Accounting Standards Update (ASU) 2018-08 Not-For-Profit Entities (Topic 958), Clarifying the Scope and the Accounting Guidance for Contributions Received and Contributions Made will introduce changes in the way not-for-profit (NFP) entities record revenue. The update is prospective and changes affecting revenue recognition for resource recipients will take effect for annual periods beginning after December 15, 2018 and interim periods beginning after December 15, 2019, except for NFP conduit bond obligors, which will implement for periods beginning July 1, 2018.
The provisions for contributions made and expensed by resource providers are effective one year later (i.e., 2019 and 2020). Early adoption is permitted for all entities.
We first introduced the main provisions of ASU 2018-08 in Volume 12, Issue 3 of the Not-For-Profit Insider. The article details the differences between reciprocal and nonreciprocal transactions, conditional and unconditional transactions, and presents the decision tree not-for-profit entities can use to help determine how to account for a given transaction.
This follow up addresses some of the key points mentioned above and provides examples of these transactions which not-for-profit entities may encounter during implementation.
Defining a contribution
Making the distinction between a contribution and an exchange transaction is one of the primary provisions not-for-profit entities will need to deal with when implementing the ASU. The ASU defines a contribution as an unconditional transfer of cash or other assets, as well as unconditional promises-to-give, to an entity or a reduction, settlement, or cancellation of its liabilities in a voluntary nonreciprocal transfer by another entity acting other than as an owner. This differs from exchange transactions, which are reciprocal transfers in which each party receives and sacrifices approximately commensurate value.
In implementing the new guidance, an entity must assess the characteristics of a transaction from the perspectives of both the resource provider and the recipient to determine whether a contribution occurred.
Here are some examples:
John Smith makes a $5,000 donation to NFP A, an entity which performs charitable acts in its local community. Although Smith lives in the community in which NFP A operates and may receive some indirect benefit from the activities of NFP A as a result of his donation, Smith does not make his donation with the intention of receiving a benefit.
Analysis: There is no exchange of direct commensurate value. Smith made a nonreciprocal, unconditional transfer of cash to NFP A. This is a contribution and NFP A will recognize revenue immediately.
NFP B is an organization which serves to promote the advancement of the medical field and offer services to medical professionals. NFP B offers on its website a series of continuing medical education (CME) courses which medical professionals can purchase. Dr. Williams pays NFP B $300 to access a CME course offered on NFP B’s website. Dr. Williams completes the course and earns 10 CME credits, which he can use to meet the annual CME requirement to maintain his license.
Analysis: NFP B has a contract with a customer (Dr. Williams) and determines that the $300 should be accounted for as an exchange transaction in accordance with the guidance of the appropriate Topic (ASU 2014-09, Revenue from Contracts with Customers). The $300 serves as a payment source for products offered in the amount of $300. The payment to NFP B relates to an existing exchange transaction between NFP B and an identified customer (Dr. Williams). NFP B will recognize revenue at the time prescribed by the appropriate Topic, as referenced above.
University C receives a grant from the federal government for the construction of a new facility on its campus that will house classrooms and labs in which students will be instructed in the fields of science, technology, engineering, and mathematics (STEM). University C must comply with all aspects of the applicable rules and regulations set by the Office of Management and Budget (OMB) in using the grant funds to construct the new STEM facility. University C is required to incur qualifying expenses to be entitled to the grant funds. Any unspent grant funds during the grant period are forfeited, and University C is required to return any advanced funding that does not have related qualifying expenses.
Analysis: This grant is not a transaction in which there is commensurate value being exchanged. The federal government (the resource provider) does not receive direct commensurate value in exchange for the grant funds provided to University C. As such, University C will account for this grant under the contribution guidance in ASU 2018-08.
NFP D is an organization which researches the applications of quantum computing systems. NFP D receives a grant from the Department of Defense (DOD) to carry out research on this topic. The procedures NFP D is to perform while carrying out its research with monies from the grant are dictated by the DOD. The results of the research are classified and the DOD retains the rights to the results of the research and intends to use the results of the research in the development of a classified system.
Analysis: Because the results of NFP D’s research have particular value to the DOD, the DOD is receiving commensurate value as the resource provider. Therefore, the receipt of the resources is not a contribution received by NFP D, nor is the disbursement of the resources a contribution made by the DOD. Therefore, the transaction described above represents an exchange transaction and should be accounted for in accordance with the guidance of the appropriate Topic (ASU 2014-09, Revenue from Contracts with Customers). As such, NFP D will recognize revenue at the time prescribed by the appropriate Topic.
Determining whether a
promise-to-give is conditional
In addition to defining a promise-to-give as either a contribution or an exchange transaction, a not-for-profit entity must also determine whether the promise-to-give is conditional or unconditional. As defined above, a contribution may only be unconditional. A promise-to-give is conditional if it has both:
1. One or more barriers that must be overcome before a recipient is entitled to the assets transferred or promised
2. A right of return to the contributor for assets transferred (or for a reduction settlement, or cancellation of liabilities) or a right of release of the promisor from its obligation to transfer assets (or reduce, settle, or cancel liabilities)
An entity must evaluate whether the stipulations of the agreement constitutes a barrier that must be overcome before the recipient is entitled to the assets transferred or promised. There are several indicators that a barrier is present, including the following:
1. Measurable performance-related barrier or other measurable barrier (ex. specified level of service, an identified number of units of output, or a specific outcome)
2. Limited discretion by the recipient on the conduct of an activity
3. Stipulations that are related to the purpose of the agreement
An entity will only recognize contribution revenue in the period in which the conditions to receive the resources transferred or promised are met. Conditional grants and promises to give are disclosed in the footnotes to the financial statements of both the recipient and the resource provider. If a transaction is not clearly unconditional, it is presumed to be conditional.
University E receives federal funding in the form of a grant related to its nursing program. The terms of the grant specify that the recipient must use the assets for allowable and reasonable qualifying expenses based on rules and regulations issued by the OMB. The grant is paid on a cost-reimbursement basis that requires a recipient to incur specific qualifying expenses in order to be entitled to the promised resources. Any unused assets are forfeited, and any unallowed costs that have been drawn down by University E are required to be refunded.
Analysis: The grant’s requirements that University E use the assets for allowable and reasonable qualifying expenses and comply with standards set by the OMB results in limited discretion by the recipient on the conduct of an activity. As the assets are transferred on a cost-reimbursement basis, the agreement also includes a release from the promisor’s obligation for unused assets. As such, this constitutes a donor-imposed condition. University E will only recognize revenue as qualifying expenses are incurred.
NFP F is engaged in the retraining and rehoming of retired Standardbred racehorses. NFP F has the capacity to house and train 25 horses at a time for applications like dressage, jumping, and trail riding. NFP F receives a grant from Foundation G in the amount of $200,000 paid upfront to be used to expand its capacity to 100 horses.
The agreement indicates that NFP F must expand its facility to at least 100 horses by the end of the next calendar year. The grant contains a right of return if the minimum expansion target is not met.
Analysis: NFP F determines that this grant is conditional. The grant includes a measurable barrier (capacity for an additional 75 horses) that must be achieved for NFP F to be entitled to the assets and a right of return for unused assets or unmet requirements. NFP F will record the receipt of cash and deferred revenue at the time the upfront payment is made. NFP F will not recognize revenue until the conditions are met.
NFP H is a small, independent museum with the stated mission of preserving the local history of its community and educating the public. NFP H receives a $50,000 grant from the State to cover certain operating costs incurred by the museum. The grant is received by NFP H at the beginning of each fiscal year and the grant agreement stipulates that NFP H must report its expenses under the grant to the State on a quarterly basis at the end of each quarter. NFP H would be required to refund the entire grant to the State if it fails to comply with this reporting requirement.
Analysis: NFP H determines that the reporting requirement alone is not a barrier because it is an administrative requirement and not related to the purpose of the agreement. In this example, the right of return is not considered conditional because the return clause is not coupled with a barrier to be overcome. The grant is therefore unconditional, although restrictions may still apply as to the use of the grant monies. See “Conditions vs. Restrictions” below.
Conditions vs. restrictions
Distinguishing between donor-imposed conditions and donor-imposed restrictions requires the exercise of judgement. However, donor-imposed conditions should be met by the entity before the receipt of the transferred assets or resources is recognized as a contribution. Donor-imposed restrictions limit the use of contributions, but they do not affect whether the recipient is entitled to the contribution.
Mary Brown is a successful alumni of University I. Brown agrees to donate $500,000 in scholarships to University I
if the University launches a new academic program in cybersecurity. The agreement stipulates that if the program is launched, the scholarships can only be awarded to students enrolled in the new cybersecurity program.
University I launches the program and Mary Brown donates $500,000 to University I as agreed upon.
Analysis: Because Brown’s donation to University I includes stipulations that are related to the purpose of the agreement and a right of release of the promisor from its obligation to transfer assets (University I must launch the new program in order to receive the resources), this is a conditional contribution. Until the conditions are met, University I will not recognize revenue related to this transaction, but will disclose the agreement in the footnotes of its financial statements.
Once the program is launched and the conditions are met, University I will recognize donor-restricted contribution revenue in the amount of $500,000. The resources are restricted because Brown’s agreement limits the use of the contribution only to scholarships to students enrolled in the new program. As scholarships are awarded and the restrictions are met, the University will recognize a release of the restriction.
ASU 2018-08 will have a significant impact on the way not-for-profit entities record revenue. However, the standard provides a clear decision tree which not-for-profit entities can utilize in determining how to properly record their transactions. With the standard going into effect this year, it is critical that not-for-profit organizations understand and evaluate how it will affect them and how to implement any changes that may be required.