In June of 2018, FASB issued ASU 2018-08: Clarifying the Scope and the Accounting Guidance for Contributions Received and Contributions Made.
Today I provide an overview of how this standard affects nonprofit revenue recognition.
ASU 2018-08: Nonprofit Revenue Recognition
The purpose of the standard is to provide guidance in regard to recognizing revenues in nonprofit organizations. This standard is conceptually consistent with Topic 606, Revenue from Contracts with Customers, which requires revenue to be recognized when performance obligations are satisfied. ASU 2018-08 requires contribution revenue recognition when conditions are met (see below).
Once ASU 2018-08 becomes effective (years ending December 31, 2019 for many nonprofits), nonprofits will recognize revenues in one of three ways:
- Exchange transaction
- Conditional Contribution
- Unconditional Contribution
1. Exchange transaction
If a nonprofit is paid based on commensurate value, then there is an exchange transaction. The nonprofit recognizes revenue as it provides the service or goods. Apply Topic 606, Revenue from Contracts With Customers, for these transactions. An example of an exchange transaction is a nonprofit is paid market rate for painting a local store.
ASU 2018-08 makes it plain that benefits received by the public as a result of the assets transferred is not equivalent to commensurate value received by the resource provider.
2. Conditional Contribution
A conditional contribution is one where:
- a barrier is present and
- a right of return or right of release for the contributor exists
The following are indicators of a barrier:
- Recipient must achieve a measurable, performance-related outcome (e.g., providing a specific level of service, creating an identified number of units of output, holding a specific event)
- A stipulation limits the recipient’s discretion on the conduct of the activity (e.g., specific guidelines about incurring qualifying expenses)
- A stipulation is related to the primary purpose of the agreement (e.g., must report on funded research)
Recognize revenue when the barrier is overcome.
An example of meeting a measurable outcome would be if the donor requires the serving of meals to 1,000 homeless persons. Another example of the first indicator above is a matching requirement.
An example of limited discretion would be a requirement to hire specific individuals to conduct an activity.
Are budgets an indicator of limited discretion? A line-item budget for a grant is often seen as a guardrail rather than a barrier. A June 2019 FASB Q&A states “Thus, stipulations other than adherence to a budget (for example, the need to incur qualifying expenses) would normally need to be present for a barrier to entitlement to exist.” The Q&A goes on to say, “The unique facts and circumstances of each grant agreement must be analyzed within the context of the indicators to conclude whether a barrier to entitlement exists.”
An example of a stipulation related to the primary purpose of the agreement is a grant that requires the filing of an annual report of funded research. If the grantor requires repayment of the amount received should the report not be filed, then the requirement is a barrier. Judgment is necessary to determine whether a requirement is a barrier. For example, filing routine reports to a resource provider showing progress on a funded activity may be seen as routine and not a barrier. Goals or budgets where no penalty is assessed if the organization fails to achieve them are not considered barriers.
Per ASU 2018-08 “Conditional contributions received are accounted for as a liability or are unrecognized initially, that is, until the barriers to entitlement are overcome, at which point the transaction is recognized as unconditional and classified as either net assets with restrictions or net assets without restrictions.”
3. Unconditional Contribution
If there are no barriers or if barriers have been overcome, the receipt is unconditional. There might still be a purpose or time restriction, resulting in the funds being classified as “With Donor Restrictions” until the restriction is satisfied. Recognize the revenue either as:
- Net Assets with Donor Restriction
- Net Assets without Donor Restriction
A public company or a not-for-profit organization 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 new standard for transactions in which the entity serves as a resource recipient to annual reporting periods beginning after June 15, 2018, including interim periods within that annual period. Other organizations would apply the standard to annual reporting periods beginning after December 15, 2018, and interim periods within annual periods beginning after December 15, 2019.
A public company or a not-for-profit organization 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 new standard for transactions in which the entity serves as a resource provider to annual reporting periods beginning after December 15, 2018, including interim periods within that annual period. Other organizations would apply the standard to annual reporting periods beginning after December 15, 2019, and interim periods within annual periods beginning after December 15, 2020.
Early adoption of the amendments in this ASU is permitted.
ASU 2018-08 should be applied on a modified prospective basis. Retrospective application is permitted. Under a modified prospective basis, the amendments should be applied to agreements that are either:
- Not completed as of the effective date
- Entered into after the effective date
A completed agreement is an agreement for which all the revenue of a recipient or expenses of a resource provider have been recognized before the effective date of ASU 2018-08.
No prior-period results should be restated. There is no cumulative-effect adjustment to the opening balance of net assets at the beginning of the year of adoption.
In the year of adoption, the entity is required to disclose:
- The nature of and reason for the accounting change
- An explanation of the reasons for significant changes in each financial statement line item in the current annual or interim period resulting from applying the amendments instead of the previous guidance
Per ASU 2018-08, “Accounting for contributions is an issue primarily for not-for-profit (NFP) entities because contributions are a significant source of revenue for many of those entities. However, the amendments in this Update apply to all entities, including business entities, that receive or make contributions of cash and other assets, including promises to give within the scope of Subtopic 958-605 and contributions made within the scope of Subtopic 720-25, Other Expenses—Contributions Made.”