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‘Revenue recognition’ for nonprofits: When should you report grant revenues and contribution support

Nov 08, 2018

By Linda J. Kramer, CPA, MBA
Accounting & Auditing Director

When the Financial Accounting Standards Board’s (FASB’s) new revenue recognition standard was released in 2014, it caused quite a stir across industries. But the standard applies only to revenue from “exchange transactions,” also known as reciprocal transactions.   

In the nonprofit world, contributions are nonreciprocal, and your grants may be, too — meaning different rules apply.

Recognizing contributions

In Accounting Standards Update (ASU) No. 2014-09, Revenue from Contracts with Customers, the FASB defines a contribution as an unconditional transfer of cash or other assets to an entity in a voluntary nonreciprocal transfer. It specifically distinguishes contributions from exchange transactions, which it describes as reciprocal transactions where each party receives and sacrifices approximately equal value.

That means that contributions don’t fall within the rules in ASU 2014-09, including its voluminous disclosure requirements. Instead, you generally should report contributions in the period you receive the contribution, pledge or commitment to donate. Restrictions imposed — directions given by the donor or solicited by the nonprofit— as to how or when the funds may be used don’t change the timing of recognition.

But when the donor’s gift is available only after certain requirements are met by your organization, the timing may be different. Specifically, you shouldn’t recognize a conditional promise to give as support until the conditions are substantially satisfied. For example, a promise to give, requiring a minimum matching contribution, can’t be recognized until the match is received. Transfers of assets with donor-imposed conditions should be reported as refundable advances until the conditions are substantially met or explicitly waived by the donor.

But you can recognize a conditional promise to give upon receipt of the promise, if the possibility is “remote” that the condition won’t be met. An example is a grant requiring you to submit an annual report to receive subsequent annual payments on a multiyear promise.

Recognizing grants

Determining whether a grant is an exchange transaction, where the grantor expects goods and services for its money, or a type of restricted or conditional contribution, where the grantor intends to make a gift to support the organization, can be more complicated. For example, a grant based on the number of meals or beds a nonprofit provides its client population could be considered an exchange transaction, because it’s essentially a contract to provide goods or services. Similarly, a research and development grant could be characterized as an exchange transaction, if the grantor retains intellectual property rights in the outcomes.

A grant that’s an exchange transaction is subject to ASU 2014-09’s five-step framework:

  1. Identify the contract (or contracts) with a customer.
  2. Identify the performance obligations in the contract.
  3. Determine the transaction price.
  4. Allocate the transaction price to the performance obligations in the contract.
  5. Recognize revenue when (or as) you satisfy a performance obligation.

Say you received a fixed-fee grant to perform specific research for a governmental agency, and the agency will own the outcome. The grant is a contract because the parties each receive something of equal value (grant funds and research) (step 1). The provision and delivery of the research is the performance obligation under the contract (step 2). The fixed fee is the transaction price (step 3). With only one performance obligation, the entire transaction price is allocated to it (step 4), and you will recognize the grant revenue when you deliver the research to the agency (step 5).

This is a simplified example. Nonprofits can find it challenging merely to determine whether a grant is an exchange transaction or a contribution — or a combination of the two, requiring “bifurcation” for proper accounting treatment. And, when a grant is an exchange transaction, it can be tough to identify the performance obligations, when they’re satisfied and the proper allocation of the transaction price to those obligations.

Further contribution clarification

In Accounting Standards Update No. 2018-08, Clarifying the Scope and the Accounting Guidance for Contributions Received and Contributions Made, the FASB addresses concerns that it is sometimes difficult to determine whether certain grants and similar contracts are exchange transactions or contributions. This ASU takes a look at what to consider when evaluating a contribution as conditional. A contribution is conditional if it contains a barrier that must be overcome. After a contribution is deemed unconditional an entity would then consider whether the donor has imposed any restrictions. The guidance also explains that payments received from third-party payers that are part of an existing exchange transaction are not in the scope of the guidance on contributions. These would include payments from Medicaid and Medicare.

Be prepared

These ASUs  will take effect for some nonprofits as soon as 2019 (fiscal years beginning after December 15, 2018). Now is the time to start analyzing all of your revenues and support to determine when and how you should recognize them.

If you would like help getting started with your analysis, please contact us.

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