The Financial Accounting Standards Board (FASB) has issued an Accounting Standards Update (ASU Topic 958) that clarifies and improves the scope and accounting guidance for contributions of cash and other assets received and made by non-profits.
Why An Update?
The impetus for this update is to clarify when grants and contracts with resource providers should be treated as an exchange transaction versus a non-exchange transaction. Exchange transactions must follow the new ASU 2014-09, Revenue from Contracts with Customers, Topic 606 which adds new disclosure requirements.
The new guidance also includes new information to assist non-profits in determining when a contribution is conditional which effects the timing of recording revenue and expense. Non-profits have been challenged in determining whether a contribution is conditional or unconditional and distinguishing a donor-imposed condition from a donor-imposed restriction when applying the guidance in Subtopic 958-605, Not-for-Profit Entities – Revenue Recognition. This is often the case when a non-profit receives assets accompanied by certain stipulations but with no specified return requirement for when the stipulations are not met. Diversity in accounting practice occurs when assessing the likelihood of whether failing to meet a condition is remote and in evaluating whether and how remote provisions affect the timing of when a contribution is recognized.
What Are The Main Provisions Of This Amendment?
The amendment clarifies several areas:
- Whether a transfer of assets or the reduction, settlement, or cancellation of liabilities is classified as a contribution or an exchange transaction.
- How a non-profit should determine whether a resource provider is participating in an exchange transaction by evaluating whether the resource provider is receiving commensurate value in return by determining the following:
- A resource provider does not equate with the general public. The public benefit is not equivalent to commensurate value received by the resource provider.
- Carrying out a resource provider’s mission or the positive sentiment from acting as a donor does not characterize commensurate value received by a resource provider for purposes of determining whether a transfer of assets is a contribution or an exchange.
- In instances in which a resource provider is not receiving commensurate value for the resources provided, non-profits must determine whether a transfer of assets represents a payment from a third-party payer on behalf of an existing exchange transaction between the recipient and an identified customer. If so, other guidance (for example, Topic 606) applies.
- Non-profits are now required to determine whether a contribution is conditional based on whether an agreement includes a barrier that must be overcome and either a right of return of assets transferred or a right of release of a promisor‘s obligation to transfer assets. The presence of both a barrier and a right of return or a right of release indicates that a recipient is not entitled to the transferred assets or a future transfer of assets until it has overcome the barrier(s) in the agreement.
- After a contribution has been deemed unconditional, non-profits would then consider whether the contribution is restricted on the basis of the current definition of the term donor-imposed restriction, which includes a consideration of how broad or narrow the purpose of the agreement is, and whether the resources are available for use only after a specified date. Indicators are used to guide the assessment of 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. The indicators include:
- Inclusion of a measurable performance-related barrier or other measurable barrier. An example of a measurable barrier would be a requirement that the recipient is entitled to the assets only upon the occurrence of an identified event (for example, a matching requirement).
- The extent to which a stipulation limits discretion by the recipient on the conduct of an activity. Examples of limited discretion could include a requirement to follow specific guidelines about qualifying allowable expenses, a requirement to hire specific individuals as part of the workforce conducting the activity, or a specific protocol that must be adhered to.
- Whether a stipulation is related to the purpose of the agreement. This indicator generally excludes administrative tasks and trivial stipulations.
When Will The Amendments Be Effective?
The amendments in this Update 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 amendments should be applied to agreements that are either:
1. Not completed as of the effective date
2. 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 (for example, Topic 605, Topic 958, or other Topics). The amendments in this Update 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, non-profits are required to disclose both:
1. The nature of and reason for the accounting change
2. 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.
For transactions in which a non-profit has issued, or is a conduit bond obligor for, securities that are traded, listed, or quoted on an exchange or an over-the-counter market and serves as a resource recipient, the non-profit should apply the amendments in this Update on contributions received to annual periods beginning after June 15, 2018, including interim periods within those annual periods. All other entities should apply the amendments for transactions in which the entity serves as the resource recipient to annual periods beginning after December 15, 2018, and interim periods within annual periods beginning after December 15, 2019.
For transactions in which a non-profit has issued, or is a conduit bond obligor for, securities that are traded, listed, or quoted on an exchange or an over-the-counter market and serves as a resource provider, the non-profit should apply the amendments in this Update on contributions made to annual periods beginning after December 15, 2018, including interim periods within those annual periods.
All other entities should apply the amendments for transactions in which the entity serves as the resource provider to 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.
Do you have questions regarding this FASB update? Please contact your Maher Duessel audit partner.
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Please note this summary update is not meant to be a substitute for reading the FASB update in its entirety.