NFP ASU 2018-08 Contributions Made and Received · 2018. 10. 18. · Issue 1: Exchange vs Nonexchange • Refines existing guidance in Subtopic 958 ‐605 to clarify the scope of

ASU 2018‐08

Not‐for‐Profit Entities (Topic 958): Clarifying the Scope and Accounting Guidance for Contributions Received and Contributions Made

Kimberly DeWoody, CPA

• Baylor University, Bachelors and Masters in Accounting

• Audit Partner –Fort Worth Office and Non‐Profit Practice Leader

• Over twelve years of public accounting experience focused on public and private clients

• Industry focus –non‐profits, manufacturing/distribution, energy, employee benefit plans

[email protected] 817.259.9254

3

Charlie Kennimer, CPA

• University of Texas at Arlington, Bachelors in Accounting

• Senior Manager –Fort Worth Office

• Over nine years of public accounting experience focused on private clients

• Industry focus –non‐profits, manufacturing/distribution, construction, real estate, employee benefit plans, and healthcare

[email protected] 817.259.9708

4

Timeline

• August3,2017–FASBissuedtheexposuredraft

• November1,2017–Duedateforcomment letters

• December 13, 2017 – FASB discussed summary of commentsreceivedontheproposedUpdate

• February14,2018–FASBredeliberations

• June21,2018–FASBissuedASU2018‐08

Background

• What is the Objective?– Improve and clarify existing guidance on revenue recognition of grants and contracts by not‐for‐profit entities

• Why?– Long‐standing diversity in practice relating to treatment of grants and contracts as contributions or exchange transactions

• Who does it apply to?– Applies to all entities (NFPs and business entities) that receive or make contributions

– Applies to both contributions received by a recipient and contributions made by a resource provider.

Effective Date

• For Recipients (early adoption permitted)– NFP that has issued or is a conduit debt obligor for, securities that are traded, listed, or quoted on exchange, or an over‐the‐counter market

• Annual periods beginning after June 15, 2018

– All other entities• Annual periods beginning after December 15, 2018• Calendar year end December 31, 2019• Fiscal year ends 2020 (i.e. June 30, 2020 or September 30, 2020)

Effective Date

• For Resource Providers, effective date will be delayed by one year– NFP that has issued or is a conduit debt obligor for, securities that are traded, listed, or quoted on exchange, or an over‐the‐counter market

• Annual periods beginning after December 15, 2018

– All other entities• Annual periods beginning after December 15, 2019

Overview

• Step 1: Classifying grants as exchange (reciprocal) or nonexchange (nonreciprocal).

• Step 2: If nonexchange, classify grant as conditional or unconditional.

Issue 1: Exchange vs Nonexchange

• Refines existing guidance in Subtopic 958‐605 to clarify thescope of contribution accounting and expand the illustrativeexamples– Emphasis on direct, commensurate value to the grantor for reciprocal (exchange) transactions

• Benefit to general public or specified third parties does not equal commensurate benefit to grantor

• Furthering the grantor’s mission does not equal commensurate value to the grantor

– The type of grantor should not override the substance of the transaction




Consideration for government grants– Historically … considered reciprocal as the governmentdoesn’t make contributions and entity is paid for servicesperformedgovernment’sbehalf

– Now… funded by government but activities are carried outfor thebenefitofgeneralpublic

• Likely, will result in more nonreciprocal transactions since noexchangeofcommensuratevalue.

• However, impactonfinancial statementsmaynotbesignificant.

Issue 2: Conditional vs. Unconditional

• Clarifies and refines existing guidance in Subtopic 958‐605 byindicating that a contribution must satisfy 2 thresholds to beconsideredconditional:

(1) A right of return to the promisor for the transferredassets or a right of release of the promisor from itsobligationto transferassets

AND(2) Abarrier thatmustbeovercomebefore the recipient is

entitled to the assets transferred or promised. A barrierisdescribedthroughtheuseof indicatorsandexamples


• IndicatorsofaBarrier:– Measurableperformancerelatedbarrier– Measurableotherbarrier– Relatedtothepurposeof theagreement– Recipienthas limiteddiscretionoverhowthe transferredassetswouldbespent


Performance‐relatedandothermeasurablestipulations:• Provideaspecific levelofservice

– Serve1,000mealsperweek inasoupkitchen.• Achievespecificoutcome

– Must lower thehigh‐school dropoutrate to10%.• Raisematchingcontributions ($or%)

– Forevery$1,000contributed,mustraise$500.• Specificevents

– Acompanypromises to contribute$XX if its networthor stockpricereachesaspecific level.


Stipulationsthat limit therecipientsdiscretion:• Hire specific individuals as part of workforce conducting theactivity.

• Adhere tospecific researchprotocol.• Follow specific guidelines about qualifying allowableexpenses.– Federal grants that include requirement to comply withfederalcostprincipals.


Stipulationsmustrelate tothepurposeof thegrant:• If trivial or administrative conditions that are remote, thenrequirement isnotaCondition.(1) Submit a report to grantor summarizing research

findings• Relatesdirectlytopurpose,couldconstituteabarrier.

(2) Submit a report that indicates how the grantor’sresourceswerespent.

• Relatestoevaluatinggrantcompliance,notabarrier.

Recognizing Revenue for a Conditional Contribution

• Recipients–When thecontribution isno longer conditional

• Nolongerarightof returnof release• Barrier(s)hasbeenovercome

– Funds received in advance would be recorded as aliability in the recipient‘s books

• Donors–Contributions made generally should be recognizedby the donor at the same time the recipientrecognizes the contribution received• Donor does not recognize until the contribution hasbecomeunconditional

• Donor follows the same determination criteria as therecipient

Recognizing Expense for a Conditional Contribution

Pop Quiz #1

• Which of the following is a required element of aconditional contributionunder theASU?A. Direct, commensurate valueB. Reciprocal transactionC. Right of return or release from obligations to

transfer assetsD. Limiteddiscretionby thedonor

Pop Quiz #1 Answer

• Which of the following is a required element of aconditional contributionunder theASU?A. Direct, commensurate valueB. Reciprocal transactionC. Right of return or release from obligations to

transferassetsD. Limiteddiscretionby thedonor

Transactions from Third Party Payers

• Does the payment represent a new, separatetransaction?

• Is thereanexisting reciprocal transaction?

• WouldNOTbeconsidered revenueby the recipient

• Would only flow through the statement of financialposition

Example 1: Exchange Transaction vs. Conditional Contribution

• Scenario:– University A was awarded a 3‐year grant from NationalInstitutesofHealth (NIH) to funddiabetes research

– Terms of the grant include a line‐item budget that requiresUniversity A to incur certain qualifying expenses and followall relevant federal regulations

– UniversityA forfeits fundsnotusedwithin the3‐yearperiod– UniversityAretains therights to theresearch findings

• Accounting under current GAAP:– University A concluded that NIH receives commensuratevalue through the societal benefit to the public from theresearchandpotential cure fordiabetes

– University A accounts for this grant as an exchangetransaction and records unrestricted revenue as it incursexpenses


• Analysis under the ASU:– No commensurate value received by NIH. Transaction is acontribution.

– Agreement has a measurable barrier (qualifying expenses)and limited discretion (federal regulations) AND a right torelease fromobligation. Contribution is conditional.

– Use of the funds it limited to funding diabetes research.Contribution isdonor‐restricted.


• Accounting under the ASU:– University A would record revenue in donor restricted netassets as it incurs qualifying expenses. Incurring theseexpenses would also trigger recording net assets releasedfromrestrictions.

– If University A has a policy to report contributions whoserestrictions are met in the same reporting period asunrestricted, it would record grant revenue as unrestrictedandtherewouldbenonetassets releasedfromrestrictions.


Example 2: Unconditional vs. Conditional Contribution

• Scenario:– NFP B was awarded a 2‐year $100,000 grant fromFoundation C to provide meals to children and mothers inneed

– Grant requires NFP B to use the funds to provide 200,000meals. The agreement specifies a pro rata right of return formealsnot servedwithin the2‐yearperiod.

• Accounting under current GAAP:– NFPBconcludes that thetransaction isacontribution– NFP B routinely serves 1 million meals annually and viewsthe likelihood of not meeting the condition of providing200,000meals as remote. The contributionswas deemed tobeunconditionalanddonor restricted

– NFP B records donor restricted revenue for $100,000 uponreceiptof thegrantagreement


• Analysis under the ASU:– NFP B concludes the transaction is a donor‐restrictedcontribution

– However, the requirement to provide 200,000 meals is abarrier that must be overcome. Also, there is a right ofreturn. NFP B concludes that this is a conditionalcontribution.

– NFP B would record a liability for any funds received inadvanceand recorddonor restricted revenue (andnetassetsreleased)as themealsareserved.


Pop Quiz #2

• Whichof the following isNOTan IndicatorofaBarrier?A. Donor will grant NFP $50,000 if the NFP also raises

$50,000 tomatchB. Donorwill grantNFP$100,000during thenext2years ,

but the NFP has to refund the money if it is not spentwithin the2years

C. Donor will grant NFP $150,000 if 1,000 studentsreceiveaminimumstandardizedtest score

D. Donor will grant NFP $200,000 but the NFP may onlyapply the funds toqualifiedexpense

Pop Quiz #2 Answer

• Whichof the following isNOTan IndicatorofaBarrier?A. Donor will grant NFP $50,000 if the NFP also raises

$50,000 tomatchB. Donorwill grantNFP$100,000 during thenext 2 years,

but the NFP has to refund the money if it is not spentwithin the2years

C. Donor will grant NFP $150,000 if 1,000 studentsreceiveaminimumstandardizedtest score

D. Donor will grant NFP $200,000 but the NFP may onlyapply the funds toqualifiedexpense

Cheat Sheet: Steps for Analyzing Transactions

1. Is the agreement a Contribution or anExchange transaction?

2. If it is a contribution, is the contributionConditionalorUnconditional?

3. If the contribution, is unconditional is itDonorRestrictedorUnrestricted?

Contribution or Exchange?

• NFP Research University was awarded $1M grant from apharmaceutical company to finance the costs of a clinical trial ofanexperimentalcancerdrug

• Pharma Co specifies the protocol for testing, number ofparticipants to be tested, dosages to be administered andfrequencyandnatureof followups

• Pharma Co requires a detailed report of the test outcome andrights tostudybelongtoPharmaCo.

• Is the$1Macontributionorexchangetransaction?

• Answer: Exchange

• Why?–Pharma Co. is receiving commensurate value asthe resourceprovided.



• Mary is enrolled at University A.Mary’s total tuition charged forthesemester is$30,000.

• Mary received a grant in the amount of $2,000 to use towardthe tuition fee,which is paiddirectly by thegrantor toUniversityA.

• Is the $2,000 received by University A a contribution orexchangetransaction?


• Answer: Neither

• Why?– ThegrantwasawardedtoMary,not toUniversityA.– Mary and University A have an exchange transaction.The $2,000 grant does not create additional revenuebut, rather, serves as a partial payment against the$30,000duetoUniversityA.


• Local government provides funding to a NFP C to perform aresearchstudyonthebenefitsofa longerschoolyear.

• NFP C plans the study, performs research and summarizes andsubmits theresearchto the localgovernment.

• Localgovernmentretains therights to thestudy.

• Is the fundingacontributionorexchange?


• Answer: Exchange

• Why?– NFP has a procurement arrangement andcommensuratevalue isbeingexchanged.

– Localgovernmentretains therights to thestudy.


• NFP University applied for and was awarded a grant from thefederalgovernment

• NFP U must follow the rules and regulations established byUniformGuidanceandtheawardingagency

• NFP U is required to incur qualified expenses to be entitled tothe assets and any unspent money during the specified time isforfeited

• NFPU is required to submit a summaryof research findings, butNFPUretains therights to the findings

• Is thegrantacontributionorexchange?


• Answer: Contribution

• Why?– Commensuratevalue isNOTbeingexchanged.– University retains the rights to the research and findingsand the University as well as public receive primarybenefit.

Conditional or Unconditional?

• NFP B is a hospital that has a research program. NFP B appliesfor and receives a $300K grant from a federal agency to fundthyroidcancer research.

• Terms of the grant include a standard budget and specify thatNFP B must incur qualifying expenses in compliance withUniformGuidanceandtheawardingagency

• The grant is paid on a reimbursement basis and requires anannualaudit

• Any unused assets are forfeited and any unallowed costs thathavebeendrawndownmustberefunded

• Is thecontributionconditionalorunconditional?

Conditional or Unconditional

• Answer: Conditional

• Why:– LimiteddiscretionbyNFPdue to requirement tospend on qualifying expenses and right ofrelease.


• NFPEworkswith gluten‐relatedallergies aspart of its overallmission.It applied for and received a $100K grant from a foundation toperformresearchongluten‐relatedallergiesover thenextyear.

• Agreement includesarightof return• Agreement indicates that the general budget submitted with the

grant proposal must be followed or that approval must be obtainedfromthefoundationforsignificantdeviations inspending

• Agreement requires at the end of the grant period a report must befiledexplaininghowtheassetswerespent



• Answer: Unconditional&DonorRestricted

• Why:–Norequirementswhich indicate abarrier.–Assets must be used for purpose which isnarrower thanoverallmission.


• NFP F is a hospital that received an upfront cash contributionfrom an individual to perform research on Alzheimer’s diseaseduring thenextyear.

• Theagreementdoesnot includearightof return



• Answer: Unconditional&DonorRestricted

• Why:–Noright of return.–Assets must be used for purpose which isnarrower thanoverallmission.


• NFP J operates a homeless shelter and provides meals to thehomeless.

• NFPJ receivesanupfrontgrantof$75K fromadonor.• The grant requires NFP J to use the assets to provide 5,000meals to thehomeless.

• The grant contains a right of return for meals not served andtherearenominimumthresholds.




• Why:–Agreement has a measurable performance‐related barrier (provide 5,000meals) and a rightof return.


• Foundation A givesNFPD a grant in the amount of $400,000 toprovidespecificcareer training todisabledveterans.

• Grant requires NFP D to provide training to at least 8,000disabled veterans during the next fiscal year (2,000 during eachquarter), with specific minimum targets that must bemet eachquarter.

• FoundationA specifies a right of release fromtheobligation thatit will only give NFP D $100,000 each quarter if NFP Ddemonstrates that those services havebeenprovided to at least2,000disabledveteransduringthequarter.

• Is thegrantconditionalorunconditional?



• Why:–Agreement has a measurable performance‐related barrier (2,000 disabled veterans perquarter)and right of releaseofobligation.


• Foundation B receives a grant proposal from an animalrescue facility, NFP F, which requests a 2‐year grant in theamount of $500,000 upfront to be used to expand itsoperations.

• Theagreement indicates thatNFP Fmust expand its facilityby at least 5,000 square feet to accommodate additionalanimalsby theendof the2years.

• The grant contains a right of return if the minimumexpansiontarget isnotachieved.

• Is thegrantconditionalorunconditional?



• Why?– Includes a measurable barrier that must beachieved to be entitled to the assets and a rightof return for unused assets or unmetrequirements.

Conditionalor Unconditional?

• NFP G is conducting a capital campaign to build a new building andmake improvements to its existing building, including a new HVACsystemandanupgradedtelephoneandcomputernetwork

• NFPG receives an upfront grant of $10K fromaprivate foundation inresponsetoaproposal submittedaspartof itscapital campaign

• Includes a right or return if the funds are not used for the purposesoutlined inthecapital campaignsolicitationmaterials

• Donordoesnot includeany specificationsonhowthebuilding shouldbeconstructedorhowother improvementsshouldbemade



• Answer:Unconditional&Donor restricted

• Why?– Agreementplaces limits onlyon the specific activity thatis being funded and resource provideddoes not includeanyspecifications.

– Donor restricted because it must be used for capitalpurposes.


• NFPHisamuseumthatownsthe land it ison.Adonorrespondedtoagrantsolicitation from NFP H to build a new wing onto the existing museumbuilding.

• Agreementcontainsa$1Mmultiyearpromise togive themoney tobeusedforthenewwing

• Agreement includes specificbuilding requirements, includingsquare footageandenvironmentalspecifications

• The first installment of the gift will not be paid until NFP H submitsarchitecturaldesignsthatmeettherequirements

• Additional installments will be paid in specified increments upon meetingspecificrequirements

• If thebuilding isnotbuilt incompliancewith thegrantagreement, thedonorisreleasedfromitsobligationtomakeinstallmentpayments

• Isthecontributionconditionalorunconditional?


• Answer:Conditional

• Why?–NFP is not entitled to the assets until amilestone is met (measurable performancebarrierand releaseofobligation)


• NFP H is a recreational organization that provides various sportsprogramstochildrenthat live inthecommunity.

• NFP H receives an upfront grant in the amount of $40,000 from afoundationtobeusedtowarditstennisprogram.

• Consistent with NFP H’s grant proposal, the agreement includesspecific guidelines for could use of the assets (for example, to hire 10tennis instructorsortoprovideasummercampfor9weeks)

• Agreementdoesnot specify thatNFPH’sentitlement to the$40,000 isdependent upon NFP H meeting any of the specific indicatedguidelines intheagreement.

• The grant contains a right of return for funds not spent on the tennisprogram.

Conditional vs. Unconditional

• Answer:Unconditional&Donor restricted

• Why?–Nobarrier toovercome.–Donor restricted because it must be used fortennis program, which is narrower than overallmission.

Contribution of an Interest in an Estate

• In 19X0, Individual notifies Church F that she has rememberedthechurch inherwill andprovidesawrittencopyofthewill.

• In19X5, Individualdies.• In 19X6, Individual’s last will and testament enters probate and

the probate court declares the will valid. The executor informsChurch F that the will has been declared valid and that it willreceive 10 percent of Individual’s estate, after satisfying theestate’s liabilitiesandcertainspecificbequests.

• The executor provides an estimate of the estate’s assets andliabilities and the expected amount and time for payment ofChurchF’s interest intheestate.

Contribution of an Interest in an Estate

• The 19X0 communication between Individual and Church F specifiedan intention to give. The ability to modify a will at any time prior todeath is well established; thus in 19X0 Church F did not receive apromisetogiveanddidnotrecognizeacontributionreceived.

• When the probate court declares the will valid, Church F wouldrecognize a receivable and revenue for an unconditional promise togiveatthefairvalueof its interest intheestate.

• If thepromisetogivecontained in thevalidwillwas insteadconditionalbased on a barrier thatmust be overcome for Church F to be entitledto the assets, Church F would recognize the contribution when thecondition was substantially met. A conditional promise in a valid willwouldbedisclosedinnotestofinancialstatements.

Transition Approach

• Modified Prospective Approach– Apply to agreements that are either

(1) Incomplete as of the effective dateor

(2) Entered into after the effective date

– No restatement of prior amounts recognized

• Retrospective application is permitted

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Transition Approach

• TransitionDisclosures– Nature of, and reason for, the change in accountingprinciple

– Reasons for significant changes in each financialstatement line item in the current reporting periodresulting fromtheamendments

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Questions

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Documents

NFP ASU 2018-08 Contributions Made and Received · 2018. 10. 18. · Issue 1: Exchange vs Nonexchange • Refines existing guidance in Subtopic 958 ‐605 to clarify the scope of