The Financial Accounting Standards Board (FASB) is looking for input. The group wishes to improve, clarify, and enhance revenue recognition standards for grants and contracts by nonprofits. They are seeking comments on the topic, and nonprofit organizations are welcome to respond.
Currently, many nonprofit stakeholders indicated confusion about when to report grant and contract revenue or how to consistently report revenue in these areas. This difficulty is compounded in the area of government grants and contracts.
The comment period for the proposed Accounting Standards Update (ASU), titled Clarifying the Scope and Accounting Guidance for Contributions Received and Contributions Made, ends November 1.
Proposed ASU Changes
The big changes proposed in the standards include distinguishing between contributions (nonreciprocal transactions) and exchange (reciprocal) transactions. If the proposed ASU changes proceed, more grants and contracts will be counted as contributions.
The proposed framework indicates that if a grant is an exchange transaction, revenues should be recorded in accordance with Revenue from Contracts with Customers. Details on this may be found in Topic 606 or other applicable topics.
Grants, on the other hand, are determined to be contributions and should be recognized as revenue for not for profit entities under Revenue Recognition Subtopic 958-605.
There are no sweeping generalities for grants. Each one must be evaluated and categorized individually. Grants can be considered exchanges if the value received is commensurate with the services rendered Then it is categorized as an exchange or reciprocal transactions.
The good news is that the ASU includes plenty of examples to help nonprofits determine whether grants are nonreciprocal or reciprocal transactions.
If a grant does not have either a barrier or a right of return, it may be considered a conditional contribution. A conditional contribution is a grant that comes with strings attached – conditions that must be met in order for the grant to be considered fully received.
Some conditions include:
- Measurable performance goals such as matching grants, levels of service, or other items that can be measured or quantified;
- A stipulation that specific conditions must be met for the grant;
- Something limiting how the funds can be spent;
- Additional actions that would be required to be taken by the recipient organization in addition to the activities that it would normally pursue
For those fuzzy gray areas, the ASU states that donations requiring stipulations can be presumed to be conditional.
Some grants may be considered contracts with a customer. In that case, the specifications in Topic 606 take priority.
When Does This Go into Effect?
The new recommendations will go into effect on or around December 31, 2019, for the fiscal year ending in 2020. That may seem like a long way off, but for nonprofits dealing with a lot of grants that fit these categories and descriptions, it may be prudent to take steps now to conform to the new guidelines. Of course, changes may be made to the recommendations based on feedback received by FASB.
The good news is that the changes do not affect prior quarters in any way, so you don’t need to change anything prior to 2019. For more details, please visit FASB.
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