By Amy Rybar Menefee, CPA, CFE | Business Assurance & Advisory Services Senior Manager | Not-For-Profit Industry Team
In June of this year, the Financial Accounting Standards Board issued Accounting Standards Update (“ASU”) No. 2018-08, which clarifies the scope and accounting guidance for contributions received and contributions made. Though this ASU primarily affects not-for-profit entities, the guidance in the ASU applies to all entities that receive or make contributions of cash and other assets, including promises to give, excluding transfers of assets from government entities to business entities. The intent of the amendment is for the resource provider and the resource recipient to both apply the same guidance on each side of the transaction, so that reporting will “match.” The amendments in ASU No. 2018-08 are effective for resource recipients for annual periods beginning after June 15, 2018 for public entities and December 15, 2018 for non-public entities. The amendments in ASU No. 2018-08 are effective for resource providers for annual periods beginning after December 15, 2018 for public entities and December 15, 2019 for non-public entities.
Contribution vs. Exchange Transaction
The first area the guidance is meant to clarify is whether a transfer of assets is considered a contribution or an exchange transaction. An entity determines whether a resource provider is involved in an exchange transaction by evaluating whether the resource provider is receiving proportionate value in return for the resources transferred on the basis of the following:
- A benefit received by the public as a result of the asset transfer is not the same as value received by the resource provider. In other words, if a resource provider receives value indirectly by providing a societal benefit, this would be considered a non-exchange transaction.
- Execution of a resource provider’s mission does not constitute value received by the resource provider for the purposes of determining whether the transfer of assets is a contribution or exchange.
Conditional Contributions vs. Unconditional Contributions
The second area the guidance is meant to clarify is whether contributions should be considered conditional or unconditional based on whether the related agreement includes a barrier that must be overcome, and either a right of return or a right of release of an obligation to transfer assets. If both a barrier and a right of return or release exists, this is an indication that a recipient is not entitled to the transferred assets or a future transfer of assets until the barriers have been overcome, meaning it is conditional. Some considerations that may be indicative of barriers are:
- The inclusion in the agreement of a measurable performance-related barrier. These may include that the recipient is entitled to the assets after the occurrence of a specific event, for example, meeting a match. Another example of a measurable performance-related barrier is achievement of a specific outcome.
- The limitation in the agreement of discretion by the recipient on how to conduct an activity. This may include requirements to follow specific guidelines or hire specific individuals to conduct the activity.
- Whether a stipulation is related to the purpose of the agreement. For example, a requirement to provide a report on findings.
The following examples help to clarify:
For years there has been diversity in practice for how grants and contracts have been clarified, and the hope is, that the clarifications contained in ASU No. 2018-08 will lead to treatment and reporting that are more closely aligned.
The information contained within this article is provided for informational purposes only and is current as of the date published. Online readers are advised not to act upon this information without seeking the service of a professional accountant, as this article is not a substitute for obtaining accounting, tax, or financial advice from a professional accountant.