Recently, the Financial Accounting Standards Board (“FASB”) issued a proposed Accounting Standards Update (“ASU”) on revenue recognition for contracts and grants, titled ‘Clarifying the Scope and the Accounting Guidance for Contributions Received and Contributions Made.’ The comment period has ended, and a final ASU is expected to be issued by June 2018. This topic became relevant as a result of the new revenue recognition standard promulgated by the FASB.
The guidance is primarily intended for not-for-profit organizations, but is applicable to any organization receiving or making grants. There has been diversity in practice among not-for-profit organizations as to whether a grant, primarily from a government unit, is a contribution (non-reciprocal transaction) or an exchange transaction (reciprocal transaction). An exchange transaction would be considered a transaction with a customer, as identified in the standards, or a party contracting for goods or services.
In order for the transaction to be accounted for as an exchange transaction, the provider (ie. government) must receive direct, commensurate value. Value received by the general public, or beneficiaries other than the government unit, is not deemed to be commensurate value by the provider. Only if the government provider contracted for service as a direct recipient would it be considered an exchange transaction. Otherwise, the transaction is accounted for as a contribution.
Once identified as a contribution, a further judgement of whether the contribution is conditional or unconditional needs to be determined in order to conclude on the accounting treatment. For a conditional contribution, the agreement must include both a barrier that must be overcome and the right of return to the grantor. The barrier needs to be measurable, and not an additional action of the agreement. For example, the requirement to submit a report is deemed not to be a condition, since it is not a direct action of the agreement and is normally an administrative requirement.
In contrast to donor-imposed conditions, donor-imposed restrictions limit the use of the contribution, but they do not change the transaction’s fundamental nature from that of a contribution.
Exchange transactions would follow Topic 606, while non-reciprocal transactions would follow Topic 958.
Keep on the lookout for the final issuance of the ASU in the late spring or early summer.