Proposed ASU on Guidance for Contributions or Exchanges
The Financial Accounting Standards Board (FASB) has issued a proposed Accounting Standards Update intended to clarify and improve the scope and accounting guidance for contributions received and made.
While accounting for contributions typically is an issue for nonprofit organizations, which receive significant revenues from contributions, the proposed amendments would apply to all organizations, including businesses, that receive or make contributions of cash and other assets. That includes promises to give within the scope of Subtopic 958-605, Not-for-Profit Entities—Revenue Recognition, and contributions made within the scope of Subtopic 720-25, Other Expenses—Contributions Made.
The proposed amendments would not pertain to asset transfers from the government to business organizations.
Comments should be made by Nov. 1 to one of three addresses listed in the proposal.
The proposal, “Not-for-Profit Entities (Topic 958), Clarifying the Scope and the Accounting Guidance for Contributions Received and Contributions Made,” is intended to help organizations evaluate whether transactions should be accounted for as contributions (nonreciprocal transactions) within the scope of the topic or as exchanges (reciprocal transactions) that would be subject to other guidance.
The proposal also distinguishes between conditional and unconditional contributions.
The move is in response to stakeholder concerns about the difficulty in characterizing grants and similar contracts with resource providers as either exchanges or contributions, and distinguishing between conditional and unconditional contributions when applying the guidance in Subtopic 958-605, Not-for-Profit Entities—Revenue Recognition.
The guidance in the subtopic requires an organization to determine if a transaction is conditional or unconditional, which affects the timing of revenue recognition. Unconditional contributions are recognized right away, and classified as net assets with or without restrictions.
Conditional contributions, on the other hand, are accounted for as a liability or are initially not recognized until the barriers to entitlement are passed. Once those barriers are overcome, the transaction is recognized as unconditional and classified as either net assets with restrictions or without.
The amendments in Accounting Standards Update No. 2014-09, Revenue from Contracts with Customers (Topic 606), place more focus on these issues because those amendments add new disclosure requirements and eliminate certain limited exchange transaction guidance in Subtopic 958-605.
Distinguishing between contributions and exchange transactions determines which guidance is applicable. Organizations should follow guidance in Subtopic 958-605 for contributions. However, exchange transactions would come under other guidance, such as Topic 606, Revenue from Contracts with Customers.
That means the accounting may differ depending on the guidance applied. Diversity in practice happens with grants and similar contracts from various resource providers. But it’s most common for government grants and contracts.
Further, stakeholders have noted it can be difficult in practice to distinguish between conditional and unconditional contributions, particularly when an organization receives assets with certain stipulations but without a specific return policy for when the stipulations aren’t met.
Diversity in practice also happens when assessing whether the likelihood of failing to meet a condition is remote, and in evaluating whether and how remote provisos affect the timing of recognizing the contribution.
Guidance in Subtopic 958-605 indicates that if a condition likely won’t be met, a conditional promise to give is considered unconditional and contribution revenue is recognized right away.
The proposed amendments would provide a more extensive framework for determining when a transaction should be considered a contribution under Subtopic 958-605 or as an exchange under other guidance, such as Topic 606.
The proposal could mean more grants and contracts are accounted for as contributions (often conditional contributions) than under current generally accepted accounting principles. That’s why clarifying the guidance about whether a contribution is conditional or unconditional is important because such classification affects the timing of contribution revenue recognition.
The proposed amendments would take effect at the same time as amendments in Update 2014-09. The amendments in Accounting Standards Update No. 2015-14, Revenue from Contracts with Customers (Topic 606): Deferral of the Effective Date, defer the effective date of the amendments in Update 2014-09 by one year.
A public business or a nonprofit that has issued, or is a conduit bond obligor for, securities that are traded, listed, or quoted on an exchange or an over-the-counter market would apply the proposed amendments to annual periods beginning after Dec. 15, 2017, including interim periods within that annual period.
All other organizations would apply the proposed amendments to annual periods beginning after Dec. 15, 2018, and interim periods within annual periods beginning after Dec. 15, 2019.
Early adoption of the proposed amendments would be permitted regardless of the early adoption of the amendments in Update 2014-09.
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Terry Sheridan is an award-winning journalist who has covered real estate, mortgage finance, health care, insurance, personal finance, and accounting and taxation issues for newspapers, magazines, and websites. A Chicago native and former South Florida resident, she now lives in New England.