After the Financial Accounting Standards Board’s (FASB’s) 2014 release of Accounting Standards Update (ASU) No. 2014-09, Revenue from Contracts with Customers, many nonprofits were confused about whether grants and similar contracts were covered by these new revenue recognition rules. The FASB’s subsequent issuance of ASU No. 2018-08, Not-for-Profit Entities (Topic 958): Clarifying the Scope and the Accounting Guidance for Contributions Received and Contributions Made, was intended to provide some helpful answers.
However, the second ASU apparently left a significant number of stakeholders with some questions, particularly regarding the effect of budget requirements and cost-sharing provisions. In response, the FASB has released a Q&A.
Some light is shed
ASU 2018-08 describes how to determine if a grant or similar contract is 1) a contribution or 2) an “exchange transaction” subject to the revenue recognition rules. If it is an exchange transaction, you follow the guidance under ASU 2014-09. If the transaction is a contribution, you follow the guidance under ASU 2018-08 and determine whether it’s conditional. Unconditional contributions are recognized when received, while you don’t recognize conditional contributions until you overcome the conditions for receiving the funding.
A conditional contribution must include both:
- A barrier the organization must overcome to receive the contribution, and
- Either a right of return of the transferred assets or a right of release of the promisor’s obligation to transfer assets.
The ASU identifies three indicators that a grant agreement includes a barrier — including limits on the nonprofit’s discretion over how to conduct an activity.
The FASB heard from stakeholders that additional guidance was needed regarding this indicator. The new guidance discusses whether budget requirements and cost-sharing provisions limit discretion and therefore indicate that barriers to receiving the funds exist, or whether they’re merely donor-imposed restrictions.
Guidance on budget requirements
The update makes clear that the existence of a budget and a requirement that you adhere to it within deviation limitations don’t, on their own, indicate a “barrier to entitlement.” For example, a barrier doesn’t exist simply because you must obtain preapproval to deviate from a line-item by more than 10% of the budgeted amount. Rather, the agreement generally must include other stipulations, such as the need to incur qualifying expenses, for a barrier to exist.
The FASB stresses, though, that the limited discretion indicator is just one of three indicators for determining whether a grant agreement includes a barrier. Moreover, some of the indicators may prove more significant than others, and no single indicator is decisive on the question. That means you must analyze the unique facts and circumstances of each grant agreement to conclude whether a barrier to entitlement exists.
Guidance on cost-sharing provisions
Cost-sharing provisions require the grantee to use a certain amount of funds other than the grantor’s toward a program or project to be entitled to the granted funds. They typically involve the spending of the nonprofit’s own resources, as opposed to matching provisions, where the nonprofit is required to raise funds from another outside source.
According to the FASB, a cost-sharing provision should be considered a barrier only if it’s clear that grant funds are contingent on the organization meeting the requirement. The likelihood of satisfying the requirement is irrelevant.
Consider, for example, a multiyear grant that requires you to provide, from your own resources, a certain percentage of the award in each year to be entitled to the funds for that year. If you don’t meet the cost-share for a particular year, the grantor has the right to require return of the funds. Under the new guidance, a barrier to entitlement would exist for each year — so recognition of the grant fund revenue should be deferred until the cost-sharing requirement is met each year.
But what if a multiyear grant instead requires you to provide from your own resources a certain percentage of the total grant award by the end of the last year to be entitled to the funds, with no annual requirement or a right to require return? While a barrier would exist, the timing of when you must meet it and the timing of the specific grant funds at risk of return would differ from the example above. You would need to defer recognition of the grant revenue in a particular year only if the remaining portion of the award for future years doesn’t exceed the amount at risk.
Proceed with caution
The new Q&A tackles issues that many nonprofits have run into when implementing ASU 2018-08, but it also calls for some specific calculations in certain circumstances, especially when it comes to deferral of revenue recognition. Read it here: https://bit.ly/2uCy2UA. Your CPA can help ensure your compliance.