When the Financial Accounting Standards Board (FASB) released new rules for revenue recognition, contributions were specifically excluded from the scope of the revenue recognition standard. This prompted the FASB to provide further guidance in its Accounting Standards Update (ASU) No. 2018-08, Not-for-Profit Entities (Topic 958): Clarifying the Scope and Accounting Guidance for Contributions Received and Contributions Made.

Because of these new rules, there will likely be more grants and similar contracts being accounted for as contributions that had been under current Generally Accepted Accounting Principles (GAAP).

Why the new rules?

The new rules reflect FASB’s position that nonprofits have taken inconsistent approaches when characterizing grants and contracts as exchange transactions (reciprocal) rather than contributions (nonreciprocal transactions). There has also been diversity in practice in determination of whether a contribution is conditional or unconditional, according to FASB. With this disparity in practice, some nonprofits account for government grants as contributions, while other organizations account for them as exchange transactions. The distinction is important because these two types of revenues received are treated differently from an accounting perspective.  Contributions generally are reported in the period the pledge or commitment to donate is received, whereas exchange transactions are subject to the revenue recognition rules, including robust disclosure requirements.

When is it a contribution or exchange transaction?

When characterizing a grant or similar contract, a nonprofit must evaluate whether the “provider” (the grantor or another party to a contract) receives commensurate value in return for the assets transferred. If so, the transaction is an exchange transaction.

The ASU makes clear that “the provider” is not synonymous with the general public; therefore, an indirect benefit to the public because of the asset transfer does not constitute “commensurate value received.” Execution of the provider’s mission or the positive sentiment from acting as a donor also doesn’t equate to the commensurate value received.

If the provider doesn’t receive commensurate value, the nonprofit must then determine if the asset transfer represents a payment from a third party for an existing transaction between the nonprofit and an identified customer (for example, Medicare or a Pell Grant). If so, the transaction isn’t a contribution and other accounting guidance would apply. If not, it’s a contribution.

A careful review of the specific characteristics of the transaction should be considered from the perspective of both the resource provider and the recipient to determine whether the transaction is a transfer of assets or a contribution.

When is contribution revenue recognized?

Conditions of a contribution affect when the revenue is recognized. This ASU explains that a conditional contribution comes with:

  1. a barrier the nonprofit must overcome to receive the contribution, and
  2. either a right of return of assets transferred or a right of release of the promisor’s obligation to transfer assets if the condition is not met.

An unconditional contribution is recognized when promised or received. However, a conditional contribution isn’t recognized until the barriers to entitlement are overcome.

To assess whether the nonprofit must overcome a barrier to receive the contribution, it should consider the following indicators:

  • Does the agreement include a measurable performance-related barrier or other measurable barriers (for example, raising a certain amount of matching funds)?
  • Are there limits on the nonprofit’s discretion over how to conduct an activity (for instance, a requirement to hire specific individuals to run a new program)?
  • Is there a stipulation that relates to the purpose of the agreement (excluding administrative tasks and trivial stipulations, such as producing an annual report)?

Depending on the circumstances, some indicators might prove more important than others. No single indicator will determine the outcome and therefore a careful review is important and use of judgment is required.

The ASU contains helpful guidance for implementation and practical examples and illustrations to assist you with the implementation.

When is this effective?

The new rules are effective for most nonprofit organizations who are resource recipients for annual reporting periods beginning after December 15, 2018. For nonprofit organizations who are resource providers, the new rules apply one year later. Early adoption is permitted.

We can help you determine the best course forward for your organization’s accounting practices.

About the Authors

Katie A. Allender

Manager, Assurance and Advisory



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