Clarification for Accounting Changes
The Financial Accounting Standards Board (FASB) has provided guidance and clarification for their recent updates regarding Revenue Recognition. Correctly accounting for grants and contributions is an issue for not-for-profit entities since both are a significant source of revenue. Since grants and contributions are often the main source of revenue for not-for-profit entities, it is imperative that they be classified correctly when restrictions and conditions apply. Determining the donor’s intention is critical and affects the timing in recognizing revenue and the manner in which the contribution is accounted for.
The FASB ruling is effective for annual periods beginning after December 15, 2018, but early adoption is permitted.
Donor-imposed restrictions specify a use, such as a particular program or service, or to acquire buildings or equipment. A donor may impose a restriction that is perpetual in nature, such as gifts to an endowment fund.
Donor-imposed conditions must have both: one or more barriers that must be overcome before the recipient is entitled to the assets transferred or promised, and a right of return to the contributor, or release from its obligation. The condition must be determinable by way of an agreement sufficiently clear to be able to support the conditions. Barriers could be performance related and should be measurable. One example would be challenge, or matching, grants whereby the revenue is recognized when the conditions have been met.
The extent of donor-imposed restrictions and/or conditions is a key factor in determining when to recognize grant and contribution revenue. We encourage our clients to begin accounting for all receipts with these definitions in mind. Please contact your audit representative here at Earney & Company, L.L.P. with any questions, or if you need assistance in making changes in your accounting systems.