FASB has released an exposure draft which slightly redefines the distinction between revenues and contributions for the nonprofit world.
Exposure draft is called Not-for-Profit Entities (Topic 958) – Clarifying the Scope and the Accounting Guidance for Contributions Received and Contributions Made.
On 9/11/17 I watched FASB’s one hour webcast on the exposure draft. This is only the second time I’ve seen a presentation on the issue and I haven’t yet dived into the 51 page document. That means I’m just starting to understand the changes.
What I’m going to do here is give a high level introduction. Keep in mind this is just an overview without all the details. Furthermore it is my preliminary understanding after having only heard the presentation twice and looking at the slide deck once. Please don’t cite this in your workpapers!
This exposure draft does not call for any change in how transactions are presented in the statement of activities. Organizations can present particular transactions as either revenue or contributions as they wish. The point was made several times in the presentation that the rules spelled out here determine which model is used for recognizing a transaction, not what presentation is used on the statement of activity.
There is a fantastic graph in the slide deck that provides a good visualization of the current and proposed accounting. It is copyrighted and thus I won’t be presenting it here. I’m sure you’ll be seeing the graphic before you get very far into your study.
Here’s a breakout of how exchange transactions are currently handled. These are also called reciprocal transactions. Currently we think of these as revenue, although the verbal comments in the presentation indicate that is no longer necessarily how exchange transactions must be presented.
- Exchange transactions:
- Direct commensurate value to resource provider – The funds provider, or counterparty, receives direct benefit, such as research for which the results go back to the counterparty.
- Specified third parties – This would be payments from a counterparty for which there is a specific person who receives a benefit – Think Pell grants or healthcare reimbursements or payments for residents of a group home.
- General public – This would be projects for which society in general benefits, such as awareness education or research for which the results will be published and anyone may use what is learned. I don’t have any other or better examples at the moment.
This will be slightly changed as follows:
- Exchange transactions /Reciprocal (we currently would categorize these as revenue):
- Direct commensurate value to resource provider
- Specified third parties – government/resource provider is a third-party pay or on behalf of an identified customer – again think Pell grants or healthcare reimbursements
- Nonexchange transactions/Nonreciprocal (I think this is the area of current diversity of practice; sometimes these transactions are be presented as revenue and other organizations would present as contributions):
- Specified third parties – The details are fuzzy to me about what payments to specified third-party would count as a nonexchange transaction. There is a blank spot on the illustration with a comment to pay attention to future developments.
- General public – Again this would be projects for which there is neither direct commensurate valued back to the resource provider or a payment on behalf of a particular customer.
The next question in determining how to recognize a contribution is to consider whether it is conditional or unconditional. The new wrinkle is that for a transaction to be conditional there are two requirement that must be met:
- A right of return or release must exist and
- The agreement must include a barrier
The barrier is a new concept. I don’t know how to define that yet. The slide deck gives indicators of a barrier.
Indicators of barriers would be:
- A measurable performance-related barrier or other measurable factor is included in the agreement – This would typically be a quantified performance factor, such as number of meals fed or number of individuals counseled.
- Whether the item being considered for barrier status is related to the purpose of the agreement – A requirement or stipulation such as obtaining an audit under the Uniform Guidance or filing a financial report at the end of the agreement would not be a barrier because those are not related to the purpose of an agreement.
- The degree or extent for which a particular stipulation limits discretion by the recipient – If there are very narrow descriptions on how money will be spent such as a detailed line-item budget, then less discretion exists and there would be a barrier. If only major changes in spending need to be approved, then there would be far more discretion.
- The degree to which the requirement calls for additional actions by the organization – If an organization has to perform additional actions beyond what it otherwise would have done, this would be a barrier. For example, if the transaction requires the NFP to open up a new counseling center, or feed an additional 2000 meals, then there is an indication of a barrier. In contrast if the agreement calls for doing what the organization was otherwise doing, such as advocating for change, or searching for a disease cure or analyzing a societal issue, the stipulation would not be a barrier.
Notice there is no indication of a likelihood or probability in the above definition. Seems to me this is a significant change. Currently there is a probability assessment to deciding whether there is a condition. For example, providing an annual report is not a condition. On the other hand, breaking ground on the new building by next fall or achieving a certain level of matching contributions would usually be considered a condition.
For the examples just given, the new rules would assess the factors differently. Providing an annual report is unrelated to the purpose of a transaction and thus not a barrier. Raising specific matching contributions or breaking ground by a specific date would be measurable performance factors, are related to the purpose of the grant, and require additional actions. Thus, those would be strong indicators of barriers.
One comment by a presenter is that agreements with government entities will likely tend to have a number of barriers, such as major performance factors, limited discretion for a change in spending, and specific additional steps. In contrast contributions from foundations and individuals would not only not have a right of return but would be far less likely to have those barriers in place.
Again, keep in mind this is my description after listening to a webcast. Please do your own research.
The next step in processing how to handle a contribution would be to consider whether there are restrictions present. I’m a little fuzzy on whether there is any change from current authoritative literature on this point.
The slide deck has another wonderful illustration – a decision tree on the recognition decision process. I think that’s copyrighted as well so I will not make a copy of it. Here’s my description without a visual:
- Decision #1 – does the counterparty receive a direct commensurate value, or, is it a third-party payment on behalf of identified customers?
- If yes, it is a reciprocal transaction. Proper accounting treatment is found in Rev Rec (ASC 606) or other appropriate accounting guidance. Exit decision tree.
- If no, it is a non-exchange transaction (nonreciprocal / what we currently would call a contribution). Go to decision #2.
- Decision #2 – Is a transaction conditional, in other words, is there both a right of return/release and a barrier?
- If yes, the transaction is conditional. Revenue (probably a contribution) is recognized when the condition is met. After the condition is met go to decision #3.
- If no, the transaction is unconditional; go to decision #3.
- Decision #3 – Are there restrictions present (for example a limit on time or purpose limit narrower than the mission of the organization)?
- If yes, it is a purpose-restricted or time-restricted contribution.
- If no, it is an unrestricted contribution. (Notice I’m not using the new phrasing from ASU 2016-14.)
One more time – this is my description before I dive into the actual document. Please don’t use this post as anything other than a high-level introduction. I’m writing it to force myself to put the concepts I think I just heard into words to help it sink in to my little brain. Are you getting the hint that you should not over-rely on this post?
Implementation
The webcast explains the exposure draft calls for a modified prospective implementation. The new recognition requirement would apply to transactions on or after the effective date. For transactions that have not been completed there is no change to recognition in prior years; there is only a change in future recognition of the remainder of the transaction.
Full retrospective restatement is allowed.
Effective date
The proposed effective date would be for years beginning after December 15, 2018 for nonpublic companies. That means it would first be in effect for charities with a December 31, 2019 calendar year-end or something like a June 30, 2020 fiscal year-end.
When can we expect a final document?
Exposure draft was released on August 3, 2017.
The presenters said the goal is to have a final ASU released in the second quarter of 2018.
The driving force for timing is so that it will go into effect at the same time as Rev Rec is adopted.