The Wait is Over: Guidance to Clarify Accounting for Grants and Contributions is Here!

On June 21, 2018, the Financial Accounting Standards Board (FASB) issued Accounting Standards Update (ASU) 2018-08: Clarifying the Scope and Accounting Guidance for Contributions Received and Contributions Made. The question on the minds of many not-for-profit industry professionals has been: should a transaction be accounted for as a contribution or as an exchange transaction? The criteria previously used for evaluating these types of transactions presented many challenges, leaving many practitioners in the dark on how to characterize grants and contributions. The result has been a long history of diversity in practice relating to the accounting for grants and contributions. The highly-anticipated revenue recognition standards have placed an additional focus on these challenges and the need for clarification. The ASU is FASB’s response to improving guidance framework and providing a stronger definition of exchange transactions.

The Short of It

The ASU improves the language surrounding contributions received and contributions made by both not-for-profit organizations and for-profit businesses. For instance, the update provides stronger guidance about whether a transfer of assets (or the reduction, settlement, or cancellation of liabilities) is a contribution or an exchange transaction. Additionally, the update also clarifies the process of determining whether a contribution is classified as conditional or unconditional.

The amendments in the ASU likely will result in more grants and contracts being accounted for as either contributions or conditional contributions than observed in practice under current guidance. For this reason, clarifying the guidance about whether a contribution is conditional is important because such classification affects the timing of contribution revenue and expense recognition.

This information only skims the surface of what the ASU entails. There’s no need to try to read and interpret the ASU on your own. Ellin & Tucker’s not-for-profit industry experts are here to help you navigate through your areas of concern and find the correct accounting solutions for you and your organization.