FASB Addresses Accounting for Grants and Contracts
Just issued, the Financial Accounting Standards Board’s (FASB’s) exposure draft, Clarifying the Scope and the Accounting Guidance for Contributions Received and Contributions Made, is intended to address questions stemming from FASB Accounting Standards Update (ASU) No. 2014-09, Revenue from Contracts with Customers, regarding its implications on the grants and contracts of not-for-profit organizations. Specifically, do not-for-profit grants and contracts fit the definition of a contract with a customer, such that the new revenue standard would apply? Or are they more appropriately classified as contributions, which would exclude them from the scope of ASU 2014-09 and instead require the application of contribution guidance (more on that below)?
The FASB exposure draft clarifies that the first decision to consider is whether the transaction is reciprocal (an exchange) or non-reciprocal (a contribution). That is, does the donor or grantor “receive commensurate value in return for the resources provided?” If so, then the asset transfer is an exchange transaction. It is important to note that societal benefit—even if it furthers the resource provider’s charitable mission—is not commensurate reciprocal value.
For nonreciprocal transactions (contributions), the next point to consider is whether conditions have been placed on the resources provided, as the presence of conditions affects the timing of revenue recognition. For a contribution to be conditional, the answer to both of the following questions is expected to be “yes.”
- Does the donor/grantor retain a right of return to the resources provided?
- Is there a barrier the not-for-profit organization must overcome to gain rights to the resources provided?
Because the second question is the more difficult one to answer, FASB’s proposed amendments provide the following indicators that a barrier may exist:
- The not-for-profit is required to achieve a measurable outcome (e.g., incur certain qualified expenses, help a specific number of beneficiaries or produce a certain number of units).
- The not-for-profit is required to overcome a barrier related to the primary purpose of the asset transfer agreement. (Note: This excludes trivial or administrative requirements.)
- The not-for-profit has limited discretion over how the resources are spent.
- The not-for-profit is required to take significant additional actions that it otherwise would not have taken.
Conditional contributions are recognized as liabilities or not recognized at all until the barrier(s) are overcome, at which point the contributions are recognized as unconditional and classified as net assets with or without donor restrictions. Unconditional contributions are recognized immediately and classified as net assets with or without donor restrictions. Thus, after determining the presence of conditions, the existence of restrictions, if any, is the final key point to consider.
The full exposure draft includes a flowchart to walk you through this evaluation process. For more information on the unique aspects of not-for-profit accounting and financial reporting, visit the AICPA’s Not-for-Profit Section at aicpa.org/NFP.
Lana Richards, CPA, Manager- Not-for-Profit Content Development, Association of International Certified Professional Accountants and Cathy J. Clarke, CPA, Chief Assurance Officer – National Audit and Assurance Quality Group, CliftonLarsonAllen LLP. Cathy’s primary responsibilities include overseeing the audit quality with the firm, being a technical resource for her firm's audit and assurance practice and quality review of assurance and accounting engagements. She is the immediate past chair of the AICPA's Not-for-Profit Industry Expert Panel. Throughout her career, Cathy has served a variety of clients in numerous industries, with an emphasis on not-for-profits and healthcare entities.
Signing a contract courtesy of Shutterstock.