FASB ASU 2018-08, Topic 958, Clarifying the Scope and Accounting Guidance for Contributions Received and Contributions Made

The Financial Accounting Standards Board’s (“FASB’s) release of Accounting Standards Update (“ASU”) 2014-09, Topic 606, Revenue from Contracts with Customers, in 2014 caused the accounting industry to question if grant revenue, particularly grants from governmental entities, should be subject to the new standard as an exchange transaction.  There had already been previous inconsistency in the not-for-profit sector regarding the treatment of such grants as either exchange transactions or as contributions.  The American Institute of Certified Public Accountants (“AICPA”) created a task force to develop guidance on the application of the revenue recognition standard. The task force responded to the FASB and the AICPA that the “grey area” needed to be clarified.  The FASB then added the project to their agenda. 

On June 21, 2018, FASB issued ASU 2018-08, Topic 958, Clarifying the Scope and Accounting Guidance for Contributions Received and Contributions Made.  The new guidance clarifies what is an exchange transaction, of which revenues would be reported under Topic 606, and what is a contribution reported under Topic 958.  Practitioners may be surprised to learn that transactions once considered “exchange-type” may in fact have been contributions all along.

The new guidance presents three key considerations for the not-for-profit to walk through in order to determine what type of transaction transpired.

1. Determine if the transaction is an exchange, third-party payer, or a contribution. An exchange is where commensurate value is received by the resource provider and a recipient. Commensurate value is NOT achieved by: 1) the resource provider executing their mission through the transfer of assets; or 2) the general public receiving benefit from resources provided through another entity, such as a government agency. A third-party payer is where no commensurate value is received by the resource provider AND the resource provider is paying on behalf of an existing exchange transaction between the recipient and an identified customer.  A contribution is where no commensurate value is received by the resource provider AND they are not a third-party payer.
   
   For example:  A grant from the federal government to a not-for-profit to support the dissemination of information on brain trauma ultimately benefits the general public and under this guidance would be considered contribution revenue; however a PELL grant received from the government by a school where the benefactor is not the general public, but instead a particular individual who is receiving education over a defined period of time, would be treated as amounts received from a third-party payer as payment towards an existing contract between the school and the student.
2. If the not-for-profit has determined the transaction is a contribution, it has to determine if it is conditional or unconditional.  A conditional transaction is an agreement which includes BOTH a ‘barrier’ that must be overcome AND either a ‘right of asset return’ or ‘release of promise to give.’ Ambiguous donor stipulations are presumed to be conditional if not clearly unconditional. Barrier indicators are 1) measurable performance requirements before entitlement to assets; or 2) stipulations related to the purpose of the agreement or limiting recipient discretion in conducting an activity.
3. If a contribution is unconditional, determine if it is restricted or unrestricted.

For transactions in which an entity is either a public business entity or an not-for-profit 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 any changes to its financial statements due to ASU 2018-08 with annual periods beginning after June 15, 2018, including interim periods within those annual periods. All other entities should apply the changes due to ASU 2018-08 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 not-for-profit 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 (for example, a corporate foundation, a corporation, or an not-for-profit ), the entity should apply any changes to its financial statements due to ASU 2018-08 with annual periods beginning after December 15, 2018, including interim periods within those annual periods. All other entities should apply the changes due to ASU 2018-08 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.  

This accounting guidance is to be applied on a modified prospective basis.  Retroactive application is permitted. Early adoption is also permitted.