In June 2018, the Financial Accounting Standards Board (FASB) issued Accounting Standards Update (ASU) 2018-08, Clarifying the Scope and the Accounting Guidance for Contributions Received and Contributions Made. This ASU clarifies and improves the scope and accounting guidance around contributions of cash and other assets received and made by not-for-profit (NFP) organizations and business enterprises. This guidance does not apply to transfers of assets from governments to for-profit businesses.
The ASU will assist entities in determining whether transactions should be recorded as a contribution (nonreciprocal transaction) or as an exchange (reciprocal transaction). Transactions covered include transfers of assets and the reduction, settlement or cancellation of liabilities. Because of diversity in accounting treatments, the ASU contains additional guidance for accounting for grants and other contracts/agreements with governmental entities. In addition, the guidance focuses on determining whether the resource provider (contributor/grantor) is receiving commensurate value in return for the assets transferred.
If a transaction is determined to be an exchange transaction (both parties give and receive commensurate value), follow the guidance in ASU 2014-09, Revenue from Contracts with Customers. This ASU applies to NFPs, but not to contribution transactions.
If a transaction is determined to be a contribution, ASU 2018-08 also provides expanded guidance on determining whether a contribution is conditional or unconditional and for distinguishing between donor-imposed conditions and restrictions. This ASU requires an entity to determine whether a contribution is conditional based on whether the underlying agreement includes a “barrier” that must be overcome and either a right of return of assets transferred or a right of release of a contributor’s obligation to transfer assets. The presence of both a barrier and either a right of return or a right of release indicates a conditional gift and the recipient is not entitled to the contribution until it has overcome the barrier(s) in the agreement.
The ASU also removes the probability assessment for meeting conditions. Previously, if the possibility that an organization would not meet a condition was considered remote, a conditional promise to give was deemed unconditional and contribution revenue was immediately recognized. This new guidance clearly describes that, if determined to be a conditional contribution, revenue is not recognized until the condition(s) are satisfied.
ASU 2018-08 is effective for contributions received for annual periods beginning after December 15, 2018 (calendar 2019 or fiscal 2020 year-ends). For transactions in which an entity is either a public company or an NFP that is a conduit bond obligor, the ASU is effective for annual periods beginning after June 15, 2018. The ASU is effective for contributions made for annual periods beginning after December 15, 2019 (calendar 2020 or fiscal 2021 year-ends) and reporting periods beginning after December 15, 2018 for public company or conduit bond obligor NFPs.
The amendments in this ASU should be applied on a modified prospective basis. Therefore, any agreements for which all revenue or expense has not yet been recognized as of the effective date and new agreements entered after the effective date should apply this new guidance. No prior period results should be restated, and there should be no cumulative-effect adjustment to the opening balance of net assets at the beginning of the adoption year. Retrospective application is permitted.
If you have questions, CSH’s Not-for-Profit team is ready to help. Reach out to your CSH advisor for additional guidance.