Accounting for contributions and grants has often proven complicated for not-for-profits, especially when they come with donor-imposed conditions. But 2018 guidance from the Financial Accounting Standards Board (FASB) provided some much-needed clarification of earlier instructions.
Traditionally, nonprofits have taken varying approaches to characterizing grants and similar contracts as exchange transactions (also known as reciprocal transactions) or contributions (nonreciprocal transactions). The new guidance makes the process relatively simple. To determine how to treat a grant or similar contract, assess whether the “provider” receives commensurate value for the assets it’s transferring. If so, treat the grant or contract as an exchange transaction.
If the provider doesn’t receive commensurate value, determine whether the asset transfer is a payment from a third-party payer for an existing transaction between you and an identified customer (for example, payments made under Medicare). If it is, the transaction isn’t a contribution, and other accounting guidance would apply. If it isn’t, the transaction is accounted for as a contribution.
Distinguishing between conditional and unconditional contributions has been the other main challenge for nonprofits. But the new rules stipulate that a conditional contribution includes:
1. A barrier the nonprofit must overcome to receive the contribution, and
2. Either a right of return of assets transferred or a right of release of the promisor’s obligation to transfer assets.
Unconditional contributions are recognized when received. However, conditional contributions aren’t recognized until you overcome the barriers to entitlement. To determine whether you must overcome a barrier to receive a contribution, consider:
• The inclusion of a measurable performance-related or other measurable barrier (for instance, a matching requirement),
• Limits on your nonprofit’s discretion over how to conduct an activity (such as specific requirements on allowable expenses), and
• A stipulation that relates to the purpose of the agreement (not including administrative tasks and trivial stipulations such as production of an annual report).
The new rules also provide a simultaneous release option, which allows you to classify unconditional donor-restricted contributions directly in “net assets without donor restrictions” if the restriction is satisfied in the same period that the revenue is recognized.
Already in effect
The FASB’s Accounting Standards Update No. 2018-08 already affects most nonprofits. It takes effect for most organizations that are recipients of funds for annual reporting periods starting after December 15, 2018, and interim periods within annual periods beginning after December 15, 2019. The rules generally take effect one year later for organizations that are resource providers.
Note that, as a result of this guidance, you may find yourself accounting for more grants and similar contracts as contributions than you have in the past. If you aren’t sure what this means for your financial statements, loan covenants and other matters, contact us.
Accounting for contributions and grants is now easier
Written by Stuart Mordfin, CPA, CGMA
Stuart M. Mordfin has over 30 years of experience as a certified public accountant. He has worked with clients in such diverse industries as manufacturing, publishing, real estate development and operations, jewelry and other luxury products, retail, restaurants, a variety of professional service companies. In addition he has on numerous occasions worked as a court appointed accountant on receiverships, guardianships and bankruptcies. Stuart has developed and expanded his CPA practice through innovation, well-informed decision-making, and creative, proactive thinking. Stuart M. Mordfin joined the firm in 1987, and has been a partner since 1999. He became managing partner in 2004. Since his entrée into the firm, Stuart has lead the way for its expansion into financial planning services through the formation of Mordfin Financial & Business Advisors LLC. Stuart works with many family-owned businesses. Experiencing firsthand what it means to be an integral part of the family business, Stuart is able to offer a unique and valuable perspective to his clients. He is well qualified to assist family-owned businesses move from one generation to the next.