For those responsible for nonprofit financial management and accounting services, here is a brief update from the Financial Accounting Standards Board (FASB). FASB is in the process of improving, clarifying, and enhancing recognition standards for grants and contracts by nonprofits. While the comment period is now closed, it bears noting that the recommendations made to FASB will be taken into consideration with other feedback as they prepare enhanced guidelines.
Nonprofits Seek Clarity on Grant and Contract Revenue Recognition
Government grants and contracts tend to cause confusion among nonprofit financial management when it comes to revenue recognition. Many nonprofit leaders aren’t sure when to recognize such revenue, or revenue recognition is inconsistently recognized and recorded.
To provide further clarity, FASB is hoping to provide an update on the proposed Accounting Standards Update (ASU), titled Clarifying the Scope and Accounting Guidance for Contributions Received and Contributions Made. The commenting period ended November 1. New guidelines are forthcoming.
Proposed ASU Changes
The biggest proposed change is differentiating between contributions (nonreciprocal transactions) and exchange (reciprocal) transactions. Under the new guidelines, it is likely more grants will fall into the contributions category.
The proposed framework indicates that if a grant is an exchange transaction, revenues should be recorded in accordance with Revenue from Contracts with Customers. Details on this may be found in Topic 606 or other applicable topics.
Grants, on the other hand, are determined to be contributions and should be recognized as revenue for not for profit entities under Revenue Recognition Subtopic 958-605.
All grants must be evaluated individually, and a designation made for each. Grants can be considered exchanges if the value received is commensurate with the services rendered. Then, it is categorized as an exchange or reciprocal transactions.
The good news is that the ASU includes plenty of examples to help nonprofits determine whether grants are nonreciprocal or reciprocal transactions.
Handling Conditional Contributions
A conditional contribution is a grant that comes with strings attached—conditions that must be met for the grant to be considered fully received. Grants without barriers or considerations may be unconditional.
Typical considerations or conditions include:
- Goals that can be measured, such as matching grants, levels of service, or other items that can be measured or quantified;
- A stipulation that specific conditions must be met for the grant;
- Something limiting how the funds can be spent;
- Additional actions that would be required to be taken by the recipient organization in addition to the activities that it would normally pursue.
Where there are gray areas, FASB recommends treating them consistently in the manner that makes the most sense for your nonprofit. As with many nonprofit financial management topics, common sense often takes precedence when situations do not easily fit standard guidelines.
If a grant can be considered a contract with a customer, then the specifications in Topic 606 should be followed.
New Guidelines Deadline: 2019
The good news is the changes do not affect prior quarters in any way, so you don’t need to change anything prior to 2019. For more details, please visit FASB.
The new recommendations will go into effect on or around December 31, 2019, for the fiscal year ending in 2020. That may seem like a long way off, but for nonprofits dealing with a lot of grants that fit these categories and descriptions, it may be prudent to take steps now to conform to the new guidelines. Of course, changes may be made to the recommendations based on feedback received by FASB.
If you are unsure of how to adhere to the new guidelines, how to categorize grants or funds, or just need help with your nonprofit financial management and accounting needs, contact Beck & Company. We offer an array of accounting services for nonprofits to help you manage your resources so, by improving your margin, you fulfill your mission.
Nonprofit Financial Management at 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.