RECOGNIZING CONTRIBUTIONS –ASU 2018-08 TOPIC 958
Changes to revenue recognition under ASU 2014-09 did not explicitly address contributions. ASU 2018-08 was created to provide guidance to nonprofit organizations with the goal to encourage consistent revenue recognition between various entities specifically relating to contributions. The guidance redefines when recognition of revenue should be delayed and when contributions are considered conditional.
The new standard is effective for fiscal years beginning after December 15, 2018 for nonpublic entities (years ending December 31, 2019 and June 30, 2020 for most nonprofits).
The guidance may affect:
- Contributions and grants
- Government grants
- Cost reimbursement arrangements
- Fee for service arrangements
Recognition of revenue from contributions/grants with BOTH a barrier and a right of return should be delayed until barriers are overcome.
The guidance further distinguishes between conditional and unconditional contributions. If a barrier exists, as well as requirement that receipt/payment be reduced or canceled if performance is not met, the transactions should be treated as conditional.
Organizations should determine whether a contribution is conditional and distinguish a donor-imposed condition from a donor-imposed restriction.
- One or more barriers including:
- Measureable performance-related barrier such as:
- Specified level of service
- Specified output or outcomes
- Matching requirement
- Limited discretion by the recipient on how activity is conducted
- Purpose related stipulations
- A right of return or release
RIGHT OF RETURN
Agreements including terms that revenue would be reduced or canceled if a specific level of performance is not met are considered to include a right of return. If a barrier and right of return exist, funding will be recognized up to the point performance has been met. Conditional contributions received in advance are deferred and recognized as a liability, until performance requirements have been met.
RECIPROCAL EXCHANGE OR CONTRIBUTION?
The guidance outlines that the resource provider is not synonymous with the general public. If the nonprofit is providing value to the general public, the transaction will generally be considered a contribution. Additionally, the guidance defines when a nonprofit is carrying out a contract, which in turn helps promote the resource provider’s mission, or provides positive sentiments from acting as a donor, the factors would not meet the requirement of providing value to the resource provider and would be recognized as a contribution.
Foundation grants and agreements can be complex with provisions regarding approvals of reports at intervals and/or completion of the grant. The act of providing a report to the Foundation most often does not indicate a barrier; however, if the report must show that a certain level of outcome has been met for payment to occur, then a barrier may exist. If a right of return also exists, revenue recognition may be delayed. Agreements may also include matching requirements or performance outcome requirements, which create a barrier, and revenue recognition most likely is conditional. Grants should be evaluated individually at the time notification of the grant is received.
For some organizations, government awards have been treated as reciprocal (exchange) transactions even though the general public was benefiting. Under the clarified guidance, the FASB states that if the general public is benefiting, the government grant should be considered nonreciprocal under the contribution guidance and will need to follow the decision tree for contributions. Government expense reimbursement contracts may fall under the new contribution recognition requirements, however the actual recognition of revenue may not change. Each grant and contract should be evaluated to determine the proper treatment.
HOW TO START
- Read all new agreements awarded after the effective date, as well as any agreements not completed as of the effective date, and determine if funding is nonreciprocal (contribution) or an exchange transaction.
- Determine if a barrier AND right of return exists
- Determine if conditions exist
- Review decision tree to help determine how revenue should be recognized (unconditional and recognized immediately or conditional and potentially delayed)
Need help deciding? Follow the decision tree provided by the FASB (click link, right) FASB Decision Tree