On August 3, 2017 the Financial Accounting Standards Board (FASB) issued an Exposure Draft, Not-for-Profit Entities (Topic 958), Clarifying the Scope and the Accounting Guidance for Contributions Received and Contributions Made (proposed ASU). The following is a brief overview of the proposed ASU and how it might affect your organization.
WHO WILL BE AFFECTED?
Primarily not-for-profit entities. However, all entities that receive or make contributions of cash and other assets are affected.
WHAT ARE THE KEY CHANGES?
The amendment seeks to clarify existing standards and reduce diversity in practice. No new guidance has been added. Key clarifications include:
- Determination of whether a resource provider is participating in an exchange transaction depends on if commensurate value is received by a resource provider. This does not include execution of the resource provider’s mission or positive sentiment from acting as a donor.
- Determination of whether a contribution is conditional depends on whether the agreement includes a right of return of assets transferred and the existence of a barrier to the usage of the resource; such as:
- Performance related (i.e. number of units output or specific outcome)
- Stipulations related to purpose of the agreement (generally excludes administrative tasks and trivial stipulations)
- Limited discretion by recipient over how the transferred assets should be spent
- Additional action(s) that needs to be taken to be entitled to transferred assets
WHAT DOES THIS MEAN FOR YOU?
It is likely more grants and contracts will be accounted for as contributions. Carefully review grants and contracts for items of commensurate value to determine whether a transaction is an exchange or contribution. If a contribution, identify any barriers or right of return to determine if the contribution is conditional.
WHEN DOES THE NEW STANDARD GO INTO EFFECT?
The proposed ASU will be effective starting January 1, 2020 for fiscal year end December 31, 2020. Early adoption is permitted.
WHAT SHOULD YOU DO NOW TO PREPARE?
The proposed ASU will be applied on a modified prospective basis for agreements either 1) not completed as of the effective date, or 2) entered into after the effective date. As the effective date approaches, for agreements not yet completed, document factors you consider in determining the accounting treatment for each.