The latest FASB Accounting Standards: “How do I characterize thee? Let me count the ways: Fish or fowl; reciprocal or nonreciprocal; conditional or unconditional?”

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There have been a lot of changes in the accounting practices for nonprofits over the past couple of years. It’s not really surprising, because it has been 25 years since the Financial Accounting Standards Board (FASB) has made major updates to generally accepted accounting principles (GAAP) for nonprofits. The recent changes began with Accounting Standards Update (ASU) 2014-09, Revenue from Contracts with Customers (Topic 606), which modified the timing and methods nonprofits use to recognize revenues generated through contracts. ASU 2016-14, Not-for-Profit Entities (Topic 958): Presentation of Financial Statements of Not-for-Profit Entities, which goes into effect this year (“for annual financial statements issued for fiscal years beginning after December 15, 2017”), revises several accounting practices. It changes the classification of net assets from unrestricted, temporarily restricted, or permanently restricted to net assets without donor restrictions and net assets with donor restrictions; increases disclosure requirements, including those related to asset liquidity; and requires that expenses be presented by function.

The most recent update, Accounting Standards Update (ASU) 2018-08, Not-for-Profit Entities (Topic 958): Clarifying the Scope and the Accounting Guidance for Contributions Received and Contributions Made, was released on June 21, 2018, and will take effect in 2019 for most nonprofits. The update attempts to address the longstanding confusion around characterizing grants and contracts, particularly government grants and contracts, as “exchange transactions” or “contributions.” The distinction matters because revenues received from the two are treated differently from an accounting perspective. If revenue is determined to be a contribution rather than resulting from an exchange transaction, it must then be furthered distinguished as being either a conditional or unconditional contribution. Conditions include activities that must occur for the nonprofit to earn the money from the grant or contract. This can be outcome related, raising required matching funds, a right of return of assets if conditions aren’t met, helping a specific number of people, etc. Whether an agreement is conditional or unconditional also depends upon whether the grantor or grantee has primary decision-making authority in terms how the activities are conducted.

To offer some perspective, based on federal definitions, a grant is an award of financial assistance from a government agency to a nonprofit to carry out a public purpose, or what FASB will now refer to as a conditional contribution. Contracts are for the purpose of obtaining goods and services for the purchaser’s benefit—or what FASB calls an exchange transaction. To further clarify this, the ASU specifically points out that benefit provided to the general public is not considered an exchange of commensurate value. Therefore, this is likely to have a big impact on government grants and contracts, which in the past have often been considered exchanges, but many of which will now be treated as conditional contributions.

With some new principles already in effect (ASU 2014-09 and ASU 2016-14) and this latest update becoming effective in just a few months, nonprofits should consult with their bookkeepers and/or accountants to ensure that their financial recordkeeping is in order. If changes are needed, it’s best to start discussing and preparing for those changes now rather than on January 1.

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