On June 21, 2018, the Financial Accounting Standards Board (FASB) issued Accounting Standard Update (ASU) 2018-08: Clarifying the Scope and the Accounting Guidance for Contributions Received and Contributions Made. This ASU will impact all organizations that receive or make contributions of cash or other assets. This ASU includes specific criteria to consider when determining whether a contract or agreement should be accounted for as a contribution or as an exchange transaction. It also provides a framework for determining whether a contribution is conditional or unconditional which will impact the timing of revenue recognition. As a result of this new ASU, organizations will account for more grants/contracts/agreements as contributions, specifically conditional contributions.
What is changing compared to the current standard?
Under this new standard, every grant/contract/agreement must be analyzed under the new framework to determine if it will be recorded as a contribution, an exchange transaction or both. For any agreements identified as conditional contributions, the organizations will also need to identify and track the specific conditions of the contract and record the contributions as the conditions are met.
Step 1: Contribution vs an Exchange Transaction?
The determining factor for whether an organization will account for a grant/contract/agreement as a contribution or an exchange transaction is whether the asset provider is receiving equal value in return for those assets. If equal/proportionate value is received, it is accounted for as an exchange transaction and follows revenue recognition or other applicable standards. If equal value is not received by the asset provider, it is accounted for as a contribution and follows contribution standards. If some value but not equal value is received, then it is accounted for as both an exchange transaction and a contribution. A decision tree flowchart is included in ASU 2018-08 for further guidance.
Let me illustrate with a few examples.
Example 1: If a Foundation provides a grant of $5,000 for Entity ABC to conduct a study on the homelessness patterns in that city (approx. cost $5,000) and requires Entity ABC to provide the report, data and findings back to the Foundation, this would be accounted for as an exchange transaction because the Foundation (asset provider) received equal value for the grant.
Example 2: If the Foundation provides a grant of $5,000 for Entity ABC to provide meals to the homeless in that city and requires Entity ABC to provide a quarterly report of number of meals served, this would be accounted for as a contribution. The Foundation (asset provider) has received no direct benefit or equal value for the grant. Note: In this ASU, it is clear that societal benefit or benefit to the general public is not considered equal reciprocal value to the asset provider.
Example 3: If the Foundation provides a grant of $10,000 for Entity ABC to conduct a study on the homelessness patterns in that city (approx. cost $5,000) and requires Entity ABC to provide the report, data and findings back to the Foundation, this would be accounted for as both an exchange transaction and a contribution. There would be an exchange transaction recorded for the $5,000 in value that the Foundation (asset provider) received and a contribution of $5,000 for the amount provided in excess of value received.
Step 2: Conditional versus Unconditional Contributions
Once the organization has reviewed the grant/contract/agreement and determined that it is a contribution, the next step is to determine whether the contribution is conditional or unconditional. This will affect churches more than step 1. An unconditional contribution is recognized immediately whereas a conditional contribution cannot be recorded until the conditions have been met. This applies to any promises to give you might receive.
To be a conditional contribution, the grant/contract/agreement must include both of the following:
- The asset provider has the right to get their funds back or not to release future payments on promises to give if the organization does not meet the conditions and
- One or more barriers need to be overcome before the organization is entitled to the assets transferred or promised
The ASU also provides some guidance in identifying barriers in the contract. There are three specific barriers to look for:
- The organization is required to achieve a measurable outcome or a specific event must occur
- Examples – Add 5,000 square feet to the facility, host 10 job coaching events for the unemployed, receive $100,000 in matching contributions in the next 3 months
- The organization has limited discretion over the way the activity can be conducted
- Examples – Incurring qualified expenses, requirements to hire specific individuals or a specific protocol that must be followed
- The organization has limited discretion over how the funds are used
- Examples – Funds must be used to expand facilities, funds must be used to purchase a piano, funds must be used for the homeless
If, however, you receive a check before the barriers are overcome, this should be accounted for as a refundable advance (liability account) until the conditions have been substantially met or explicitly waived by the donor.
What do I need to know about implementation?
This ASU will be applied to agreements that are not completed as of the effective date (only applies to the unrecognized portion) and to agreements that are entered into after the effective date. For most organizations, they should consider these new standards for any contracts they sign that will still be in effect as of December 31, 2019 or thereafter. No prior period results should be restated, and there should be no adjustment to net assets as a result of implementing this standard.
As a result of this new ASU, tax-exempt organizations will account for more contracts/agreements as contributions, specifically conditional contributions. Revenue recognition on conditional contributions is delayed until the conditions are met and therefore, in the year of implementation, tax-exempt organizations may see a drop in their revenue. In addition, conditional contributions must be disclosed in the footnotes. Overall, implementation of this new ASU will result in an increase of conditional contributions, a reduction of recorded unconditional promises to give, a reduction in reported temporarily restricted net assets and increased footnote disclosures.
Decision Tree Flowchart from ASU 2018-08