Prior to FASB ASC 606, there were two methods used in practice to recognize revenue from Federal Financial Assistance (FFA). The first treated FFA as unconditional contributions restricted as to purpose. The more common method treated FFA as conditional contributions resulting in the recognition of revenue as reimbursable expenses were incurred.
Under the “unconditional contribution method”, an organization recognized a contribution receivable upon receipt of FFA with a corresponding increase in temporarily restricted revenue. As allowable expenses were incurred, the organization released restrictions equal to the amount of reimbursable expenses incurred. At the end of the award period, if the award was completely spent, the receivable and restricted net assets were equal to $0. However, in certain circumstances, if the full amount of the award was not spent within the period of performance, the organization posted adjustments to revenue and receivables reducing both accounts to $0.
Under the “conditional contribution method” a recipient of FFA recognized a purpose restricted contribution as conditions were met. Within the framework of FFA, this generally meant upon the incurrence of allowable costs in furtherance of the federally funded program.
Simultaneous Release Option
GAAP allows an organization to report restricted contributions that are met in the same period in one of two ways. The organization has the option to report the revenue as temporarily restricted with a corresponding release from restrictions, or to report those contributions as unrestricted (known as the simultaneous release option). Most organizations elect to use the simultaneous release option. This policy decision must be disclosed in the notes to the financial statements and applied consistently.
The application of the simultaneous release option results in presentation of revenue in a manner that would be achieved in a cost reimbursable contract. Given the similar presentation, many in the profession have treated FFA as cost reimbursable exchange transactions. The new guidance, however, makes it clear that FFA should not be considered an exchange transaction.
Diversity in Application Led to Diversity in Timing of Revenue Recognition
Varying interpretations of FASB ASC 605 led to divergent methodologies of revenue recognition. This diversity in practice generally relates to the interpretation of what constitutes a condition. The disagreement largely centered around whether the federal cost principles and post award requirements imposed via the Uniform Guidance (previously OMB Circulars A-110, A-122 and the Common Rule) should be considered conditions or lesser requirements akin to administrative burdens.
The difference in these interpretations led to one of two treatments:
- Revenue was recognized upon receipt of FFA. In this method, revenue is recognized as a component of temporarily restricted net assets when received. In subsequent periods net assets are released from restrictions and transferred to unrestricted. In practice, this leads to periods in which there are large increases in net assets in the first year of an award and gradual declines in subsequent periods.
- Revenue was recognized as reimbursable expenses were incurred. In this method, revenue and expenses are generally equal. As a result, large variances in net assets between periods are not encountered.