The Financial Accounting Standards Board (FASB) has issued Accounting Standards Update (ASU) 2018-08. This update improves and clarifies the guidance regarding contributions received and contributions made.
The board found that there was a lack of clarity and consistency in how grants and contracts were characterized as either exchanges or contributions. In addition, they found that non-profit organizations differed in how they determined if contributions were conditional or unconditional.
“That’s important because that distinction between conditional vs. unconditional impacts the pattern of revenue recognition,” said Christine Botosan, FASB Board Member.
ASU 2018-08 provides criteria for determining between exchanges or contributions by looking at whether the provider is receiving commensurate value in return for resources transferred. This clarification will help organizations determine if the transfer should be treated as a contribution (nonreciprocal transaction) or an exchange (reciprocal) transaction.
Note that the “commensurate value” described above is value to the provider, not to the general public. So, funds transferred from New York State would be considered a contribution unless New York State itself receives commensurate value.
If commensurate value is not provided, the organization should determine if the transaction is a third-party payment for an existing exchange transaction (such as Medicare, Medicaid, Pell Grant, etc.) If commensurate value is not provided, and the transaction isn’t a third-party payment, it should be accounted for as a contribution.
The ASU also provides additional detail on how to distinguish conditional contributions from unconditional contributions, as well as the difference between donor-imposed conditions and donor-imposed restrictions. Conditional contributions must include a barrier that must be overcome and a right of return or right of release. If a contribution is determined to be unconditional, it must be analyzed to determine if it is restricted or unrestricted.
ASU 2018-08 applies primarily to non-profit organizations, however it can apply to organizations that receive or make contributions of cash and other assets, including businesses. It does not apply to transfers of assets from governments to businesses.
The amendments in this ASU are effective for reporting periods beginning after June 15, 2018 for non-profit organizations and public companies serving as resource recipients (and December 15, 2018 for other organizations). For non-profit organizations serving as resource providers, the amendments are effective for reporting periods beginning after December 15, 2018 (and December 15, 2019 for other organizations.) Early adoption is permitted.
For more information on ASU 2018-08, visit https://www.fasb.org/home.