By Richard Koch, CPA
Director of Quality Control at Gray, Gray & Gray
In 2018, the Financial Accounting Standards Board (FASB) issued ASU 2018-08 clarifying the scope and the accounting guidance for contributions received and contributions made. This standard will be applicable for non-public organizations for transactions in which the entity serves as the resource recipient to annual periods beginning after December 15, 2018 (2019 calendar year-ends); and for transactions in which the entity serves as the resource provider to annual periods beginning after December 15, 2019 (2020 calendar year-ends). This standard should be applied on a modified prospective basis. Retrospective application is permitted. Early adoption of the standard is permitted.
This long-anticipated standard brings clarity on how to distinguish an exchange from a non-exchange transaction, as well as what constitutes a condition vs. a restriction.
The goal of the standard is to make it easier for not-for-profit organizations to determine whether gifts, grants or contracts should be accounted for as contributions or as reciprocal transactions. Starting next year all organizations are required to evaluate whether a resource provider (government, foundation, corporation, etc.) is receiving commensurate value in a transfer of resources, and whether or not contributions are conditional or unconditional.
If the resource provider receives commensurate value the transaction must be accounted for as an exchange transaction. If commensurate value is not received it can be accounted for as a contribution, at which time the organization must determine if the contribution is unconditional or conditional. If it is unconditional the transaction can be recorded immediately; if it is conditional the condition must be recorded once the conditions are met.
For a contribution to be conditional it must have both a barrier that must be overcome; and a right of return to the resource provider for assets transferred or a right of release of the promisor from its obligation to transfer the assets.
What is a barrier? It could be a measurable performance-related barrier, such requiring a specific matching donation level be achieved before assets are released, or that a specific level of service be delivered. Another barrier could be restrictions on how assets may be used. Or if the resource provider includes a stipulation that is unrelated to the purpose of the donation, such as requiring reports on the use of a grant that are not directly applicable to the purpose of the grant.
FASB expects more grants and contracts (including those from the federal government) to be accounted for as contributions than under current conditions. Any not-for-profit receiving grants, gifts or contracts should be preparing to implement the new accounting standards now.
If you have questions about the new accounting standards for non-profits or other accounting questions please contact me at (781) 407-0300 or via email at email@example.com