The FASB recently issued ASU 2018-08, Not-For-Profit Entities: Clarifying the Scope and the Accounting Guidance for Contributions Received and Contributions Made (Topic 958). This ASU is intended to address the diversity in practice that currently exists among not-for-profits regarding the characterization of grants and contributions as either exchange transactions or non-exchange transactions. In addition, this ASU also clarifies how to distinguish between conditional and unconditional contributions.
When accounting for a transaction such as a grant under extant GAAP, an organization had to consider if the resource provider was receiving something in return of approximately equal value (an exchange transaction) or if the resource provider was contributing to the organization (a non-exchange transaction). The term “approximately equal” was difficult to apply as granting entities often receive indirect benefits for the gift such as public recognition that are almost impossible to quantify. The amendments in this ASU remove the term “approximately equal” and replace it with the concept of “commensurate value”. The ASU specifies that benefit received by the general public does not qualify as commensurate value. In addition, it also specifies that the execution of a resource provider’s mission or the positive sentiment from acting as a donor would also not qualify as commensurate value.
Once it has been determined that a transaction is a non-exchange transaction (a contribution), the second determination is whether the contribution is conditional. The new ASU specifies that a contribution is conditional only if the agreement contains a barrier that must be overcome, and there is a right of return of the assets transferred if the barrier is not overcome. If both of these are present, then the organization should not recognize contribution revenue until the barrier has been overcome. Examples of a barrier include performance related thresholds as well as stipulations that limit the discretion by the recipient on the conduct of an activity.
If a contribution is deemed unconditional, an organization would then consider whether the contribution is restricted. The definition of a donor-imposed restriction is not changed by this ASU.
ASU 2018-08 is effective for public entities for annual reporting periods beginning after December 15, 2018 and for all other entities for annual reporting periods beginning after December 15, 2019. Early adoption is permitted.
The full text of ASU 2018-08 is available here.
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