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Thursday, August 31, 2017

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Accounting for Contributions Received and Made for Private Nonprofit Colleges and Universities


On August 3, 2017, the Financial Accounting Standards Board (FASB) released an exposure draft that will clarify and improve the scope and accounting guidance for contributions received and made. Although this guidance will most significantly impact private nonprofit institutions of higher education, we also anticipate some trickle-down to for-profit institutions, depending on whether these institutions are receiving grants or making grants. The exposure draft specifically addresses stakeholder concern regarding:
  • Characterization of grants and similar contracts as either exchange transactions or contributions
  • Distinguishing between conditional and unconditional contributions
It should be noted that institutions should follow the guidance in the FASB Codification topic section 958-605 when accounting for assets as contributions, and topic section 606, Revenue from Contracts with Customers (see Effective Date of the Standard), when accounting for assets as exchange transactions.

Exchange Vs. Non-Exchange and Commensurate Value
In determining whether a transfer of assets is an exchange transaction or a contribution, an institution must identify whether the resource provider is receiving commensurate value in return for the resources transferred or if the transaction is a contribution. Resource providers can include private foundations, individual donors, government agencies and other nonprofit organizations, to name a few.

Simply put, commensurate value means something of equal measure or amount is given or received. If the resource provider is not receiving direct benefit from assets transferred, then the resource provider is not receiving commensurate value, and thus the transaction most likely resembles a contribution. In other transactions where the resource provider is receiving commensurate value, an exchange transaction would most likely exist.

When considering if a resource provider is receiving commensurate value, an institution must evaluate the resource provider’s mission and purpose for the transfer, the express intent of the institution and the resource provider, which party has discretion in determining the amount of the assets, penalties to the recipient for nonperformance and discretion over how the funds are used as key indicators. Below are a couple of examples to distinguish between a contribution and an exchange transaction:

Example Financial Aid Award – Exchange Transaction
A student enrolled at an institution has received a grant to apply towards the semester’s tuition. The grant is awarded to the student and not the institution. The grant is paid by the resource provider to the institution. The grant serves as a partial payment against the student’s tuition bill and is not additional revenue for the institution. This transaction represents an exchange transaction between the student and the institution, because the student is identified as a customer of the institution who is receiving benefit from the grant. The tuition is accounted for under the exchange transaction revenue recognition guidance.

Example Research Award – Contribution
An institution has applied and is awarded a research grant from the federal government. The institution would have to follow the rules established by the federal government pertaining to the award. The institution is required to incur qualifying expenses to be entitled to the funds. Any unearned funds are forfeited by the institution. A provision of the award requires the institution to submit a summary of research findings to the federal government, but the institution has rights to the funding and can publish and distribute the findings at their discretion. In this case, the research and findings benefit the public rather than the federal awarding agency, and therefore it can be concluded that the federal government is not receiving commensurate value in this transaction. The transaction would be classified as a contribution subject to the analysis of any barriers that may classify it as conditional or unconditional.

Contributions and Donor-Imposed Conditions
Donor-imposed conditions represent barriers that must be overcome before the recipient is entitled to assets transferred or promised by the donor. If an institution cannot overcome the barrier, and this gives the donor the right of return of assets that have been transferred or a right of release from its obligation to transfer assets in the future, then it is considered a conditional contribution. The table below gives some examples of types of barriers that a donor could impose, the metric used to measure whether the barrier has been overcome, and an example of the barrier we might see in the higher education space.

Type of Barrier Measurable Metric Higher Education Scenario
Measurable performance-related Specific outcome, certain level of service, identified number of units An insitution is given assets contingent upon increasing freshmen graduation rates
Stipulation related to the purpose of the agreement Additional activity or event (generally excludes administrative tasks and trivial situtions) In order to receive funding to address cybersecurity risks, the institution must engage an external consultant to perform a cybersecurity risk assessment profile with risk gaps indicated
Limited discretion by recipient Specific guidance on how assets should be spent Specific guidance on how assets should be spent
Requires additional action Additional action(s) taken for a new or existing activity Agreements that are often coupled with measurable performance-related barriers

Example – Unconditional Contribution (Right of Return but No Barrier)
An institution is conducting a capital campaign to raise funds, which will be used for a variety of capital improvements and repairs to campus facilities. The institution has submitted a proposal and received a cash grant from a private foundation. The grant agreement includes a right of return if the grant funds are not spent by the institution in the means outlined in the capital campaign. The grantor, however, did not include any stipulations about how the improvements or capital outlay should be made. Because the funds will go toward capital improvements that benefit the public, the transaction is classified as a contribution. Additionally, this transaction does not include any of the barriers as noted above. Therefore, the contribution would be considered unconditional because the institution has discretion over how the grant is used, and classified as unconditional donor-restricted revenue when awarded.

Example – Conditional Contribution
An institution applied for and received a grant from a funder to provide career training in its nursing program. The grant requires a minimum number of patients who must receive services during the year provided by nurse trainees in the program before the funder will transfer the assets. In this example, the award is classified as a contribution because the public is benefiting from the award rather than the resource provider. Further, the agreement includes a barrier, which is a right of release for a measurable performance-related metric in the minimum number of patients who must be seen each year. Therefore, the contribution would be considered conditional until the performance-related barrier is satisfied.

Effective Date of the Standard
The amendments in the update would be applied on a prospective basis in the first set of financial statements following the effective date to the agreements that are either not completed as of the effective date or not entered into after the effective date. An agreement would be considered completed if all the revenue under that agreement has been recognized by the institution before the effective date. Retrospective application would also be permitted.

The effective date for the amendments in this proposed update is the same as the effective date for Accounting Standard Update 2014-09 Revenue from Contracts with Customers (Topic 606). For most private college and universities, this would be for periods beginning after December 15, 2018.

The exposure draft also includes questions for respondents to comment on all matters in the proposed update, and the comment period is open for 90 days from the date of the exposure draft.

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