The Financial Accounting Standards Board (FASB) on Feb. 14, 2018, continued to fine-tune a proposal to help museums, universities, charities and other not-for-profit groups more easily determine how to record the proceeds from grants and donations that have conditions attached to them.
The board released Proposed Accounting Standards Update (ASU) No. 2017-270, Not-for-Profit Entities (Topic 958): Clarifying the Scope and the Accounting Guidance for Contributions Received and Contributions Made, in August 2017. The proposal is an effort to clarify the evaluation of whether gifts to not-for-profit groups should be accounted for as contributions and subject to FASB ASC 958-605, Not-for-Profit Entities—Revenue Recognition, or as reciprocal transactions called exchanges that should be accounted for with other areas of U.S. Generally Accepted Accounting Principles (GAAP). The proposal also attempts to distinguish between contributions with conditions attached and the contributions without conditions.
Some of the feedback about the proposed changes said the proposal was a significant improvement to existing U.S. GAAP, but some groups asked the accounting board to clarify some provisions, including the indicators of a barrier, which are used to determine the contributions that have conditions attached to them. Some financial professionals questioned the inclusion of an indicator about “additional actions,” saying this provision was repetitive and potentially confusing. The FASB on Feb. 14 agreed to expand what it meant with some indicators and also scrap the “additional actions” indicator while leaving most of this aspect of the proposal intact.
“People generally agreed with the barrier and the right-of-return notion, and I view these as just improvements on that core principle,” FASB Vice Chairman James Kroeker said. “A lot of it, to me, is just can we draft better what we intended as a core principle?”
In addition, the FASB agreed that the guidance for distinguishing between conditional contributions and unconditional contributions should be the same for both a recipient and a donor. Many not-for-profit groups are both recipients of funds as well as grantors, the FASB said.
“The persuasive point you had [is that] some entities both give and receive grants,” Kroeker said. “It would be odd to have one set of words for grants they receive and another set for that which they’re giving.”
The FASB decided that the effective date of the proposed amendments would be the same as the effective date as the board’s high-profile revenue recognition standard, FASB ASC 606, Revenue From Contracts With Customers. Public companies must comply with the new standard in 2018. All other entities have until 2019.
But several donor groups expressed concerns about changing their accounting processes in time to comply with the proposed changes to the not-for-profit guidance. The FASB staff’s outreach to financial reporting professionals also showed that financial supporters often recognize the entire amount of a contribution as grant expense up front and as unconditional, regardless of strings attached. They said they consider conditions as best-effort metrics, and if the recipient does not meet all the terms but shows progress toward them, it is highly unlikely the organization would claw back the contribution.
The FASB agreed to maintain the effective date, but it agreed to give donors an additional year to comply with the amendments.
“Respondents stated that the accounting-for-contribution expense is not affected by Topic 606 and, therefore, does not need to align with its effective date,” according to the FASB’s meeting memo. “In addition, resource providers may need to adjust internal systems to keep track of when barriers are overcome. Delaying the effective date would allow resource providers additional time to understand the amendments and adjust their internal policies and procedures accordingly.”
The proposal aims to address a long-standing criticism that U.S. GAAP contains scant, conflicting guidance about how not-for-profit organizations should recognize exchanges versus contributions. The criticism intensified after the FASB published its revenue recognition standard in 2014 via ASU No. 2014-09, Revenue From Contracts With Customers (Topic 606), and erased the already limited guidance.
With the publication of the new revenue standard, which went into effect for public companies in 2018, the FASB found itself having to address two issues: the type of not-for-profit arrangements that had to follow the new revenue recognition rules, and the transactions that should be considered contributions or nonreciprocal transactions and subject to FASB ASC 958-605. In addition, the FASB wanted to clear up the accounting for contributions to not-for-profit organizations that have stipulations attached to them but no specific return policy if the organization fails to meet the terms.
The proposal clarifies guidance about “exchange” transactions. An exchange, sometimes called a reciprocal transaction, involves a group receiving money in return for providing services or incurring other obligations, such as when a local government provides funding to a not-for-profit group to research the benefits of a longer school year.
If finalized, the FASB expects more grants and contracts to be accounted for as contributions versus exchanges.
“For this reason, clarifying the guidance about whether a contribution is conditional or unconditional is important because such classification affects the timing of contribution revenue recognition,” the proposal reads.
The proposed amendment primarily affects not-for-profit groups, such as charities and foundations, but the FASB says the guidance could also apply to for-profit enterprises that receive government grants.
According to the proposal, a contribution is considered “conditional” when the agreement includes a barrier that must be overcome and a provision that calls for the group to return the contribution if they do not meet the terms of the agreement or a provision that allows the donor to back out of providing the funds. The proposal calls these terms a “right of return” of the assets and a “right of release” of the obligation to transfer the assets.
The proposal’s indicators for helping not-for-profits and donors determine when an agreement contains a barrier are among its key provisions. Depending on the circumstances, some indicators may carry more weight than others, but no single indicator would be considered completely indicative of a contribution’s classification. The indicators include requirements that the money be used to achieve a certain outcome or that the organization undertake certain actions. The proposal offers the example of a private foundation offering $400,000 to a not-for-profit group to provide career training to disabled veterans with a stipulation that the group must help at least 2,000 veterans each quarter or else the foundation does not give the money. This is an example of a contribution with a condition attached, the FASB said.
The indicators in the proposal included: a measurable performance-related barrier or other measurable barrier; whether a stipulation is related to the purpose of the agreement; the extent to which a stipulation limits discretion by the recipient and the extent to which a stipulation requires an additional action or actions.
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