In June 2018, the Financial Accounting Standards Board (FASB) in the United Stated issued an Accounting Standards Update (ASU) (No. 2018-08, Not-for-Profit Entities, Topic 958) which 1) clarified the accounting for contributions received and made by nonprofits and 2) clarified the accounting for federal grants and similar contracts received by nonprofits.
According to the ASU, when considering whether or not contributions are unconditional or conditional and thus whether or not they should be recognized or deferred, the nonprofit must consider the following:
- Does a "barrier" exist for which the nonprofit must overcome in order to be entitled to the contribution; and
- Does a right to return the contribution exist if that barrier noted above is not met.
If both of these scenarios are met, nonprofits should consider the contribution as “conditional” and thus recorded as deferred on the financial statements.
Likewise, the ASU requires nonprofits to consider whether US federal grants are reciprocal or nonreciprocal and whether commensurate value is transferred. As such, most nonprofits going forward will find themselves classifying US governmental grants as conditional contributions rather than as exchange transactions as was previously common practice.
More information on this ASU can be found on FASB’s website.
