If you’re a nonprofit accounting professional, you may be worried (or at least curious) about how Accounting Standards Update (ASU) 2014-09 and its five-step revenue recognition policy will affect your nonprofits.

It’s clear that it won’t impact on accounting for contributions, but what about government contracts? After all, many of us have considered those to be exchange transactions (not contributions) that would definitely fall under ASU 2014-09, since the government is outsourcing their responsibilities to our nonprofits… Right?

Well, not exactly, says the Financial Accounting Standards Board (FASB).

Its ASU 2018-08, which is effective now, provides a conceptual framework for distinguishing between exchange transactions and various types of contributions. Determining this will lead you down one of two roads:

• FASB ASC 958 for contributions
• FASB ASC 606 for exchange transactions.

So, is it a contribution or an exchange transaction?

To help guide you through this question, ASU 2018-08 provides some key guidelines, and there is also a flow chart at ASC 958-605-55-1A. (Use these guidelines for new transactions, not for third-party payments to satisfy existing contracts between nonprofits, such as hospitals and universities, and their customers.)

1. Whether something is an exchange transaction, a contribution, or a combination of the two is NOT determined by:

• labels like “contract”, “grant”, “membership” and “sponsorship”
• the type of resource provider (government agency, foundation, individual, corporation).

2. Contributions are non-reciprocal in nature, whereas exchange transactions occur when a resource provider receives something of “commensurate value” in exchange for a payment to a nonprofit. Commensurate value does NOT include:

• the resource provider’s positive sentiment or fulfillment of mission.
• benefits conferred upon the general public as a result of a grant, contract, etc.

Conditional vs unconditional contributions

Say a nonprofit determines that a transaction is a contribution. It must then work out whether it is conditional or unconditional BEFORE it considers whether the transaction contains donor restrictions.

To be considered conditional, a contribution must contain BOTH of the following elements:

• There is a “measurable performance-related barrier” (excluding routine administrative requirements) that must be overcome by the nonprofit. Common examples include:

o   requirement for programmatic outputs or outcomes

o   occurrence of specified events

o   performance obligations that depend on the actions of third parties (and are therefore beyond the nonprofit’s control)

o   line item expenditure budgets that are governed by stringent government regulations.

• The agreement between the nonprofit and the donor provides the latter with a “right of return” or “right of release of a promisor’s obligation” (which does NOT need to be legally enforceable) in the event that the nonprofit does not overcome the “barriers”.

Conditional contributions are not recognized in the financial statements until the respective barriers are satisfied.

Contributions with or without donor restrictions

Once all barriers have been satisfied, the recipient nonprofit will recognize a contribution within the appropriate net asset class, either “without donor restrictions” or “with donor restrictions”.  Restricted contributions are earmarked by donors for specific activities and/or time periods, but don’t contain the right of return AND barrier necessary to be considered conditional.

Consider some common examples of how different transactions might fit into this conceptual framework for contributions:

New simultaneous release provision

FASB has added a provision for contributions that are deemed to be conditional AND restricted.  Once barriers to recognition have been overcome, nonprofits have the option of recording these conditional grants directly to “net assets without donor restrictions” without the added step of initially recognizing them within the restricted class before “releasing” them to the unrestricted class. Nonprofits can continue to recognize their other restricted funding in the traditional manner.

This means that many nonprofits with government cost reimbursements contracts (who used to consider these exchange transactions but now deem them to be conditional contributions) will continue to recognize the revenue within the unrestricted net asset class on a monthly installment basis (i.e. as they “overcome barriers”) while making little or no changes to their day-to-day accounting practices for revenue and support.

Quid pro quo contributions

Certain transactions may be part exchange and part contribution (fundraising dinners, for example).  As usual, the nonprofit will need to determine what portion is reciprocal vs nonreciprocal, and then apply the appropriate guidance to each component.

What will ASU 2018-08 mean in practice?

FASB anticipates that ASU 2018-08 will result in more transactions being classified as conditional contributions, and fewer being classified as exchange transactions. In any event, there will be many facts and circumstances for nonprofits to consider, and sound professional judgment will be vital.

For further reading, including examples and case studies, we recommend downloading ASU 2018-08 from the FASB website.