether the data and progress is satisfactory or not.
This grant unconditional. The initial funding of $2,000,000 has no barriers or right of return and is therefore unconditional. The remainder is also unconditional as the requirement to spend the grant on the approved project allows for broad discretion on spending, there are no additional requirements in the agreement that would indicate a measurable performance barrier exists, and the reporting requirement is administrative and not related to the purpose of the agreement.
Example #2: Grant from a Corporate Foundation
NFP B received a $500,000 grant to perform research. The grant agreement includes a right of return and the requirement that a report is to be filed at the end of the period detailing out how the funds were spent.
This grant is unconditional as no barrier exists. The reporting requirement is an administrative function and does not require NFP B to meet any specific barrier.
Example #3: Grant from Federal Government
NFP C received a $1,000,000 grant from the Federal Government. The grant agreement required NFP C to follow rules and guidelines as outlined by the Federal Government. Expenses or costs incurred must also be in accordance with rules and guidelines outlined by the Federal Government. Any unused grant funds are forfeited and if any expenses are deemed unallowable in accordance with guidelines they must be returned.
This grant is conditional as a barrier exists; NFP C has specific requirements on how the funds should be spent and there is also a right of return.
Example #4: Grant from an Individual
NFP D received a $500,000 grant from an individual to provide food and supplies for shelter dogs and cats. The grant requires NFP D to find permanent homes for at least 2,000 animals during the next year, with specific monthly targets that must be met. The individual reserves the right to discontinue payments if the specified targets are not met.
This grant is conditional as a measurable performance-related barrier exists, along with a release from obligation. The individual requires NFP D to achieve a specific level of service that is considered a barrier, and the individual can stop payments if the barrier is not met.
Under ASU 2018-08, it will be critical to evaluate new transactions under the new rules to determine whether they are reciprocal (exchange) or nonreciprocal transactions (contributions). Further, for nonreciprocal transactions it will also be critical to determine whether a condition exists using the barrier and right of return/release model. As noted in the examples above, the transactions can be complicated, but the ASU is intended to provide clarity around these types of contributions.