October 2, 2017

In August 2017, the Financial Accounting Standards Board (FASB) issued an exposure draft, Clarifying the Scope and the Accounting Guidance for Contributions Received and Contributions Made. The draft is intended to provide a more robust framework for determining the proper accounting treatment of grants and contracts.

Why is the Guidance Necessary?

Under existing guidance, there has been a lack of consistency among not-for-profits in accounting for grants and contracts, particularly those from government agencies and private foundations.

The proposed Accounting Standard Update (ASU) provides clarifications to help organizations evaluate if a transaction should be accounted for as a contribution, or as an exchange transaction.

How Could the ASU Affect Your Organization?

Similar to existing guidance, the first consideration that needs to be made is whether the transaction is reciprocal (exchange), or non-reciprocal (contribution). If the resource provider is receiving value in return for the resources being transferred, it is indicative of an exchange transaction.

However, an important distinction the proposed ASU makes is that neither providing societal benefits, nor furthering the resource provider’s mission, constitutes commensurate value. In either of those cases, the transaction should be considered nonreciprocal.

Government agencies will often make grants to organizations to provide the public with certain benefits. Most not-for-profits have typically classified these as exchange transactions. The new proposed guidance will now consider them “conditional” contributions.

Consequently, the FASB also redefines “conditional” contributions in the proposed ASU. Under the proposed guidance, a contribution would be considered conditional if the donor specifies a barrier that must be overcome in order to be entitled to the funds, and the donor has the right of return of resources provided.

If the agreement includes both of the above criteria, the organization would not record grant revenue until it has overcome the barriers. The proposed guidance provides the following notable indicators of barriers:

  • The organization is required to achieve a measurable performance-related outcome, or another outcome that is measurable. Some common examples could be requirements to provide a specified level of service, delivering a number of units of output, making qualifying expenditures, and matching requirements.
  • The organization has limited discretion over how the resources are spent.
  • There are stipulations, which are related to the primary purpose of the agreement, that are not trivial or administrative. The proposed ASU specifically addresses that requirements to supply reports are typically administrative in nature and not considered a barrier.
  • The organization is required take additional action.

What Can We Expect Next?

If finalized, the proposed accounting changes could significantly impact the timing of when revenue is recognized by not-for-profit organizations. In the meantime, organizations can begin evaluating the potential impact on financial reporting.

The proposed standard would follow the same effective dates as the new revenue recognition standard, ASU 2014-09, Revenue from Contracts with Customers, which is used for annual reporting periods beginning after December 15, 2018. If the not-for-profit in question is a conduit debt obligor with publicly traded debt, the effective date is one year earlier.

The FASB invites comment on the exposure draft until November 1, 2017. Clark Nuber PS will continue to monitor and provide updates on the proposed change in the accounting standard. Here is a link to the full exposure draft of the proposed ASU.


Please contact Candi Avery with questions about this article.

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This article contains general information only and should not be construed as accounting, business, financial, investment, legal, tax, or other professional advice or services. Before making any decision or taking any action, you should engage a qualified professional advisor.