A proposal released by the FASB earlier this month on accounting for grants and contributions is applicable to business organizations as well as not-for-profits (NFPs).
Not just for not-for-profits
Although the express title of the proposal – Not-for-Profit Entities (Topic 958): Clarifying the Scope and the Accounting Guidance for Contributions Received and Contributions Made – highlights the guidance will be housed in the NFP section of FASB’s Accounting Standards Codification – and the guidance was designed primarily with NFPs in mind – FASB announced the proposed amendments:
- would apply to all organizations that receive or make contributions of cash and other assets, including business enterprises.
- would not apply to transfers of assets from the government to businesses.
- would apply to both a recipient of contributions received and a resource provider of contributions made.
Goal is to provide consistency, operability
The NFP proposal is designed to help organizations determine whether a transfer of assets is a contribution accounted for in accordance with Topic 958, NFP, or an exchange transaction accounted for in accordance with other guidance, such as Topic 606, revenue recognition.
According to a FASB spokesman, the proposal aims to provide a more robust framework to drive consistency and enhance operability. He noted the proposal, “provides additional guidance about determining whether a contribution is conditional or unconditional on the basis of whether an agreement contains a barrier that must be overcome, and either a right of return of assets transferred or a right of release of a promisor’s obligation to transfer assets.” Indicators would guide the assessment of whether an agreement contains a barrier.
“The proposed guidance could result in more grants and contracts being accounted for as contributions (often conditional) than under current GAAP,” added the FASB spokesman.
Practice issues prompting proposal
Chris Cole, an Associate Director at the AICPA leading their NFP initiatives, serves on the FASB’s NFP Advisory Committee.
He explained the guidance was prompted by existing practice issues and additional questions arising after the issuance of FASB’s revenue recognition standard as to whether grants and contracts should be accounted for as contributions or exchange transactions.
“The matter became pressing after the issuance of FASB ASU 2014-09, Revenue from Contracts with Customers (Topic 606), which eliminated a paragraph commonly used to make that determination,” said Cole.
He provided FASB with direct access to the AICPA’s NFP Expert Panel and NFP revenue recognition task force, to discuss, among other things, “the concepts of whether the expectation of not meeting a condition is considered remote and the difference between a conditional contribution and a restricted contribution, which have been subject to diverse application for many years.”
The number one benefit of FASB’s proposal, says Cole, is providing clarity around the process of assessing these transactions. “The proposed flowchart provides a very good map of the process.”
Also important, says Cole, is the fresh look at the definition of conditions with respect to contributions, which in turn has a direct impact on the timing of revenue recognition for contributions. Additionally, he notes the clarification that indirect benefits received by the general public do not constitute reciprocal value to the resource provider.
Although the terminology applied to many transactions under the proposed standard may change from “exchange” to “contribution,” Cole says the underlying accounting, in many cases, will produce the same result because the assessment process will result in the contribution being conditional.
Businesses: Take note
Cole notes that businesses that receive contributions have to comply with these standards, because the sole guidance in the FASB Accounting Standards Codification on accepting contributions resides in the Not-for-Profit (ASC 958) section.
“In particular, those businesses who perform research where the business retains the right to any data or discoveries will want to take a close look to determine how this proposed standard will affect their revenue recognition practices,” he adds.