FASB Changes Impact how Grant Revenues are Categorized

The comments period may have ended, but changes are still coming to Accounting Standards Update (ASU), titled Clarifying the Scope and Accounting Guidance for Contributions Received and Contributions Made. FASB issued a call for comments, which ended November 1. The proposed changes would clarify revenue recognition for contributions received and made and help nonprofits account more clearly for certain types of funds.

What Is the Proposed Change and Framework?

The changes are intended to help nonprofits distinguish between contributions (nonreciprocal transactions) and exchange (reciprocal) transactions. The changes also hope to add clarity to conditional and unconditional contributions. The results of the proposed framework changes may, in fact, push more grants into the category of contributions.

Under the new framework, if grants are deemed to be exchange transactions, then the revenues should be recorded as per the guidelines under Revenue from Contracts with Customers (Topic 606) or other applicable topics.

Grants determined to be contributions should be recognized instead as revenues in accordance with Subtopic 958-605, Not-for-Profit Entities–Revenue Recognition.

Nonprofits Still Have a Say

Nonprofits still have a majority say in how grants are categorized. Their first step is to determine whether a particular grant is a revenue or exchange transaction. If the grantor receives services of comparable value, it is usually safe to say that a transaction is an exchange.

The good part of the proposed guidelines is that the FASB includes numerous examples to help nonprofits understand the proposed framework and determine for themselves how the revenues will be categorized. Nonprofit still have a great deal of latitude in how and why they categorize particular revenues. They must, however, adhere to their own internal logic and establish guidelines based on the overarching, generally accepted accounting standards.

When Will the Changes Take Effect?

If the proposed changes do take effect, they won’t impact nonprofit reports until 2019 or 2020. They may impact organizations with the calendar year ending in 2019 or the fiscal year ending in 2020. Accounting actions completed before these dates may follow the old guidelines, which gives organizations plenty of time to update their accounting methods. If significant changes are made between the previous books and the new books, under the changed guidelines, the reason for the change should be noted in the financials next to each line that is affected by the change.

Accounting for Nonprofits Is Always Changing

Although it may seem as if accounting for nonprofits should be straightforward, grants represent an area with the potential for considerable gray areas. Nonprofit financial managers should look at the intention of the grant, whether any reciprocal action or stipulation is required, or how the grant must be satisfied.

Straight grants with no conditions attached are the easiest to recognize in revenues. Others, that come with conditions need careful, thoughtful attention. Developing your own set of revenue recognition rules that are in line with the FASB recommendations may be helpful to keep your organization consistent in how it manages its grant funds.

Beck & Company

Beck & Company is a certified public accounting firm serving the greater Washington D.C. area and the Eastern seaboard. We offer consulting services, auditing, and software selection to help nonprofits with their accounting needs. Contact us today for more information or assistance.

FASB Set to Release Nonprofit Accounting Changes Summer 2016

The Financial Accounting Standards Board (FASB) is set to release the first wave of nonprofit accounting changes during the summer of 2016, according to an article in Accounting Today.

The article indicates that FASB has completed its assessment of the feedback received on Phase 1 of its intended changes. The organization appears ready to release the first set of accounting standards changes that will guide nonprofit organizations in the near future.

The changes are expected to significantly affect the way nonprofits report net revenue, as well as other less significant changes impacting how nonprofits report and account for their finances. This is the first major overhaul of the nonprofit accounting guidelines in over 20 years. The overhaul came because FASB recognized the changing face of the nonprofit sector, with newer types of nonprofits requiring a different view on accounting standards.

Nonprofits Prefer to Stay Flexible, In-Sync with For-Profit Accounting

One thing that surprised the people at FASB was the outpouring of feedback they received from the nonprofit sector. Typically, the standards board receives only a smattering of feedback when it requests public input. The nonprofit sector sent in 250+ letters detailing feedback on the proposed changes.

The biggest request was that FASB retain the flexibility it has previously allowed in nonprofit reporting. Another request that came over loud and clear was the desire for nonprofits, in similar industries as for-profits, to continue using accounting methods and standards in line with the industry itself, rather than based on tax status.

The goal of keeping both for-profit and nonprofit accounting models in sync is to keep their reporting methods clear and easily understandable by most people. Because many people are at least familiar with basic accounting concepts used by for-profits, by keeping the nonprofit model similar, donors and the general public can better understand the finances of nonprofits. Transparency is maintained as it pertains to financial records because the information can be understood more easily.

The Rollout Schedule: What to Expect                                                                     

As Phase 1 begins rollout this year, it will impact reports generated starting December 2017. Financial statements for the fiscal year ending December 2017 should follow the new guidelines, with early adoption permitted.

The Big Change: Two Net Asset Reporting Categories Instead of Three

The biggest changed planned for Phase 1 includes condensing the three net asset reporting categories into two. The current categories include unrestricted, temporarily restricted and permanently restricted. The two new categories will be donor restrictions and without donor restrictions. The “without donor restrictions” category replacing the former unrestricted category.

Other areas impacted by the changes include some minor tweaks in the reporting of investment returns, as well as liquidity and availability.

Help Navigating the Changes

An upcoming webinar will be discussing how the FASB and IASB have released a new revenue recognition standard – which will dramatically impact the financial processes of software companies. Although the effective date is several quarters away, you need to begin taking action now. Click here to register for the New FASB Rev Rec Standards, Actions You Should Take Now Webinar on Thursday, June 16th at 11 AM PT/2 PM ET.

It can be difficult to discern which changes may truly impact your nonprofit organization and which may be considered and evaluated for your particular needs. The professional CPAs and consultants at Beck & Company can assist you through these changes, helping you update your accounting standards to reflect your nonprofit’s financial models and goals. We invite you to contact us to learn more. Call us at 703-834-0776.