Why Is This Exposure Draft Being Issued?
The Financial Accounting Standards Board (FASB) has issued an Exposure Draft entitled Topic 958: Clarifying the Scope and Accounting Guidance for Contributions Received and Contributions Made. This update is being planned to assist non-profits in determining when a transaction, including a grant, is an exchange transaction versus a contribution. The guidance further distinguishes between conditional and unconditional contributions. It became important to issue the new guidance in this area since exchange transactions will follow new revenue recognition guidance in ASU 2014-09 (as amended) for annual reporting periods beginning after December 15, 2018. Contributions do not fall under the new revenue recognition guidance.
What Are The Main Provisions?
A resource provider (including a private foundation, a government agency, or other) is not synonymous with the public. Therefore, indirect benefit received by the public as a result of a transaction is not equivalent to proportional value and does not result in an exchange transaction. Furthermore, execution of a resource providers’ mission or the positive sentiment from acting as a donor would not constitute proportional value received resulting in an exchange transaction.
The amendments in this proposed Update would also clarify that when a transaction is payment from a third-party payer on behalf of an already existing exchange between a non- profit and a customer, the guidance under the new revenue recognition guidance in ASU 2014-09 (as amended) would apply.
The proposed amendments would also require that an entity determine whether a contribution is conditional based upon 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 exists. Unconditional contributions are recognized immediately and classified as either net assets with restrictions or net assets without restrictions. Conditional contributions received are accounted for as a liability or are unrecognized initially, that is, until the condition is met, at which point the transaction is recognized as unconditional and classified as either net assets with restrictions or net assets without restrictions.
When Would This Amendment Be Effective?
The amendments in this proposed
Update would be applied on a modified prospective basis in the first set of
financial statements following the effective date to agreements that are either
not completed as of the effective date nor entered after the effective date.
Retrospective application would be permitted, but optional. The effective date is expected to be for
annual reporting periods beginning after December 15, 2018.
What Happens Next?
After the draft ASU was released,
there was negative feedback in the accounting community. In a response to FASB
the Not-For-Profit Committee of the Pennsylvania Institute of Certified Public
Accountants (PICPA) wrote that “In general, the committee finds certain aspects
of the proposal to be unnecessarily confusing, and believes that the proposed
guidance will not change current practice or eliminate practice diversity.”
Because there is a lack of clarity in the examples given by the FASB, there is
still room for interpretation and there will likely still be diversity in the
application of the updated standards.
The FASB will review all comments
received and determine if changes should be made to the draft ASU.
Lisa A. Ritter, CPA, CFE, CITP,
as part of her participation with the Pennsylvania Institute of Certified
Public Accountants (PICPA’s) Not-For-Profit Technical Issues Subcommittee has
assisted in the preparation of a comment/response document to FASB. We will keep you posted as updates become available.