Be aware! If your organization receives contributions from third parties, or contracts with government agencies, there are changes to the method and timing of recording revenue. These changes could be effective as early as July 1, 2018 for not-for-profit public business entities.
On June 21, 2018, the Financial Accounting Standards Board (FASB) finalized the Accounting Standards Update (ASU) 2018-08, Clarifying the Scope of the Accounting Guidance for Contributions Received and Contributions Made.
This new update assists entities in determining whether transactions should be accounted for as contributions (nonreciprocal transactions) or as exchange transactions (reciprocal transaction). A key concept in this update is whether the resource provider is receiving commensurate value in return for the resources transferred. This determination is what decides which guidance should be applied, resulting in potential different accounting and recognition timing.
A more robust framework for determining whether a contribution is conditional or unconditional is also provided in the ASU. The process includes distinguishing between a donor-imposed condition and a donor-imposed restriction. This determination is critical, because it affects the timing of contribution revenue. For a donor-imposed condition to exist, there must be a barrier to overcome and a right of return of assets transferred or release of the promisor’s obligation to transfer assets.
One of the largest areas that will be affected relates to government grants and contracts. Most entities will now account for these as restricted conditional contributions. Previously, many organizations treated these as exchange transactions. This was largely because many organizations did not believe that the government gives “contributions,” because the general public is receiving commensurate value. This update makes a clear differentiation between the benefit received by the general public and the resource provider receiving that benefit. Therefore, under the new guidance, these transactions will often be considered nonreciprocal (i.e., contributions).
Effective dates of this ASU fall in line with ASU 2014-09:
Resource Recipients (i.e., grant recipients):
- Public Business Entities* - annual periods beginning after June 15, 2018
- All Other Entities - annual periods beginning after December 15, 2018
Resource Providers (i.e., grant makers):
- Public Business Entities* - annual periods beginning after December 15, 2018
- All Other Entities - annual periods beginning after December 15, 2019
*Includes those entities that have issued conduit debt
Early adoption is permitted. A modified prospective transition approach is required, which means that in the year of adoption, the changes will apply to all new agreements and to the remaining portions of any agreements from prior years that have not been completed as of the effective date.
For those entities that are resource recipients and are considered a pubic business entity, this means that this standard is in effect required immediately upon issuance of the ASU! It is also worth noting that many organizations are both grant recipients and grant makers. As shown above, there are different effective dates depending on this classification, which means that these entities will need to determine if they should stagger implementation dates, or accelerate the implementation of the ASU to not mislead net financial results.
Schneider Downs’ not-for-profit advisory professionals are well educated on these updates and are here to help you navigate these times of significant changes. Please contact us to get more information and assistance on implementing this new ASU.