It may be time to update your nonprofit policies about how grants and contributions are accounted for in your organization’s financials. FASB issued a proposed Accounting Standards Update (ASU), titled Clarifying the Scope and Accounting Guidance for Contributions Received and Contributions Made. Although the comment period is now closed (it closed November 1, 2017), nonprofits should keep a watchful eye on the final guidelines issued by FASB.
What Are the Proposed Changes to Nonprofit Policies?
The FASB updates its policies and guidelines to help nonprofits account for financial information in a clear, concise manner. One of the areas that can be confusing is how to account for grants and contributions. Are grants and various miscellaneous contributions donations or revenues? What if some fall into one category and some fall into another?
The proposed standards update is intended to help nonprofits distinguish between contributions (nonreciprocal transactions) and exchange (reciprocal) transactions, and conditional and unconditional contributions.
Grants may be defined as contributions (nonreciprocal transactions) when the funds are given without an expectation of a commensurate service in return. A grant awarded to a nonprofit without any requirement for reports, updates, or services in kind may be considered a contribution.
Conversely, grants given with an expectation of commensurate service are considered reciprocal transactions. The grant is awarded in exchange for a service in kind.
Conditional grants are given with certain strings, or conditions, attached. The recipient of the grant may be required to provide reports on their activities or complete various set milestones to receive the grant. Unconditional, as the name suggests, means there are no conditions attached.
If this sounds confusing, rest assured that the FASB provides plenty of examples in their proposed ASU guidelines. Each nonprofit needs to make decisions and judgments about their grant accounting policies based on what makes good sense to them as well as what adheres to both the letter of the law and the spirit of generally accepted accounting practices.
What Happens if a Grant Is a Contribution?
Subtopic 958-605 requires that your organization determines whether a grant is conditional or unconditional. This decision affects the timing of revenue recognition. Unconditional grants may be recognized when the revenue is initially received. Conditional grants are usually recognized when the granting conditions are satisfied.
A few examples of how to differentiate between a conditional and unconditional grant:
- A donor provides a grant but indicates that the organization must overcome a barrier or achieve a specific goal for the conditions of the grant to be satisfied. This is a conditional grant.
- There is a right of return of the assets or a right of release to the grantor from its obligations. This makes it a conditional grant.
There is no one overriding factor that makes a grant conditional. Typically, a barrier must be overcome or there must be some stipulation of what constitutes a release from obligations or the right of return.
Signs of a conditional grant often include:
- Stipulations as to what constitutes the completion of the requirements. Administrative tasks are excluded from the potential signs. Filing a report, an update letter, or some such paperwork may be considered a trivial or administrative task and hence does not influence the choice to categorize the grant as conditional or unconditional.
- Stipulation over how the funds may be spent. This may include requirements on which programs, services, or activities can benefit from the grant.
- Other actions listed in the grant as a requirement.
The ASU recognizes that some grants can be ambiguous or confusing. In that case, the recommendation is to categorize the grant as conditional. And, certain grants may be considered contracts with customers. If that is the case, then the guidelines under Topic 606 apply.
As your organization grows, it’s important to have nonprofit policies in place to guide revenue recognition. The FASB guidelines are constantly updating to reflect changes in the financial environment impacting nonprofits. We hope that you have found this information helpful as you review your nonprofit accounting needs.
RBP Methods is a nonprofit software and consulting firm that helps right-brained people navigate a left-brained world. We offer a wide range of consulting services focused on helping nonprofits manage their accounting and financial needs. Our software choices include Abila, AccuFund and other nonprofit financial management tools. For more information, visit RBP Methods or call us at 503-648-9051.