On June 21, 2018, the Financial Accounting Standards Board (FASB) issued
ASU 2018-08 to clarify how organizations should characterize grants and similar contracts with government agencies and others. Specifically, it assists organizations in evaluating whether transactions are:
- reciprocal exchange transactions or contributions (non-reciprocal transactions)
- conditional or unconditional contributions
Step 1: Distinguish if the transaction is an exchange transaction or a contribution.
With an exchange transaction, each party directly receives commensurate value. The new standard explicitly states that when the general public receives the primary benefit, even if it furthers the resource provider’s charitable mission, it is not commensurate value.
Using the following examples, we will determine if an exchange transaction or contribution exists.
Nonprofit A is a regional destination marketing organization that regularly conducts research to discover what drives tourism and ways to increase the economic impact of tourism. NFP A receives funding from local businesses to finance the cost of a tourism study to review the social and cultural aspects of tourism in the region. The local businesses determine the specifics of the study, and the rights to the results of the study belong to the local businesses. Because the results of the study have particular value to the local businesses, the local businesses are receiving commensurate value as the resource provider. Therefore, this transaction would be accounted for as an exchange transaction.
The same nonprofit receives a grant to assist with bringing events to the area. Nonprofit A is required to incur qualifying expenses during a specified timeframe in order to receive the funding. Any unspent money is forfeited by Nonprofit A. The grantor is not receiving any commensurate value for providing this funding as the public (local businesses) is receiving the primary benefit of this funding. Therefore, Nonprofit A would account for this grant as a contribution.
Step 2: Determine if a contribution is conditional or unconditional.
The organization needs to determine whether conditions have been placed on the resources being provided. This determination is important for the nonprofit as unconditional contributions are recognized immediately, whereas conditional contributions are not recognized until the conditions have been substantially met. ASU 2018-08 clarifies that both of the following must exist for a contribution to be conditional:
- there is a barrier the nonprofit must overcome to be entitled to the resources, and
- the contributor retains a right of return for the resources provided
The new standard provides the following indicators that a barrier may exist:
- The nonprofit is required to achieve a measurable outcome (ex: help a specific number of beneficiaries or produce a certain number of units).
- The nonprofit is required to overcome a barrier related to the primary purpose of the agreement. This excludes trivial or administrative requirements. Examples such as producing an annual report or providing financials are common administrative requirements in contribution agreements. This reporting is not related to the underlying purpose of the agreement and generally it is to confirm the resources were used in accordance to the agreement and is not intended to affect the extent to which the nonprofit is entitled to the contribution.
- The nonprofit has limited discretion over how the resources are spent (ex: a requirement to follow specific guidelines about incurring qualifying expenses).
Using the following examples from the ASU, we will determine if a contribution is conditional or unconditional.
Nonprofit B is a homeless shelter that receives a grant to build a new wing onto its existing building. The agreement contains a multiyear promise to give and includes specific building requirements. Payments of the multiyear promise to give will be made as Nonprofit B achieves milestones identified in the agreement. If a particular milestone is not met, Nonprofit B is not entitled to the assets. In this example, a milestone is deemed a measurable performance barrier because NFP B’s entitlement to the transferred assets is contingent upon the completion of a milestone. In addition, the agreement includes a release of the resource provider’s obligation to transfer assets if the stipulations are not met. Therefore, this would be considered a conditional contribution and revenue would be recognized as the barriers are met.
The same nonprofit receives a grant to be used towards its community meal program. The agreement includes specific guidelines for which Nonprofit B could use the assets (for example, to hire three additional cafeteria workers or to purchase additional food) but does not specify that Nonprofit B’s entitlement to the funds is dependent on Nonprofit B meeting any of the specified guidelines in the agreement. The grant contains a right of return for funds not spent on the community meal program. Nonprofit B determined this is an unconditional promise to give as the agreement does not contain a barrier to overcome in order for it to be entitled to the assets.
The ASU includes a decision tree to help nonprofits in the evaluation process. View the full decision tree here: https://www.hawkinsash.cpa/wp-content/uploads/2019/08/ASU-2018-08-Decision-Tree.pdf
Effective Date and Application
The amendments in ASU 2018-08 are effective for annual financial statements issued for fiscal years beginning after December 15, 2018, and for interim periods within fiscal years beginning after December 15, 2019. Application to interim financial statements is permitted, but not required in the initial year of application.
The amendments should be applied only to the portion of revenue or expense that has not yet been recognized before the effective date. No prior-period results should be restated. The organization will be required to disclose the nature of and reason for the accounting change and an explanation of the reason for significant changes in each financial statement line item resulting from the amendments.
Early application is permitted.
If you have any questions regarding how ASU 2018-08 will impact your organization, please contact your Hawkins Ash CPAs representative.