Building off the basic comments that we discussed in ASU - Grant Revenue Recognition (Part 1), we are going to discuss in more detail with examples on how to record these contributions or exchange transactions.
Here is what you need to know:
The new guidance discusses if you have an exchange transaction that needs to be reported under the revenue recognition standards ASC 606, or a contribution that is specifically excluded from the new review standards. Based on the new standards, most governmental grants that you have accounted for in the past are now accounted for as contributions.
The FASB also clarifies that a contribution is conditional if the agreement includes both a barrier that must be overcome for the recipient to be entitled to the assets transferred and a right of return for the transferred assets or a right of release of the promisor’s obligation to transfer assets. Most of the federal grants noted above that are now contributions vs exchange transactions will be conditional contributions and not recorded on the books until the conditions are met, vs unconditional where the contribution is booked right away at fair value.
The new rules apply to both nonprofits that are receiving the funding and to those that give out the funding (for example a private foundation).
Effective date: NOW -- for all entities with fiscal year starting after 12/15/18. For all calendar year ends, the new rules are in place now. If you are off year end, the new rules take place after your next fiscal year that starts in 2019.
The Details
Determine if your organization received an exchange transaction (resource provider receives commensurate value in exchange for the assets transferred, also called a reciprocal transaction) or a contribution transaction (one party benefits and the other party does not expect anything in return). The distinction is important because you account for exchanges under revenue recognition guidance (e.g., ASC 606, Revenue from Contracts with Customers). You account for contributions under Accounting Standards Codification (ASC) 958-605, Not-for-Profit Entities — Revenue Recognition excluded from the new revenue recognition standards.
Under the new guidance, when the public receives the primary benefit, that benefit is not considered equal value to the resource provider. Therefore, in the past, when the government granted a homeless shelter funds to run its mission, the organization accounted these funds as an exchange since the government was providing funds to help the community carry out the work of the government. Most people also believed that the government was not going to give out free money (contribution).
The impact on this new guidance will result in more grants and contracts being accounted for as contributions rather than exchange transactions.
If your organization receives a contribution, you need to determine whether it is a conditional or unconditional contribution.
This distinction is important because you record each one differently in your financial statements. An unconditional contribution is recognized when it is received or made. A conditional contribution is recognized when the barriers are overcome.
The new guidance clarifies that a contribution is conditional if the agreement includes both a barrier that must be overcome for the recipient to be entitled to the resources, and a right of return for the assets transferred.
Some examples of barriers
Measurable performance barriers (such as serving 100 homeless dogs)
Limitations on how the recipient can use the funds (such as a requirement to hire specific types of individuals or to use the contribution only for qualifying expenses)
Dollar-for-dollar grant match
Donor’s promise to contribute $100,000 to Fluffy Puppy if it trains 10 seeing eye dogs
In order to have a condition
The agreement or a document referenced in an agreement must state that the recipient is entitled only to the transferred assets if it overcomes the barrier or barriers.
An agreement does not need to include the phrases “right of return” or “release from obligation.” Agreements should be sufficiently clear to communicate when a recipient is entitled to the transferred assets.
Example:
Fluffy Puppy Dog House, a NFP organization, receives a grant from an individual to build a new wing onto its existing building. The agreement contains a multi-year promise and includes building requirements (e.g., square footage, a specific certification that the new wing is environmentally friendly, and house 200 new pets). Specified installments will be paid when the recipient achieves the milestones identified in the grant agreement. If the organization does not achieve a particular milestone, the donor is released from its obligation to make installment payments. Fluffy Puppy concludes that the agreement is conditional because the organization is not entitled to the assets until a milestone is met, and the agreement includes a right of release from the obligation to transfer assets if the stipulations are not met. Fluffy Puppy recognizes the revenue as the barriers are overcome.
Example:
Fluffy Puppy receives a grant from a foundation to use for its Dogs 4 Vets program. The agreement contains specific guidelines about how the assets could be used (e.g., to hire a dog trainer, obtain 8 dogs, 12 weeks of training). The grant contains a right of return for funds not spent on the Dogs 4 Vets program. The NFP concludes that the grant is not conditional because the agreement does not include a barrier. Although the grant contains guidelines for how the funds can be spent, the agreement does not specify that entitlement to the funds depends on meeting those guidelines. Fluffy Puppy recognizes the revenue upon receipt of the assets but classifies it as restricted because the organization is required to use the funds for the Dogs 4 Vets program.
Still not sure what you should do?
Start by answering the question in the top left corner.
If you have questions about implementing the new revenue standards, keep in touch with TBFoster Nonprofit Accounting to get your answers. We have solutions to help your Organization get over this hurdle. Contact our not-for-profit team leader at trent@tbfosteraccounting.com and please join our Facebook group the “Nonprofit Accounting Spot.”
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