When the new revenue recognition standard came out, Accounting Standards Update (ASU) No. 2014-09, Revenue from Contracts with Customers (Topic 606), it specifically excluded contribution revenue and investment returns. Therefore, it appeared that unless the organization had significant earned revenue, the standard would have little effect on many not-for-profit organizations. However, a consequence of ASU 2014-09 was renewed focus on certain revenue streams of NFPs, which resulted in a second revenue recognition update.
Under current accounting principles generally accepted in the United States (U.S. GAAP), aspects of revenue recognition for NFPs are subjective. The updated guidance, ASU 2018-08, Clarifying the Scope and Accounting Guidance for Contributions Received and Contributions Made, (the Update), addresses those nuances to add clarity and consistency in practice.
The Update addresses two criteria used to determine how and when revenue is recognized. The two criteria are:
- Whether a transaction is a contribution (non-reciprocal transaction) or an exchange transaction (commensurate value is received by the funder). This determines what U.S. GAAP applies to the transaction (ASC 958-605 or ASC 958-606).
- If the transaction is a contribution, whether it is conditional or unconditional. This determines the timing of when revenue is recognized.
Contribution vs. Exchange Transaction:
In the Update, the FASB clarifies that certain funding from the U.S. federal government and from many other resource providers are contributions, as the value received by the donor is not commensurate with the resources provided. In other words, the value the resource provider receives is incidental or indirect, and the true value of the funding is realized through benefit to others. Therefore, these revenues are contributions and should be recognized under ASC 958-605, Not-for-Profit Entities – Revenue Recognition. The next step is to determine whether the grant is conditional.
Conditional vs. Unconditional:
Grant and contribution agreements can include conditions that must be met for the NFP to retain the right to the funds. Currently, when an agreement includes conditions, the recipient can subjectively determine the likelihood of whether it will satisfy the condition. If the chance of not satisfying the condition is remote, the NFP may recognize the revenue when the contribution is made.
Under the Update, this subjectivity is reduced by defining more clearly that if these two elements are present, revenue will be recognized only when both conditions are satisfied:
- A barrier that must be overcome; and
- Either a right of return of assets transferred or a right of release of a promisor’s obligation to transfer assets.
As Already Applied Under Current U.S. GAAP:
Once grant or contribution revenue is recognized, the recipient must determine whether the contribution is restricted based on how broad or narrow the purpose of the agreement is, and whether the resources are available for use only after a specified date. If the revenue is restricted, it is released from restriction when the funds are used for their intended purpose.
Due to the conditional nature of many U.S. federal awards, their classification as grants may not change the revenue recognition of many NFPs — revenue will be recognized as the conditions are satisfied, which often occurs as expenditures are incurred. Grants from other donors, such as foundations, should be reviewed for conditions for which subjective assessment will become limited and may delay recognizing revenue until the conditions are satisfied.
Changes to Contributions Received and Made:
Another significant change — the Update applies to both contributions received and made. Therefore, recipient organizations and resource-providing donors should review the Update and determine whether it affects them. Furthermore, the Update applies to all entities, including business entities that either receive or make contributions of cash or other assets. Finally, the disclosure requirements for conditional contributions of ASC 958-310-50-4 apply, so the total amounts of conditional contributions, and a description of each group having similar characteristics, must be disclosed in the footnotes to the financial statements.
Implementing the Standard:
The final standard was issued on June 21, 2018 as ASU 2018-08. You can access a copy of the standard here.
The effective date for recipients (grantees) that are public entities is periods beginning after June 15, 2018; for all other entities the effective date is periods beginning after December 31, 2018.
Early adoption is permitted irrespective of early adoption of ASU 2014-09. A not-for-profit will have two choices for implementing the new standard:
- Full retroactive application to all periods presented; or
- The modified prospective approach.
The Update recommends the modified prospective approach as the preferable one and outlines how that is to be applied at year-end in the year of adoption.
© Clark Nuber PS, 2018. All Rights Reserved