ASU 2019-08 Helps Nonprofits Account for Different Types of Revenue

Because donor contributions are a significant part of the revenue stream for most nonprofits, properly accounting for these contributions is a task that requires constant vigilance. A recent Accounting Standards Update provides guidance from the FASB that should help nonprofits more accurately report their revenue. ASU 2018-08, Clarifying the Scope and the Accounting Guidance for Contributions Received and Contributions Made, helps nonprofits figure out what set of rules they need to follow when accounting for different types of revenue.

The FASB issued ASU 2018-08 in June of 2018 to address confusion about the correct way to characterize grants and other contracts. Specifically, this guidance should help nonprofits answer two questions: Should this transfer of assets be considered a contribution or an exchange transaction? And if it is a contribution, is it conditional or unconditional?

Contributions Vs. Exchange Transactions

Assessing whether a specific transaction is a contribution or an exchange transaction matters because this assessment determines what guidance should be applied when recognizing this revenue. Contributions should be accounted for using the guidance from Subtopic 958-605, Not-for-Profit Entities—Revenue Recognition; for recognizing exchange transactions, entities should use other revenue recognition guidance such as Topic 606, Revenue from Contracts with Customers.

The key difference between these transactions is reciprocity. Contributions are nonreciprocal. The resource provider (the entity that is transferring assets to the nonprofit) gives its resources to the nonprofit without expecting to receive something in return. 

Exchange transactions, by contrast, occur when a “resource provider is receiving commensurate value in return for the resources transferred,” states ASU 2018-08. For the provider, executing its mission or improving its reputation doesn’t count as commensurate value. So, for example, a foundation that makes a major donation to a food bank may win favor with its own donors by having given so generously, but that positive boost alone wouldn’t make this an exchange transaction. Even if the foundation was created with a specific mission statement to support food banks, its donation would probably meet the contribution criteria rather than the exchange transaction criteria.

Conditional Vs. Unconditional Contributions

Another key piece of ASU 2018-08 addresses the differences between conditional and unconditional contributions. According to the FASB, a contribution to a nonprofit is conditional if it has 1) a barrier that must be overcome before the nonprofit is entitled to the contribution and 2) a right of return or release of obligation. 

The text of the ASU provides a lot of specific detail that nonprofits can use to determine whether both criteria are met. As an example, though, let’s say a food bank receives a grant from an individual donor to create a new program serving clients with food allergies. The donor may create a barrier by establishing milestones that the food bank must meet in the process of creating this new program, with the donor making installment payments when each milestone is reached. The donor has the right to stop making installments if the food bank doesn’t fulfill its requirements. All of these conditions are clearly stated in the agreement made between the donor and the food bank. In this case, both criteria are met and this contribution would be treated as conditional. 

By contrast, assets that are donated or gifted to a nonprofit without these restrictions are generally unconditional. Even in the above example, the donor’s contributions would be considered unconditional if the agreement between the two parties didn’t address both the barrier(s) and right of return. 

Assessing whether contributions are conditional or unconditional matters because this affects the timing of revenue recognition. Unconditional contributions are recognized immediately, while conditional contributions can’t be recognized until the conditions are met and the barriers are removed. 

This is just one example of how conditional and unconditional contributions differ, but there’s a lot of nuance around this topic. Verifying that a nonprofit is complying with current guidance about revenue recognition may require the help of an attorney, CPA and other financial planning professionals. 

Does your nonprofit have questions about ASU 2018-08 or other complex accounting issues? Reach out to Livingston & Haynes for personalized help.