Are Grants Subject to Revenue Recognition?
This article originally appeared in BDO USA, LLP’s “Nonprofit Standard” newsletter (Fall 2018). Copyright © 2018 BDO USA, LLP. All rights reserved. www.bdo.com
The FASB clarifies longstanding question for nonprofits.
Nonprofits received long-awaited clarification on a key accounting question from the Financial Accounting Standards Board. As discussed in this article, 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.
Classifying grants as either a contribution or exchange transaction is the first step in implementing revenue recognition. The clarified guidance in ASU 2018-08 aims to help nonprofits complete that first step in a consistent way across the sector.
This article outlines a practical example of the process to evaluate a grant under the new ASU.
Practical Example: How To Evaluate A Grant Under The New Guidance
Description of ‘Nonprofit A’: A large research association that specializes in space exploration. Its 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:
|Classify the grant as an |
exchange transaction if:
|Classify the grant as a
|Specific provisions of the grant||The resources are paid by the federal government as the work is incurred (cost reimbursement) and request for payment is submitted. The federal government specifies the protocol of the testing, material the technology is made of, and the type and duration of testing that must take place.|
The federal government requires a detailed report of the test outcome within two months of its conclusion and any intellectual property (IP) as a result of the grant belongs to the federal government.
|Nonprofit A makes all decisions about research protocol, material the technology is made of, and the type and duration of testing that must take place.
In addition, the nonprofit retains all the commercial rights for any IP that is developed as a result of the research. Nonprofit A still has to produce the detailed report of the test outcome within two months.
|Deciding factor: Reason for classifying the grant as an exchange transaction or contribution||This example would be an exchange transaction because of how prescriptive the grant is, and because the government owns the IP. Therefore, in this case the federal government is receiving something of commensurate value.||In this scenario, the transaction would be considered a contribution because there is no commensurate value being exchanged.
Even though Nonprofit A is expected to produce a report, the FASB does not consider this an equal exchange of value. The ASU deems filing this type of specified report to be administrative in nature and not a performance standard.
|Is the grant |
subject to the new revenue recognition standard?
|Yes. All exchange transactions are subject to Accounting Standards Codification Topic 606, Revenue Recognition from Contracts with Customers.||No. The above scenario is a conditional contribution, which is not subject to revenue recognition. The condition is met as the work is incurred in accordance with the grant agreement.
Determining whether a grant is conditional or unconditional can be difficult. The ASU states that determining if a donor-imposed condition exists is the key to determining when the contribution can be recognized as revenue. The first consideration is whether the grant agreement has a right-of-return requirement in which the grantee must return to the promisor (grantor) assets transferred as part of the agreement or a right to release of the promisor from its obligation to transfer assets. The scenario in the above does not meet any of these requirements.
Additionally, the ASU has provided the following indicators that could create a barrier and make the grant conditional:
• The inclusion of a measurable performance-related barrier or other measurable barrier.
• Whether a stipulation is related to the purpose of the agreement.
• The extent to which a stipulation limits discretion by the recipient.
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. Colleges, universities, research institutions and social services organizations that rely heavily on 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.
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 long-standing question for the sector. And now it’s up to nonprofits to apply it to their own books and run the rest of the race to implement revenue recognition and finish strong.Sign up for e-news and alerts