The Financial Accounting Standards Board (FASB) issued Accounting Standards Update (ASU) 2018-08 that clarifies and improves the scope and accounting guidance concerning contributions of cash and other assets received and made by nonprofits and business enterprises. This ASU seeks to address differences in how nonprofits characterize grants and contracts with government agencies and others as reciprocal transactions (exchanges) or nonreciprocal transactions (contributions). In addition, the ASU seeks to assist nonprofits in distinguishing between conditional and unconditional contributions. Those requesting clarification cited instances in which similar grants and contracts were accounted for as exchanges by some nonprofits and contributions by others. These differences were most prevalent in interpreting government grants and contracts.
To determine whether the organization is receiving a contribution or participating in an exchange transaction, the recipient must evaluate whether the resource provider (a private foundation, government agency, or other) receives commensurate value in providing the resource. The ASU clarifies that any benefits that are indirect and shared by members of the general public are not of commensurate value. For example, a resource provider that funds a study to improve air quality, resulting in cleaner air, is not receiving commensurate value in funding the study. Further, positive feelings associated with donating or furthering personal missions do not equate to commensurate value.
Once classified as a contribution, the recipient must determine whether the gift is conditional or unconditional. A conditional contribution introduces a barrier the recipient must overcome, for example:
- A performance-related clause (e.g., the donor will provide $100,000 if the nonprofit raises $50,000)
- Limited recipient discretion (e.g., the grant is designated for a specific research project)
- A stipulation in the purpose of the agreement (e.g., the donor will fund the clinic expansion project if the clinic hires
a program manager)
The donor must also have the right of return of assets, or the right of release from its obligation to transfer assets if conditions are not met. Application of this concept is illustrated below:
A state agency provides a grant to a nonprofit food bank to provide food assistance to 300 qualifying students each year. The grant is a contribution because the state agency does not receive a direct benefit from the food bank’s services. If the state agency provided a grant requiring the food bank to deliver 45 backpacks of food to the state agency (benefitting the state agency and not the general public), the transaction would qualify as an exchange. The contribution is conditional because there is a performance clause of feeding 300 students.
The ASU is effective for most resource recipient entities with annual periods beginning after December 15, 2019, and for most resource provider entities with annual periods beginning after December 15, 2020.
If you have questions or would like more information, please contact Lisa Carrick at firstname.lastname@example.org or 844.4WINDES.