New Rules for Recognizing Grant and Contribution Revenue

Revenue recognition for grants and contributions has never been a straightforward task. The accounting principles originally published by the Financial Accounting Standards Board (FASB) left a lot up to interpretation which resulted in diversity in practice. To complicate matters further, the issuance of revenue recognition guidance for contracts with customers raised questions on whether grants and contributions treated as exchange transactions are within the scope of that guidance.

The FASB provided some much-needed clarity in June 2018 with a robust new framework, Accounting Standards Update No. 2018-08, Not-for-Profit Entities (Topic 958): Clarifying the Scope and the Accounting Guidance for Contributions Received and Contributions Made.

Exchange Transaction or Contribution?

The first question not-for-profits must consider is if the transfer of assets is an exchange transaction or a contribution. A true contribution is cut-and-dried: A donor gives money to an organization and receives nothing in return and it is typically the public and the clients that are served by the nonprofit who benefit from the donation. Exchange transactions occur when the nonprofit and the donor exchange something of equal of commensurate value. When a local government provides funding to a nonprofit to perform a research study and the government contains all rights to the study, for example, there has been an exchange of value.

When considering if a resource provider is receiving commensurate value, the nonprofit 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 grant

When grants come into play, this determination can become difficult. Many grants are awarded provisionally. For instance, a state government may provide a nonprofit the funds to open and operate a homeless shelter. In return, the government receives a shelter that will benefit its citizens.

Determining the reciprocity of such a transaction would be problematic. Fortunately, the FASB provides three examples that do not constitute commensurate value:

1. Any benefit received by the general public as a result of the grant
2. Indirect benefits that a government agency receives in the form of services provided to their constituents
3. The positive sentiment or fulfillment of the nonprofit’s mission

Because of these exceptions, most government grants would be recorded as contributions, making it easier for potential donors reading a nonprofit’s financial statements to compare the government grants received by one entity to grants received by another. This also means that the contribution has to be evaluated for whether it is conditional or unconditional.

Conditional or Unconditional?

After a donation or grant is classified as a contribution, it faces another test before it can be recorded on the books: Is it conditional or unconditional? Conditional terms introduce barriers that must be overcome by the organization before revenue can be recognized. If those conditions are not met, the donor has the right of return of the assets.

Conditional barriers can take many forms:

• Performance-related: A performance-related barrier requires a specific outcome before a nonprofit can accept the donation.
  Example: A nonprofit can only receive a donation when they raise the predetermined matching funds.
• Purpose of the agreement stipulation: This barrier exists when the donor stipulates that the nonprofit perform some sort of additional activity before receiving the cash.
  Example: The donor expects the nonprofit to perform a cybersecurity risk assessment before they can receive funding to address cybersecurity risks.
• Limited nonprofit discretion: This barrier exists when the donor gives specific guidance on how the funds can be used.
  Example: A donor gives money designated for a specific activity or program.
• Requires additional action: This barrier is when a donor requires the nonprofit to take specific action after they receive the donation.
  Example: The donor stipulates that, once the cash is donated, the nonprofit must build a new facility.

Recording Revenues

The key to remember is that if a transaction qualifies as an exchange transaction, the nonprofit must then follow the guidance for revenue recognition from contracts with customers which is part of other FASB guidance.

Donations and grants can only be recorded as contributions when they are unconditional. In other words, the nonprofit cannot record contribution revenue until they overcome any and all barriers. If the nonprofit has received money and barriers still remain, the organization has not yet earned that income and should record a liability on their statement of financial position. Once these barriers are cleared, the grant or donation becomes unconditional and can be moved to the statement of activities, and recorded as contribution revenue with or without donor restriction.

The rules determining whether a contribution or grant comes with or without donor restriction have not changed. Restrictions do not prevent revenue from being recorded; they simply dictate which revenue bucket the contribution falls into.

For most nonprofits, these new reporting requirements for grants and contributions will go into effect for fiscal years beginning after Dec. 15, 2018. Contact our nonprofit accounting team to discuss your best approach for transitioning to the new standard.

March 25, 2019