Clarified Revenue Recognition Standards for Not-For-Profit Entities
Revenue recognition changes have been in the works for some time within the guidelines of ASC Topic 606, Revenue from Contracts with Customers. Contributions revenue, however, was a listed exception to the new revenue recognition standard, instructing readers instead to continue following ASC Topic 958 for Not-for-Profit Entities. Simple enough, except that there has been a lot of diversity in practice in nonprofits when characterizing grants and similar contracts with resource providers as either (a) exchange transactions or (b) contributions.
In 2018, the FASB issued ASU 2018-08, Clarifying the Scope and the Accounting Guidance for Contributions Received and Contributions Made. The ASU clarifies existing guidance to distinguish between:
- Exchange transactions and contribution revenue
- Conditional and unconditional contributions
Exchange vs. Contribution
Some revenue streams are easily identifiable as either a contribution or an exchange type of transaction, but not all. This distinction matters because the resulting timing of the revenue recognition could be quite different. Nonprofits are unique in that, depending on their revenue sources, they may have both types of revenue.
Each type of revenue must be evaluated to determine whether the resource provider is receiving commensurate value in return for the resources transferred, which would signify an exchange transaction. Is the grantor getting any benefit in return?
The ASU explicitly states that a benefit received by the public because of the assets transferred is not equivalent to commensurate value being received by the resource provider. Consider a nonprofit that receives a government grant that must be used to provide counseling services to disabled veterans. In this example, the benefit is going to the disabled veterans, not back to the government, so this grant would be classified as contribution revenue.
Conditional vs. Unconditional Contribution
For contribution revenue, it is important to distinguish between donor-imposed conditions and donor-imposed restrictions. If a donor has imposed conditions on the gift, including a measurable performance related barrier and a right of return or release, the revenue should be considered conditional and would only be recorded when those conditions are met.
Alternately, a donor may dictate when or how the contribution can be spent without imposing any performance-related barriers on the recipient. In this case, the contribution should be treated as unconditional, but potentially restricted with regard to purpose or timing. Unconditional contributions should be recorded on the date of the promise to give. Revenue would be recorded as support with restrictions or without restriction, depending upon donor’s intent.
In the previous example of the government grant for disabled veterans, if the government imposes a barrier on the nonprofit that funds will only be transferred once a certain number of counseling hours have been provided, the nonprofit will treat this grant as a conditional contribution. Revenue should not be recorded until the counseling hours threshold, or condition, has been met. If the grant does not stipulate any measurable performance-related barriers and allows for the nonprofit to use broad discretion to provide these counseling services, an unconditional contribution may be recorded at the promise or award date.
Not-for-profit entities, as well as their accountants, will need to familiarize themselves with the provisions of their grant agreements to properly apply this guidance.
If you have questions on how to apply this new guidance in your not-for-profit organization, please contact Ellen Norrenberns, Audit Principal, at firstname.lastname@example.org or 314.687.2310.
To learn more about our services for the not-for-profit industry, contact Janet Ramey, Audit Principal and NPO Industry Group Leader, at email@example.com or 636.754.0231.