FASB clarifies accounting for grants and contributions

FASB on Thursday issued an Accounting Standards Update clarifying when a transfer of cash or other assets received and made, primarily by not-for-profits, qualifies as a contribution or an exchange transaction.

The ASU, which amends FASB ASC Topic 958, Not-for-Profit Entities, updates current guidance about whether a transfer of assets — or the reduction, settlement, or cancellation of liabilities — should be accounted for as a contribution or an exchange transaction. Specifically, the ASU establishes criteria for determining whether the asset provider is receiving commensurate value in return for those assets. That determination then dictates whether the organization follows contribution guidance or exchange transaction guidance found in the revenue recognition and other applicable standards.

The new guidance is expected to be particularly helpful in the accounting for grants and similar contracts awarded by governments to not-for-profits. FASB proposed the changes last year after receiving feedback that not-for-profits had run into difficulty deciding whether to characterize grants as exchanges or contributions.

The ASU also provides an enhanced framework for determining whether a contribution is conditional or unconditional, and for distinguishing a donor-imposed condition from a donor-imposed restriction. This is important because such classification affects the timing of contribution revenue and expense recognition.

“The new ASU clarifies whether certain transactions should be characterized as contributions or exchanges,” FASB Chairman Russell Golden said. “It will improve financial reporting by reducing diversity in practice among not-for-profits and other businesses and organizations that make or receive contributions of cash or other assets — most notably in accounting for grants and similar contracts received by not-for-profits from governments.”

The new standard does not apply to transfers of assets from governments to businesses.

Effective dates

The ASU includes the following instructions on when the amendments should go into effect:

“The amendments in this Update should be applied on a modified prospective basis. Retrospective application is permitted. Under a modified prospective basis, in the first set of financial statements following the effective date the amendments should be applied to agreements that are either:

1. Not completed as of the effective date.
2. Entered into after the effective date.

“A completed agreement is an agreement for which all the revenue (of a recipient) or expense (of a resource provider) has been recognized before the effective date in accordance with current guidance (for example, Topic 605, Topic 958, or other Topics).

“The amendments in this Update should be applied only to the portion of revenue or expense that has not yet been recognized before the effective date in accordance with current guidance. No prior-period results should be restated, and there should be no cumulative-effect adjustment to the opening balance of net assets or retained earnings at the beginning of the year of adoption. Under this approach, an entity is required to disclose both:

1. The nature of and reason for the accounting change.
2. An explanation of the reasons for significant changes in each financial statement line item in the current annual or interim period resulting from applying the amendments instead of the previous guidance.

“For transactions in which an entity is either a public business entity or an NFP that has issued, or is a conduit bond obligor for, securities that are traded, listed, or quoted on an exchange or an over-the-counter market and serves as a resource recipient, the entity should apply the amendments in this Update on contributions received to annual periods beginning after June 15, 2018, including interim periods within those annual periods. All other entities should apply the amendments for transactions in which the entity serves as the resource recipient to annual periods beginning after December 15, 2018, and interim periods within annual periods beginning after December 15, 2019.

“For transactions in which an entity is either a public business entity or an NFP that has issued, or is a conduit bond obligor for, securities that are traded, listed, or quoted on an exchange or an over-the-counter market and serves as a resource provider, the entity should apply the amendments in this Update on contributions made to annual periods beginning after December 15, 2018, including interim periods within those annual periods. All other entities should apply the amendments for transactions in which the entity serves as the resource provider to annual periods beginning after December 15, 2019, and interim periods within annual periods beginning after December 15, 2020.

“Early adoption of the amendments is permitted.”

— Jeff Drew (Jeff.Drew@aicpa-cima.com) is a JofA senior editor.