Do federal and state governments make contributions to nonprofit organizations? Most accountants would say: “No, government departments and agencies may provide grants and other resources to nonprofits to help governments meet their social and other program requirements, but these are not contributions and should not be accounted for as contributions.”
But not all accountants agree with this. As a result, some account for government grants as an exchange transaction typically recognizing grant and other revenue as reimbursable costs are incurred. Others record a grant as a contribution, recognizing a contribution receivable and an increase in net assets when notified of the award.
The FASB addressed this diversity in practice by issuing Accounting Standards Update (ASU) 2018-08 to help clients and practitioners evaluate whether transactions should be accounted for as contributions (nonreciprocal transactions) or as exchange (reciprocal) transactions. This will hopefully help eliminate the diversity in practice that has resulted when applying current generally accepted accounting principles (GAAP) to grants and contracts from various types of resource providers, with primary focus on government grants and contracts. Each agreement will have to be evaluated.
The differentiator between contributions and exchange transactions is whether there has been an “exchange of commensurate value”. The ASU provides enhanced guidance for determining whether an exchange has taken place between the parties to the grant or contract. In an exchange transaction, reciprocal benefits flow directly between the parties to the agreement, and the transaction should generally be accounted for under the standards for revenue from contracts with customers.
ASU 2018-08 clarifies, however, that a benefit received by the general public as a result of the assets transferred by a resource provider (e.g., a government agency) to a nonprofit for the performance of a grant or contract (e.g., to provide housing for the needy) is not equivalent to commensurate value received by the resource provider. Accordingly, many government grants to nonprofit entities may now be reported as conditional contributions discussed below.
In ASU 2018-08, the FASB redefines a conditional contribution as one that specifies a barrier which, if not overcome, results in either a return of assets transferred (e.g., when costs for a government contract or grant are disallowed) or a release of a promisor‘s obligation to transfer assets (e.g., when matching requirements are not met).
This must be determinable from the agreement or another document referenced in the agreement. Indicators are discussed in the ASU to help assess whether an agreement contains a barrier. Depending on the facts and circumstances, some indicators may be more significant than others, and no single indicator is determinative.
For accounting purposes, a conditional contribution is not accrued by the recipient as a receivable when the promise to provide resources is made. Rather, support is recognized as conditions are met or overcome (e.g., as allowable costs are incurred or matching requirements are met).
This accounting change could significantly impact the financial statements of nonprofits that currently view the government support as an unconditional contribution and record a receivable and increase net assets (with and/or without donor restrictions) for the full amount of the grant upon notice of the award from the government awards the grant. The increase in net assets will have to be deferred until the conditions are met.
However, for those nonprofit entities that currently record government grants as exchange transactions, the change to accounting for the grants as conditional contributions under ASU 2018-08 will have minimal or no impact because both methods recognize the support as reimbursable costs are incurred. Reclassifications for any donor restrictions must be made, but the measurement of assets and the increase in net assets will not be affected.
The effective dates for ASU 2018-08 are intended to align with the effective dates of ASU 2014-09, the new revenue recognition standards.
For resource recipients that are public business entities and conduit bond obligors with publicly traded debt, ASU 2018-08 is effective for annual periods beginning after June 15, 2018, including interim periods within those annual periods. For non-public and other resource recipients, ASU 2018-08 is effective for annual periods beginning after December 15, 2018, and interim periods within annual periods beginning after December 15, 2019.
For resource providers that are public business entities and conduit bond obligors with publicly traded debt, ASU 2018-08 is effective for annual periods beginning after December 15, 2018, including interim periods within those annual periods. For non-public and other resource providers, ASU 2018-08 is effective for annual periods beginning after December 15, 2019, and interim periods within annual periods beginning after December 15, 2020.
Early adoption of the amendments is permitted.
The ASU should be applied on a modified prospective basis. Retrospective application is permitted. Under a modified prospective basis, in the first set of financial statements following the effective date, the ASU should be applied to agreements that are either not completed as of the effective date or entered into after the effective date.
A completed agreement is an agreement for which all the revenue (of a recipient) or expense (of a resource provider) has been recognized before the effective date in accordance with current guidance.
The ASU should be applied only to the portion of revenue or expense that has not yet been recognized before the effective date in accordance with current guidance. No prior-period results should be restated, and there should be no cumulative-effect adjustment to the opening balance of net assets or retained earnings at the beginning of the year of adoption.
Under this approach, an entity is required to disclose both (a) the nature of and reason for the accounting change, and (b) 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.
Robert N. Gray is a shareholder with Rubino & Company and oversees the quality control of our assurance and attestation practice. If you have questions on this or any other matter, please do not hesitate to contact any of the shareholders at Rubino & Company