Contributions vs Exchange Transaction for Not-for-profits

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What you need to know.

On June 21, 2018, the Financial Accounting Standards Board (FASB) issued an Accounting Standards Update (ASU) 2018-08, Clarifying the Scope and the Accounting Guidance for Contributions Received and Contributions Made. This standard is intended to address questions stemming from FASB ASU No. 2014-09, Revenue from Contracts with Customers.

The update provides guidance on accounting for the grants and contracts of not-for-profit organizations due to stakeholders indicating that there is diversity and difficulty in practice among not-for-profits in determining whether a grant or similar contracts with government agencies or other organizations is a reciprocal transaction (exchange) or nonreciprocal transaction (contribution).  In addition, this ASU provides guidance in distinguishing between conditional and unconditional contributions.

This ASU clarifies the steps a not-for-profits must take in determining whether a government agency or other organization is participating in an exchange transaction.  To simply the steps that need to be taken, this ASU provides a framework/flow chart for classifying transfers of assets.

The not-for-profit organization would need to evaluate whether the government agency or other organization is receiving value in return for assets it is providing. If either of the criteria listed below are present the transaction is not considered reciprocal.  The two criteria are as follows:

  1. A resource provider (including a private foundation, government agency or other organization) is not synonymous with the public.  Indirect benefits received by the public because of the assets transferred is not equivalent to receiving value by the resource provide, and
  2. Execution of resource provider’s mission or positive sentiment form acting as a donor would not constitute value received by the resource provider.

In assessing whether a contribution is conditional, the ASU requires the not-for-profit organization to determine whether the grant or contract includes a barrier(s) that need be overcome and if either a right of return of assets transferred or a right of release of the government agency or other organization’s obligation to transfer assets.

The ASU provided indicators to assess whether the grant or other contract has barriers These indicators are:

  1. The inclusion of a measurable performance-related barrier or other measurable barrier,
  2. The extent to which a stipulation limits discretion by the recipient on the conduct of activity, and
  3. Whether a stipulation is related to the purpose of the grant or other contract

The ASU does provide implementation guide and illustrations to aide in determining the difference between contribution and exchange transaction.  Examples include:

  • Receipt of Resources in Exchange
  • Payment Relating to an Existing Exchange Transaction— University
  • Payment Relating to an Existing Exchange Transaction— Hospital
  • Procurement Arrangement
  • Research Grant
  • Distinguishing between Donor-Imposed Conditions and Donor-Imposed Restrictions

Challenges for implementing the ASU 2018-08 is distinguishing between contributions and exchange transaction which may not always be entirely clear when reviewing the grant or other contract.  Barriers may not be clearly defined, or measurement of the barriers may be vague or implied.  Also, assessing the likelihood of failing to meet a barrier is remote and in evaluating whether and how remote provisions affect the timing of when a contribution or an exchange transaction should be recognized

The effective date of ASU 2018-08 is the same as ASU 2014-09 which is:

For non-public entities annual periods beginning after December 15, 2108 and for entities that have issued or is a conduit obligor for, securities that ae traded, listed, or quoted on an exchange or an over-the-counter market annual periods beginning after December 15, 2017.

Early adoption is permitted.

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