In June, the FASB issued Accounting Standards Updated 2018-08, Clarifying the Scope and the Accounting Guidance for Contributions Received and Contributions Made. This new ASU clarifies:
- whether transactions should be accounted for as contributions under ASC 958-605, Not-for-Profit Entities – Revenue Recognition, or as an exchange transaction (subject to other guidance), and
- if the transaction is to be accounted for as a contribution, whether the contribution is conditional.
Although accounting for contributions primarily impacts not-for-profit entities, ASU 2018-08 applies to all entities (including business entities) that receive or make contributions but excludes transfers of assets from government entities to business entities.
Exchange vs. contribution
The classification between an exchange and a contribution is critical because they are accounted for in different ways! If an entity determines a transaction is an exchange, which represents a reciprocal transfer in which two parties exchange something of commensurate value, then the transaction would be accounted for under other guidance (e.g. ASC 606). If the entity determines a transaction is a contribution, which is a transfer of cash or other assets to an entity in a voluntary, nonreciprocal transfer by another entity, then the transaction would be accounted for under ASC 958-605. Let’s break this down by looking at two examples:
Consider a not-for-profit university that receives a research grant from Bill Nye Science Center to conduct a study on whether the Earth is round. Bill Nye specifies the protocol of the research testing, requires a detailed report of the outcome, and will own the research results at the end of testing. The university would likely classify this as an exchange transaction and account for it under ASC 606. This is because the results of the study have value to Bill Nye and Bill Nye will receive something of commensurate value (the study).
If the Bill Nye Science Center gave the research grant to the university but did not give any stipulations for the testing (except to forfeit or return any unspent money), and the university retains the rights to the study and can publish them as their own, then the university would likely classify this as a contribution under ASC 958. Here, Bill Nye does not receive anything of commensurate value as the university retains the rights to the research/study and receives the primary benefit of the findings.
Conditional vs. unconditional
If a transaction is a contribution, then an entity must determine if the contribution is conditional or unconditional, and ASU 2018-08 clarifies the criteria of evaluating this classification. A conditional contribution must include both of the following in the agreement:
- A specific barrier(s) that the recipient must overcome to be entitled to the contribution (assets transferred), and
- If the barrier(s) is not achieved, the donor is released from its obligation to transfer the resources (or the recipient must return any advanced assets).
In other words, if the recipient is only entitled to the transferred assets if it overcomes the specified barrier, then the contribution is conditional, and the recipient would defer recognition into income as the barrier(s) is overcome. If both conditions above do not exist, the recipient would recognize the contribution immediately into income as an unconditional contribution.
When evaluating whether a barrier exists, entities should consider certain indicators such as whether the barrier is a measurable performance-related based barrier (e.g., contingent upon a specific outcome); if any stipulations limit the discretions of the recipient when conducting activity (e.g., the agreement requires the recipient to hire specific individuals to conduct testing); and whether any stipulations relate to the purpose of the agreement.
Let’s go back to our last example when we determined that Bill Nye Science Center gave a contribution research grant to the university to conduct a study on whether the Earth is round. Further details of the grant specify that this is a multiyear agreement and specified installments will be paid when the university achieves testing milestones identified in the agreement (25% completed in 6 months, 50% completed in 12 months, and 100% completed in 24 months). If the university fails to reach any of the testing milestone dates, Bill Nye is released from its obligation to make installment payments. Based on these facts, the university would likely conclude this is a conditional contribution because it is not entitled to the contribution until a milestone is met (and Bill Nye is released from its obligation if the milestones are not met).
For public business entities and not-for-profit conduit bond obligors, ASU 2018-08 is effective for resource recipients for annual periods beginning after June 15, 2018 (including interim periods within those annual periods) and for resource providers for annual periods beginning after December 15, 2018 (including interim periods within those annual periods). Early adoption is permitted!
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