Now is the time to update your nonprofit accounting policies for a clear and concise categorization and accounting of grants and contributions for your organization’s financials. The Accounting Standards Update (ASU), titled Clarifying the Scope and Accounting Guidance for Contributions Received and Contributions Made, still has changes coming. Even though the comments period has ended (as of November 1, 2017), nonprofits should still keep an eye on the final guidelines issued by the FASB. The proposed changes would clarify revenue recognition for contributions received and made, and will help nonprofits account more clearly for certain types of funds.
What Is the Proposed Change and Framework for Nonprofit Policies?
An area of confusion for nonprofits is how to account for grants and contributions. The proposed changes are intended to help nonprofits distinguish between contributions (nonreciprocal transactions) and exchange (reciprocal) transactions. The changes will also add clarity to conditional and unconditional contributions. The results of the proposed framework changes may 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. The 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 the grant can be categorized as an exchange transaction.
Be reassured that, as part of the proposed guidelines, the FASB included numerous examples to help nonprofits understand the proposed framework and changes made. Each nonprofit will need to determine for themselves how the revenues will be categorized. Nonprofits still have a great deal of freedom in how and why they categorize particular revenues. However, they must stick to their own internal logic and establish their own guidelines that are based on the overarching, generally accepted accounting standards.
When Will the Changes Take Effect for Nonprofit Accounting?
It is important to remember that, if these 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. This gives nonprofits plenty of time to update their accounting methods, as any accounting actions completed before these given dates are to follow the old guidelines. With the new changed guidelines, make sure to note in your financials next to every line that is affected by a significant change made between the previous books and the new books.
Accounting for Nonprofits Is Always Changing
Although it may seem as if nonprofit accounting 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. Other grants, that come with conditions, need careful, thoughtful attention as how to categorize. Developing your own set of revenue recognition rules for your nonprofit accounting team, that are in line with the FASB recommendations, may be helpful to keep your organization consistent in how it manages its grant funds.
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