Are Grants Subject to Revenue Recognition?

Written by Lee Klumpp on November 5, 2018

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The FASB clarifies longstanding question for nonprofits 

Nonprofits received long-awaited clarification on a key accounting question from the Financial Accounting Standards Board (FASB) today. The FASB released a final accounting standards update (ASU), Not-for-Profit Entities (Topic 958): Clarifying the Scope and the Accounting Guidance for Contributions Received and Contributions Made. The ASU aims to standardize how grants and other contracts are classified across the sector, as either an exchange transaction or a contribution.

What does this new guidance change for nonprofit organizations, stakeholders, and donors? 
The latest guidance from the FASB arrives at a time when nonprofit chief financial officers (CFOs), controllers, and other key financial players are facing a fast-approaching deadline to implement new revenue recognition requirements (Topic 606). The revenue standard aims to improve accounting for contracts with customers, but it also introduces a layer of complexity and challenge to nonprofits of every size. The newly released second edition of Nonprofit Standards, BDO’s benchmarking survey, offers a glimpse of the administrative burden regulatory changes place on nonprofits: 45 percent of organizations say the time and effort required to deal with regulatory and legislative changes pose a moderate- or high-level challenge.

Revenue recognition brought to light a diversity of practice in the way that nonprofit organizations and funders classified grants and contracts from federal, state and local governments and other funding sources such as foundations in the financial statements, with some categorizing them as contributions and some as exchange transactions.

What makes standardizing practices so important now? Contributions, defined as an unconditional transfer of cash or assets in a voluntary non-reciprocal transfer, are scoped out of revenue recognition. Exchange transactions—a reciprocal transaction in which two parties exchange something of commensurate value—are within the scope and need to be accounted for following the new revenue recognition requirements.

In a recent BDO webinar, my colleagues and I discuss that classifying grants as either a contribution or exchange transaction is the first step in implementing revenue recognition. The clarified guidance aims to help nonprofits complete that first step in a consistent way across the sector.

Practical Example: How to evaluate a grant under the new guidance
Description of ‘Nonprofit A’:  A large research association that specializes in space exploration. Their mission is advancing scientific discoveries and supporting the advancement of new technology. The organization receives funding from various individuals, corporations, and governments to support its efforts.

Description of the grant: Nonprofit A received a $15 million grant from the federal government to finance the costs of a research initiative to test the effectiveness of newly developed technology.

How should Nonprofit A classify the $15 million grant?
This grant could be classified as either an exchange transaction or a contribution, depending on the exact parameters of the funding. Let’s examine both scenarios:

Disclaimer: These examples are for illustrative purposes only. Changing even one fact in the example could significantly change the accounting treatment.

What types of organizations need to take action?

  • Grantees: All nonprofits that receive grants from foundations, governments, or other funding entities will need to assess how they are accounting for contributions. College, universities, research institutions, and social services organizations that rely heavily grants and contracts could see the greatest impact.
  • Grantors: Non-governmental organizations like public and private foundations, as well as for-profit entities that issue grants to nonprofits, will need to think about how they write their grants and contracts.

What organizations will not experience a significant impact?

  • Public charities: As organizations that derive the bulk of their funding from individual contributions, they will be less impacted by this guidance.
  • Local, state, and federal governments: Nonprofits will still need to assess how they classify federal and state funding, but governmental bodies are not within the FASB’s scope and do not need to comply with this guidance. Governments are subject to standards issued by the Governmental Accounting Standards Board (GASB).

What’s next for nonprofits? 
Accounting changes are like a relay race. Today, the FASB handed off clarified guidance on accounting for contributions and answered a longstanding question for the sector. And now it’s up to nonprofits to apply it to their own books, run the rest of the race to implement revenue recognition, and finish strong.

This article originally appeared in BDO USA, LLP’s “Nonprofit Standard” blog (June 21, 2018). Copyright © 2018 BDO USA, LLP. All rights reserved. www.bdo.com

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Warren Averett is an independent member of the BDO Alliance USA. This article was borrowed with permission from BDO USA, LLP.

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