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Accounting Standards Update 2018-08 Clarifying the Scope of the Accounting Guidance for Contributions Received and Contributions Made – Non-Profit Entities

Have you reviewed the new standard for contributions received and contributions made?

ASU 2018-08 Clarifying the Scope of the Accounting Guidance for Contributions Received and Contributions Made – Non-Profit Entities assists entities to determine if transaction should be accounted for as contributions or exchange transactions and whether a contribution is conditional.

When is the standard applicable?

Nonpublic organizations should apply the amendments in the update on contributions received for their year ended December 31, 2019 and fiscal year end June 30, 2020.

Nonpublic organizations should apply the amendments in the update on contributions made for their year ended December 31, 2020 and fiscal year end June 30, 2021.

Distinguishing between exchange transactions and contributions

Entities will be required to determine 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. The standard clarifies that a benefit received by the general public, is not considered commensurate value to the resource provider. In addition, furthering the mission of the resource provider does not constitute commensurate reciprocal value.

If the transaction is determined to be an exchange transaction, the entity will follow ASU 2014-09 Revenue from Contracts with Customers, otherwise the entity would apply contribution guidance.

Evaluation of nonreciprocal transactions (contributions)

Entities are required to evaluate if conditions have been placed by the resource provider for nonreciprocal transactions. If a contribution has both of the following, it is considered conditional:

• Contributor retains either a right of return of assets transferred or a right of release of a promisor’s obligation to transfer assets
• The organization has to overcome a barrier (see below)

FASB provided the following indicators to help determine if a barrier exists:

• Inclusion of a measurable performance-related barrier or other measurable barrier. For example, a matching requirement or number of units of output.
• Limited discretion by the organization over how resources are spent. For example, the organization must follow specific guidelines about qualifying allowable expenses or a requirement to hire specific individual(s) as part of the workforce conducting the activity.
• Whether there is a primary purpose of the agreement (this general excludes administrative tasks and trivial stipulations).

Accounting for nonreciprocal transactions (contributions)

Unconditional contributions are recognized immediately and classified as net assets with or without donor restrictions. Conditional contributions are recognized as liabilities if assets are transferred in advance or not recognized at all until all of the conditions have been substantially met or explicitly waived by the donor. In addition, additional disclosures are required for conditional contributions.

Summary

This update will likely result in more grants and contracts being accounted for as either contributions or conditional contributions than observed in practice under current guidance. For this reason, clarifying the guidance about whether a contribution is conditional is important because such classification affects the timing of contribution revenue and expense recognition. Determining whether transactions are reciprocal or nonreciprocal can prove challenging for many non-profits. Please contact us for assistance in understanding how the new standard will impact your organization.