Among the many financial tasks in nonprofit organizations, accounting for contributions and grants can be particularly challenging. Doing so requires a detailed interpretation of regulatory guidance, and currently similarly structured organizations follow a variety of different practices.

In June 2018, to help nonprofits evaluate whether a transaction is a contribution (nonreciprocal) or an exchange (reciprocal) and to provide insight into accounting for conditional contributions, the Financial Accounting Standards Board issued Accounting Standards Update (ASU) 2018-08, Clarifying the Scope and Accounting Guidance for Contributions Received and Contributions Made [PDF]. This guidance is the result of questions FASB received regarding an earlier guidance, ASU 2014-09, Revenue from Contracts With Customers, as to whether nonprofit grants should be considered contributions or contracts with customers.

Evaluating Transactions

When evaluating a transaction, the first step is to determine whether each party receives commensurate value, making the transaction reciprocal. If so, it is accounted for as an exchange transaction under ASU 2014-09.

However, ASU 2018-08 specifically notes that any positive sentiment that a party receives as a result of supporting an organization’s mission does not qualify as commensurate value. If the transaction is not reciprocal, it is a classified as contribution under ASU 2018-08.

For contributions, the next step is to evaluate whether the donor imposed restrictions on the gift. Such restrictions determine when revenue is recognized by the recipient and expenses are recorded by the provider. A contribution is conditional when there is a barrier that must be overcome and when the donor retains a right to return of the assets or release from his or her obligation to transfer assets if the restrictions are not met.

There are several indicators that a barrier exists. A barrier might be measurable—for example, the donor may provide the assets only when a certain level of service is achieved or a specific event occurs. Or a barrier might limit the organization’s discretion over how the resources are used. No single indicator is determinative, and some may be more significant than others when evaluating the contribution agreement.

A contribution is conditional when there is a barrier that must be overcome and when the donor retains a right to return of the assets or release from his or her obligation to transfer assets if the restrictions are not met.

Sometimes donor stipulations are ambiguous. In such cases, the contribution is considered conditional when the agreement contains stipulations that are not clearly unconditional.

Recipients of conditional promises to give are required to comply with current generally accepted accounting principles for timing of revenue recognition. Additionally, if a contribution is received before the conditions are met, a liability is recognized.

If a contribution or promise to give is unconditional, the organization should consider whether it is restricted under the current definition of “donor-imposed restriction,” which includes consideration of the purpose of the gift and the time period in which the funds are available for use. 

ASU 2018-08 contains a decision tree (see page 19) to help recipients determine the proper accounting for transferred assets.

When Does the Guidance Apply?

The new ASU is effective for nonpublic resource recipients for annual periods beginning after December 15, 2018, and for interim periods within annual periods beginning after December 15, 2019. For nonpublic resource providers, the guidance is effective a year later: for annual periods beginning after December 15, 2019, and for interim periods within annual periods beginning after December 15, 2020.

Accounting teams should apply the guidance on a modified prospective basis in the first set of financial statements prepared after the effective date. It should also be applied to contribution agreements that are not completed as of the effective date or are entered into after the effective date. Prior-period results should not be restated, and no cumulative-effect adjustment should be recorded.