Several stakeholder groups, including the AICPA, FASB NFP Advisory Committee and others, have raised concerns over the difficulty encountered by many not-for-profit entities in applying the current guidance around accounting for grants and contributions. These groups have cited significant diversity in practice over the interpretation of the rules in the following two areas:
- When should a grant or contract be considered an exchange transaction or a contribution, and;
- What constitutes a conditional contribution verses an unconditional contribution.
On August 3, 2017, the FASB released a proposed accounting standard update to help clarify the accounting rules around these issues and eliminate the diversity within the sector. The proposal provides the following suggested improvements.
Exchange Transaction or a Contribution:
The proposed amendments would clarify how an entity determines whether a resource provider is participating in an exchange transaction by evaluating whether the resource provider is receiving commensurate value in return for the resources transferred on the basis of the following:
- A resource provider (including a private foundation, a government agency, or other) is not synonymous with the general public. Indirect benefit received by the public as a result of the assets transferred is not equivalent to commensurate value received by the resource provider.
- Execution of a resource providers’ mission or the positive sentiment from acting as a donor would not constitute commensurate value received by a resource provider for purposes of determining whether a transfer of assets is a contribution or an exchange.
Conditional verses Unconditional Contribution:
The amendments in this proposed accounting standard update would require that an entity determine whether a contribution is conditional on the basis of whether an agreement includes 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. The presence of both a barrier and a right of return or a right of release indicates that a recipient is not entitled to the transferred assets (or a future transfer of assets) until it has overcome the barriers in the agreement.
Indicators would be used to guide the assessment of whether an agreement contains a barrier. Depending on the facts and circumstances, some indicators might be more significant than others, and no single indicator would be determinative. The indicators would include:
- The inclusion of a measurable performance-related barrier or other measurable barrier. Examples of measurable performance-related barriers would include a requirement that the transferred assets be used to achieve a certain level of service, an identified number of units of output, or a specific outcome. An example of an other measurable barrier would be a stipulation that the recipient is entitled to the assets only upon the occurrence of an identified event (for example, a matching requirement).
- Whether a stipulation is related to the purpose of the agreement. This indicator would generally exclude administrative tasks and trivial stipulations.
- The extent to which a stipulation limits discretion by the recipient. The recipient has limited discretion over how the transferred assets should be spent. Limited discretion would exclude situations in which a recipient has broad discretion (for example, when the only requirement is that the transferred assets should be spent for general operating purposes, which could include amounts restricted for ongoing programs or activities).
- The extent to which a stipulation requires an additional action or actions. To be entitled to the transferred assets, the recipient would need to undertake additional identified actions it otherwise would not have undertaken.
The FASB’s proposal includes the following diagram to illustrate the process for determining whether a transfer of assets to a recipient is a contribution or an exchange transaction and how to distinguish between a conditional contribution and an unconditional contribution. The diagram also illustrates whether there is an associated donor restriction with an unconditional contribution.
Proposed Effective Date and Comment Period:
The effective date of the amendments in this proposed update would be the same as the effective date for the new revenue recognition rules under FASB ASU 2014-09 and ASU 2015-14. A public business entity and an NFP that has issued, or is a conduit bond obligor for, securities that are traded, listed, or quoted on an exchange or an over-the-counter market would apply the amendments in this proposed accounting standard update to annual periods beginning after December 15, 2017. All other entities would apply the amendments in this proposed accounting standard update to annual periods beginning after December 15, 2018.
The FASB invites individuals and organizations to comment on all matters in this proposed update by November 1, 2017. A final pronouncement is expected to be issued in 2018.