The Financial Accounting Standards Board (FASB) has met recently to discuss how not-for-profit entities (NFP) can better differentiate if their grants and contracts should be accounted for as either contributions or exchange transactions. It can often be difficult to distinguish between the two. In addition, FASB sought to improve upon the determination of conditional and unconditional contributions.
Differentiating Contributions Versus Exchange Transactions
Per FASB, many NFPs account for grants as exchange transactions. It is FASB’s belief that some of these entities may be misinterpreting the revenue recognition guidance. As such, FASB suggests grants and contacts should be considered on an individual basis. Among the possible solutions discussed were the clarification of the scope of the current revenue recognition guidance as well as the addition of more illustrative examples. Specific areas of focus are as follows:
- Instances where the general public will receive the primary benefit;
- Types of value that do not constitute commensurate value;
- The type of resource provider should not override the substance of the transaction;
- And, instances where the resource provider acts as a third-party payer for an already existing exchange transaction between the NFP and the customer.
Discerning Conditional Versus Unconditional
Per FASB, there is much diversity in practice regarding what distinguishes a donor-imposed restriction and a condition upon which the promised contribution is dependent. FASB indicates that the distinction between conditional and unconditional is contingent upon whether the funds received must be returned if the specified outcome does not come to pass. The possible solutions proposed were the development of a principle and, again, more illustrative examples. Specific areas of focus are as follows:
- Possible implementation of a barrier, which must be overcome prior to being entitled to the funds;
- Stipulation of an explicit right of return or a release of the promisor’s commitment to transfer the funds;
- Inclusion of specified, measurable preconditions (i.e. performance, level of service or output, etc.).
Note: Topics concerning the disclosure, cost/benefit analysis, and effective date of transition for the above stated solutions will be discussed further in a subsequent FASB meeting. Please return to our blog for further updates.