Why Nonprofits Should Pay Close Attention to Contributions in 2019
Last month I wrote an article about how nonprofit organizations should account for grant funding in light of changes brought about by the Financial Accounting Standards Board’s (FASB’s) new revenue recognition standard, technically known as ASC 606. Although FASB issued clarification on contributions received (ASU 2018-08) on the topic, the new standards can be difficult to understand. But nonprofits don’t have time to wait for a more explicit explanation—the new standard is in effect for calendar year 2019.
In my previous article, I talked about how a shift in the definition of a “contribution” has made it so most grant funds should now be recorded as contributions rather than exchange transactions. This is just but one element of the change. While nonprofit organizations have always had to determine whether a contribution is “conditional” or “unconditional,” they must now do so using a new definition for conditional.
To help you better understand how to account for the contributions—particularly the grant funds—your nonprofit organization receives, here’s what you should know about conditional contributions:
A conditional contribution has a donor-imposed condition.
For a donor-imposed condition to exist, the contribution must have both of the following:
1. One or more barriers that must be overcome before the recipient is entitled to the contribution (i.e., assets transferred or promised). Types of barriers could include:
♦ Measurable performance-related barriers, such as a specified level of service, number of units, or outcome.
♦ Limited discretion how the activity is conducted, such as hiring specific individuals or incurring qualifying expenses (i.e., allowable costs for federal grants).
♦ Specific protocols or stipulations related to the purpose of the agreement, such as an animal shelter to expand its facilities to accommodate a specified number of additional animals. This does not include administrative or trivial stipulations, such as routine reporting or providing an annual report.
2. A right of return to the donor, or a right of release from a promise to give, if the recipient does not overcome the barrier(s).
Here’s an example: Say your nonprofit receives grant funding to provide 1,000 meals at a homeless shelter. The grant agreement says if your organization doesn’t serve the meals, you won’t get the funds. The barrier (you must serve 1,000 meals) and right of return (or else you don’t get the funds) make this a conditional contribution.
Of course, this scenario describes most grants, so this may not be news to you. But wait, there’s more…
The likelihood of whether or not the condition will be met is no longer a consideration for a conditional contribution.
In the past, nonprofit organizations have been able to use a “likelihood assessment” to determine whether a contribution was conditional or unconditional. For instance, if the grant agreement required an organization to serve 1,000 meals to receive the funds, the organization would then determine whether or not it was likely to meet the condition. If the answer was “likely,” the organization could automatically consider the contribution to be unconditional and recognize it as such. Needless to say, very few organizations had conditional contributions on their books!
Now, thanks to the clarified rules regarding contributions received, the likelihood of whether or not the condition will be met is no longer a consideration for determining a conditional contribution. The recipient must actually meet the condition before recognizing it as unconditional.
There’s a difference between a donor-imposed condition and a donor-imposed restriction.
If a contribution comes with a specific barrier and a right of return, it’s a donor-imposed condition. Donor-imposed restrictions, on the other hand, are generally less specific. When these are involved, the donor might stipulate that the funds be used for a certain program or within a designated time frame, but it wouldn’t include the specifics of a condition.
How should your organization account for and disclose conditional contributions in 2019?
Here are a few key takeaways:
♦ Do not record a conditional contribution as a contribution until it has overcome the barrier.
♦ Record any advances of funds made prior to conditions being met as refundable advances.
♦ Disclose in your financial statement the total amounts promised as well as a description and amount for each group of promises that have similar characteristics.
We’re here to help.
You can recognize unconditional contributions on your statement of activities as soon as your organization is notified of the contribution. Pretty straightforward, right? The new definition of conditional contributions can make things a little more complicated. The most important thing to remember is to fulfill any donor-imposed conditions before recognizing a conditional contribution as revenue.
And don’t forget we’re here to help. If you’d like guidance in applying the new revenue recognition standard or the clarified standard on contributions received to your nonprofit, please give your AEM advisor a call today.