The Financial Accounting Standards Board (FASB) issued a proposed Accounting Standard Update (ASU) intended to clarify and improve the scope and the accounting guidance for contribu-tions received and made primarily by nonprofits. Stakeholders were asked to review and provide comment on the proposed ASU and the comment period was completed on November 1, 2017.
This new standard was prompted in response to the recently issued ASU 2014-09, Revenue from Contracts with Customers, which raised questions in the nonprofit world as to whether grants and contracts are in the scope of that guidance. This led FASB to determine that a response was necessary to finally address a longstanding diversity of practice among accountants regarding the appropriate classification of federal and state grants as either contributions or exchange transactions.
For revenue recognition for nonprofit organizations, the distinction between contribution and exchange (or reciprocal vs. nonreciprocal) is critical and can significantly alter the timing of revenue recognition on the contract or agreement. For government contracts, many accountants (and organizations) simply conclude that, in many cases, the federal or state government is purchasing goods or services because they believe that government transactions are reciprocal in nature (that is, the government expects commensurate value in return). They also point to the government’s service delivery requirements (for example, eligibility requirements), its proposal process for soliciting and awarding grants for the acquisition of desired goods or services, its ability to disallow grant expenses incurred, and other reimbursement requirements as indicators that many government grants are exchange transactions. There is also a widely-held belief that a government body simply does not make contributions. Therefore, these accountants and organizations will account for transactions as exchange transactions even when the substance of the transaction may strongly suggest that contribution guidance should be used.
Alternatively, other accountants and organizations may reasonably conclude that federal and state government grants often represent contributions, because the time and place of service delivery for programs are usually at the discretion of the organization; the grant amount is typically less than the total program cost; and the assets are delivered to individuals or organizations other than the government.
This has created a longstanding diversity of practice that has always been more or less tolerated with the official position of the relevant accounting standards being that each government grant should be evaluated based on its specific requirements.
Objective of exposure draft
The proposed new standard aims to clarify revenue recognition related to characterizing grants as either exchanges (reciprocal) or contributions (nonreciprocal), and in distinguishing between conditional and unconditional contributions. The proposed ASU provides nonprofit organizations with a more robust frame-work to evaluate and determine proper accounting for contracts. The guidance addresses two key issues in determining proper revenue recognition treatment.
The first issue is evaluating whether we are talking about reciprocal (exchange) vs. nonreciprocal (nonexchange/contribution) transactions, and this takes a more narrow view than is typically practiced, which will likely result in many contracts currently accounted for as “exchange” to be accounted for as “nonexchange.”
The second issue relates to those determined to be contributions (“nonexchange”) and provides guidance regarding conditional or unconditional treatment of these contributions. There is more information provided about what must be present to determine whether a donor imposed condition exists.
Examples included in the exposure draft help clarify this analysis. It seems clear from the exposure draft that the result of this standard, should it be approved and issued, will be to reduce the amount of contracts currently accounted for as “exchange” transactions and create a framework for having more contracts accounted for as conditional contributions. It seems likely that federal and state contracts are most likely to have their accounting treatment changed as a result of the proposed standard.
Effective date and conclusion
The proposed standard is intended to follow the same effective dates as the aforementioned ASU 2014-09, Revenue from Contracts with Customers, and is meant to be considered in conjunction. That means that, assuming the exposure draft is finalized, a typical nonprofit organization with a calendar year-end will adopt both of the new revenue recognition standards in the year ended December 31, 2019.
The comment period on this proposed guidance has now passed. All eyes will be on the Nonprofit Advisory Committee’s (NAC) next meeting scheduled for December 2017, during which a summary of feedback is likely to be discussed, as well as an updated timeline for potential finalization of the standard, which had been tentatively scheduled for the second quarter of 2018.
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