Contribution Accounting for Recognizing Nonprofit Revenue

How to apply FASB’s ASU 2018-08 to contributions and grants

Introduction

Nonprofit organizations often receive financial support from donors, foundations, government agencies, and other entities in the form of contributions and grants. Accounting for these transactions can be challenging, as they may involve complex terms and conditions that affect the timing and amount of revenue recognition. To address the diversity and inconsistency in practice, the Financial Accounting Standards Board (FASB) issued Accounting Standards Update (ASU) 2018-08, Not-for-Profit Entities (Topic 958): Clarifying the Scope and Accounting Guidance for Contributions Received and Contributions Made, in June 2018. In practice, many nonprofit organizations are still unaware of this ASU and are routinely accounting for these transactions incorrectly or incompletely. The guidance aims to clarify the definition of a contribution, distinguish it from an exchange transaction, and provide criteria for determining whether a contribution is conditional or unconditional. This article will explain the main provisions of ASU 2018-08 and provide examples of how to apply them to common scenarios faced by nonprofits.

Contribution or Exchange?

The first step in applying ASU 2018-08 is to determine whether a transaction is a contribution or an exchange transaction. A contribution is defined as “an unconditional transfer of cash or other assets, as well as unconditional promises to give, to an entity, or a reduction, settlement, or cancellation of its liabilities in a voluntary nonreciprocal transfer by another entity acting other than as an owner.” In other words, a contribution is a donation that does not require the recipient to provide anything of value to the donor in return. An exchange, on the other hand, is a reciprocal transfer in which each party receives and sacrifices approximately commensurate value.

To distinguish between a contribution and an exchange, ASU 2018-08 provides the following indicators:

• The expressed intent of both the recipient and the provider to exchange resources for goods or services that are of commensurate value is indicative of an exchange.
• The provider having full discretion in determining the amount of the transferred assets is indicative of a contribution. Both the recipient and the provider agreeing on the amount of assets transferred in exchange for goods and services is indicative of an exchange.
• The provider is not synonymous with the general public and, therefore, does not receive commensurate value when it transfers funds to another entity for the purpose of providing a benefit to the public.
• A provider does not necessarily receive commensurate value when it transfers funds for activities consistent with its mission or obtaining any positive sentiment from acting as a donor.
• The extent of penalties assessed on the recipient for failure to comply with the terms of the agreement may affect the classification of a transaction as either a contribution or an exchange. Penalties limited to the delivery of assets or services already provided and the return of the unspent amount are generally indicative of a contribution. Penalties in excess of the amount of assets transferred by the provider generally indicate that the transaction is an exchange.

These indicators are not conclusive, and the classification of a transaction may depend on the specific facts and circumstances. For example, some transactions may involve both a contribution and an exchange component, such as when a donor pays more than the fair value of a ticket to a fundraising event. In such cases, the transaction should be bifurcated into a contribution and an exchange, and the contribution should be measured at the difference between the fair value of the goods or services received and the consideration paid.

Conditional or Unconditional?

The second step in applying ASU 2018-08 is to determine whether a contribution is conditional or unconditional. A conditional contribution is a contribution with a donor-imposed stipulation that represents a barrier that must be overcome before the recipient is entitled to the assets transferred or promised. Failure to overcome the barrier gives the donor a right of return of the assets transferred or a right of release from its obligation to transfer assets. An unconditional contribution is a contribution that does not have a donor-imposed condition.

To identify a conditional contribution, ASU 2018-08 requires the presence of both a barrier and a right of return or release. The barrier may be indicated by one or more of the following factors:

• A measurable performance-related barrier or other measurable barrier, such as achieving a specified level of service, an identified number of units of output, a specific outcome, or a matching requirement.
• Limited discretion by the recipient on the conduct of an activity, such as requirements to follow specific guidelines about incurring qualifying expenses, hiring specific individuals, or adhering to a specific protocol.
• Stipulations that are related to the purpose of the agreement, such as a requirement to provide a specific service or output.

The right of return or release does not need to be explicitly stated in the agreement, but it must be sufficiently clear to support a reasonable conclusion that the recipient is entitled to the contribution only if the barrier is overcome. The right of return or release may be implied by the nature of the agreement or the type of the asset transferred.

A conditional contribution should be accounted for as a refundable advance or unearned contribution (liability) until the conditions are substantially met or explicitly waived by the donor. Revenue should be recognized only when the barrier is overcome, not when the contribution is received or promised. A probability assessment of whether the recipient is likely to meet the stipulation is not relevant for determining whether a barrier exists.

Some contributions may have stipulations that are not clearly unconditional or conditional. In such cases, the recipient should clarify the intent of the contribution with the donor. If the ambiguity cannot be resolved, the contribution should be presumed to be conditional.

It’s worth noting here that the use of the term “grant” can often be misleading. Accounting regulations do not provide a strict definition for “grant,” and their application can result in accounting as either contribution or exchange revenue. The terms of each grant will dictate this treatment. It’s common for grants of all types – foundations, government, individual, corporate, et al – to be accounted for as unconditional or conditional contributions. Don’t let the English language definitions of these terms confuse the situation when assessing for proper accounting treatment.

Restrictions and Disclosures

The third step in applying ASU 2018-08 is to determine whether an unconditional contribution has any donor-imposed restrictions. A donor-imposed restriction is a stipulation that limits the use of the contribution to a specific purpose or time. A restriction does not affect the timing of revenue recognition, but it affects the classification of net assets. An unconditional contribution with a donor-imposed restriction should be recognized as net assets with donor restrictions. An unconditional contribution without a donor-imposed restriction should be recognized as net assets without donor restrictions.

A donor-imposed restriction is different from a donor-imposed condition. A restriction limits the use of the contribution, but does not affect the recipient’s entitlement to the contribution. A condition affects the recipient’s entitlement to the contribution, and must be overcome before the contribution is recognized as revenue. Some contributions may have both conditions and restrictions, in which case the restrictions apply only after the conditions are met.

ASU 2018-08 also requires recipients to disclose the following information about their contributions:

• The amount of contributions received by type of asset (e.g., cash, securities, land, buildings, or equipment).
• A description of the nature and amounts of donor-imposed restrictions.
• A description of the nature and amounts of conditional contributions, including how the conditions affect the recognition of revenue and the amounts of refundable advances as of the end of the period.
• Qualitative information about how the recipient expects to satisfy the conditions, and when the recipient expects to recognize revenue.

Conclusion

ASU 2018-08 provides a framework for nonprofits to classify and account for their contributions and grants. The guidance clarifies the definition of a contribution, distinguishes it from an exchange, and provides criteria for determining whether a contribution is conditional or unconditional. The guidance also aligns the recognition of contribution revenue with the recognition of exchange revenue under Topic 606. Nonprofits should apply the guidance to their agreements and disclose the relevant information about their contributions. The guidance has been effective for annual periods beginning after December 15, 2018, for most nonprofits, and for periods beginning after June 15, 2018, for public business entities and conduit bond obligors. Nonprofits should evaluate the impact of this guidance on their financial reporting and communicate with their donors, auditors, and stakeholders.