When the Financial Accounting Standards Board (FASB) updated its rules for recognizing revenue from contracts in 2014, it only added to the confusion that non-profits already had about accounting for grants and similar contracts.

Fortunately, last year, the FASB provided some much-needed clarification with Accounting Standards Update (ASU) No. 2018-08, Not-for-Profit Entities (Topic 958): Clarifying the Scope and the Accounting Guidance for Contributions Received and Contributions Made. Calendar-year non-profits must follow this guidance when preparing their 2019 year-end financial statements.

Complicated rules

Non-profits traditionally have taken varying approaches when they:

• Characterize grants and similar contracts as exchange transactions (also known as reciprocal transactions) or contributions (nonreciprocal transactions)
• Distinguish between conditional and unconditional contributions

The FASB’s updated revenue recognition guidance — ASU 2014-09, Revenue from Contracts with Customers — eliminated some of the previous guidance for non-profits and imposed extensive disclosure requirements that did not seem relevant to contributions. ASU 2018-08 clarifies matters by laying out rules that will help non-profits determine whether a grant or similar contract is indeed a contribution and, if so, when they should recognize the revenue associated with it.

Exchange vs. contribution

To determine how to treat a grant or similar contract, you must assess whether the ‘provider’ receives commensurate value for the assets it is transferring. If it does, you should treat the grant or contract as an exchange transaction. ASU 2018-08 stresses that the provider (the grantor or other party) in a transaction is not synonymous with the general public. So, indirect benefit to the public does not represent commensurate value received. Execution of the provider’s mission or positive sentiment received from donating also does not constitute commensurate value received.

What if the provider does not receive commensurate value? You then must determine if the asset transfer is a payment from a third-party payer for an existing transaction between you and an identified customer (for example, payments made under Medicare or a Pell Grant). If it is such a payment, the transaction will not be considered a contribution under the ASU, and other accounting guidance would apply. If it is not such a payment, the transaction is accounted for as a contribution.

Conditional terms

According to ASU 2018-08, a conditional contribution includes:

• A barrier the non-profit must overcome to receive the contribution
• Either a right of return of assets transferred or a right of release of the promisor’s obligation to transfer assets

Unconditional contributions are recognized when received. However, conditional contributions are not recognized until you overcome the barriers to entitlement.

Is there a barrier to overcome before your organization can receive a contribution? Consider the inclusion of a measurable performance-related barrier, limits on your non-profit’s discretion over how to conduct an activity or a stipulation that relates to the purpose of the agreement (not including administrative tasks and trivial stipulations such as production of an annual report). Some indicators might prove more important than others, depending on circumstances. And no single indicator is determinative.

Net effect

As a result of the updated guidance, non-profits likely will account for more grants and similar contracts as contributions than they did under the previous rules. Check with your CPA to determine what that means for your financial statements, loan covenants, and other matters.