As a nonprofit, when your organization receives funds through grants and similar contracts, you must characterize the transaction as an exchange transaction or a contribution for financial reporting purposes. Historically, many nonprofits have found it difficult to make this determination, which has led to diversity in practice.
But characterizing the transaction accurately is now even more important, as it determines which accounting guidance you will need to apply starting January 1, 2019 — whether ASC 985-605 rules for contributions, or ASC 606 rules (the new revenue recognition standard) for exchange transactions. To help clarify the differences between exchange (reciprocal) and contributions (non-reciprocal), FASB recently issued ASU No. 2018-08, Clarifying the Scope and Accounting Guidance for Contributions Received and Contributions Made.
Following the (Right) Rules
Identifying the correct set of rules you need to follow will come down to whether or not the transaction is considered an exchange or non-exchange transaction.
For a transaction to be considered an exchange transaction, the recipient must provide direct commensurate value to the resource provider or a specified third party. These transactions fall under ASC 606. Read more on recent changes to revenue recognition in “New Revenue Recognition Standard: Are You Ready?”
A good example is when a nonprofit receives funding from Medicaid or Medicare to provide services, such as healthcare services, to individuals. Essentially, the contract between the nonprofit and the individual is the exchange transaction and would fall under ASC 606. The Medicaid or Medicare funding is the payment mechanism, similar to third-party insurance. The guidance also points out that when the general public receives value in a transaction, this would NOT constitute direct commensurate value and therefore this would not be characterized as an exchange transaction.
If the transaction is not an exchange transaction, you will be subject to the contribution rules. As noted in the title of ASU No. 2018-08, guidance applies to both contributions received and contributions made. After you have determined you are following the contribution guidance, the next step is to determine if the contribution is conditional, as conditional contributions are not recorded until the condition is met. The new guidance states that for a donor-imposed condition to exist there must be a right of return (or release of funds) AND the agreement must include a barrier. The likelihood of overcoming a barrier should not be considered in determining if a barrier exists. Examples of barriers include the following:
- Measurable performance barriers (such as serving 500 at-risk youth or achieving a specific outcome)
- Limitations on how the recipient can use the funds (such as a requirement to hire specific types of individuals or to use the contribution only for qualifying expenses)
- Stipulations on the purpose of the agreement (such as the requirement to convey research findings). This example would exclude trivial or administrative stipulations.
Putting It Into Practice
This new guidance is effective for non-public companies for periods beginning after December 15, 2018, (or calendar year 2019) — the same timing for which the new revenue recognition standard goes into effect for non-public companies. ASU 2018-08 will apply to agreements that are incomplete as of the effective date or those entered into after the effective date, so there will be no requirement to go back and update previously recorded revenue.
Going forward, nonprofits must analyze their revenue contracts and determine which contracts will be subject to contribution rules or ASC 606 (the new revenue recognition standard), as this determination will affect revenue recognition policies and procedures and how revenue is ultimately recorded.
Please contact a member of your service team, or contact Brian Fiedler at firstname.lastname@example.org for further discussion.
Cohen & Company is not rendering legal, accounting or other professional advice. Information contained in this post is considered accurate as of the date of publishing. Any action taken based on information in this blog should be taken only after a detailed review of the specific facts, circumstances and current law.