The Financial Accounting Standards Board (FASB) has issued Accounting Standards Update (ASU) 2018-08 to provide accounting guidance for contributions received and contributions made. The ASU will help clients and practitioners in evaluating 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, but primarily for government grants and contracts.
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 such 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.
A resource provider (e.g., a government agency) is not synonymous with the general public. A benefit received by the public as a result of the assets transferred for the performance of a grant or contract is not equivalent to commensurate value received by the resource provider. Accordingly, many government grants to Not-for-Profit entities will be reported as conditional contribution 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. A conditional contribution is not accrued by the recipient as a receivable when the promise to give is made. Rather, support is recognized as conditions are met or overcome (e.g., as allowable costs are incurred or matching requirements are met.)
For those Not-for-Profit entities with government grants that will be reported as conditional contributions under ASU 2018-08, the accounting will be substantially the same as the grant accounting they currently used whereby grant support is recognized as reimbursable costs are incurred. Accordingly, the reclassification in the financial statements will be the only change requiring disclosure in the notes. The measurement of assets and revenue 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.
Stay in touch with Rubino by signing up for our bi-weekly email newsletter!