revenue recognition of grants and contracts by not-for-profit …€¦ · contracts by...

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Revenue Recognition of Grants and Contracts by Not-for-Profit Entities

Presented by: David Odahl, CPA, Senior Manager

Agenda

• Current GAAP on distinguishing exchange transactions from contributions

• FASB ASU 2014-09, Revenue from Contracts with Customers (Topic 606)

• FASB ASU 2018-08, Not-for-Profit Entities (Topic 958): Clarifying the Scope and the Accounting Guidance for Contributions Received and Contributions Made

EXCHANGE TRANSACTIONS AND CONTRIBUTIONS

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Exchange

An exchange (or exchange transaction) is a reciprocal transfer between two entities that results in one of the entities acquiring assets or services or satisfying liabilities by surrendering other assets or services or incurring other obligations.

Characteristics of a Contribution

• Unconditional transfer of assets

• Transfer of cash or other assets (as well as unconditional promises to give) or a reduction, settlement, or cancellation of liabilities

• Transfer of assets from another entity acting other than as an owner

• Transfer is voluntary

• Nonreciprocal transfer

Donor-Imposed Condition—Current

A donor stipulation that specifies a future and uncertain event whose occurrence or failure to occur gives the promisor a right of return of the assets it has transferred or releases the promisor from its obligation to transfer its assets.

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Donor-Imposed Restriction

A donor stipulation that specifies a use for a contributed asset that is more specific than broad limits resulting from the following:

a. The nature of the not-for-profit entity

b. The environment in which it operates

c. The purposes specified in its articles of incorporation or bylaws or comparable documents for an unincorporated association.

Importance of Distinguishing

• Potential for overstating revenues and expenses

• Timing of revenue recognition

• Classification of revenues

• Disclosures

REVENUE FROM CONTRACTS WITH CUSTOMERS (FASB ASC TOPIC 606)

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Overview of Topic 606

• Joint project to converge U.S. GAAP and IFRS

• Replaces the transaction- and industry-specific revenue recognition guidance under current U.S. GAAP with a principles-based approach

• An entity should recognize revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services

Five-Step Approach

• Identify the contract(s) with a customer

• Identify the performance obligation(s) in the contract

• Determine the transaction price

• Allocate the transaction price to the performance obligation(s) in the contract

• Recognize revenue when (or as) the entity satisfies a performance obligation

Definitions

• A contract is an agreement between two or more parties that creates enforceable rights and obligations

• A contract can be written, oral, or implied by an entity’s customary business practices

• A customer is a party that has contracted with an entity to obtain goods or services that are an output of the entity’s ordinary activities in exchange for consideration

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Scope and Scope Exclusions

• Applies to all entities (public, private, and not-for-profit) that have contracts with customers except for a specific list of exclusions (e.g., lease contracts, insurance contracts, and financial instruments)

• Excludes transactions that are not a contract to transfer goods of services to a customer for consideration (e.g., contributions)

WHAT ABOUT GOVERNMENT GRANTS AND CONTRACTS?

Arguments for Exchange Transactions

• Service delivery requirements (e.g., eligibility)

• Proposal process for soliciting and awarding grants for the acquisition of goods or services

• Ability to disallow grant expenses incurred

• Tendency to require grant recipients to obtain certain program results before the government will remit funds to the grant recipients

• Other reimbursement requirements that the government might have

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Arguments for Contributions

• Grant recipient’s discretion to determine the methods, time, and place of service delivery

• A grant amount that is a subsidy to the cost of the goods or services provided

• The government’s desire to have research results disseminated

• Lack of penalties for failure to deliver other than the grant recipient returning unspent funds

FASB ACCOUNTING STANDARDS UPDATE NO. 2018-08

Reciprocal Vs. Nonreciprocal

• A resource provider is not synonymous with the general public

• A benefit received by the public as a result of the assets transferred is not equivalent to commensurate value received by the resource provider

• Execution of a resource provider’s mission or the positive sentiment from acting as a donor does not constitute commensurate value

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Specified Third Parties

• A transfer of assets is neither a contribution made nor a contribution received if it is a payment from a third-party payer on behalf of an existing transaction between the not-for-profit entity and an identified customer

• Examples include payments under Medicare and Medicaid programs and Pell Grants or similar state or local government tuition assistance programs

Conditional Vs. Unconditional

• A donor-imposed condition must have both:

a. One or more barriers that must be overcome

b. A right of return of assets transferred or a right of release of a promisor’s obligation to transfer assets

• Must be determinable from the agreement or another document referenced in the agreement

• Indicators are used to guide the assessment of whether an agreement contains a barrier

Indicators of a Barrier

• The inclusion of a measurable performance-related barrier or other measurable barrier

• The extent to which a stipulation limits discretion by the recipient on the conduct of the activity

• Whether a stipulation is related to the purpose of the agreement

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Measurable Barriers

• Often are coupled with a time limitation

• Specified level of service (e.g., 1,000 meals per week for a soup kitchen)

• Specific output or outcome (e.g., students achieving a minimum standardized test score)

• Ratio or amount of a matching contribution

• Outside event (e.g., resource provider’s net worth reaches a specified level)

• May be achieved in milestone fashion

Limited Discretion

• Limited discretion is more specific than a donor-imposed restriction

• A requirement to follow specific guidelines about incurring qualifying expenses

• A requirement to hire specific individuals as part of the workforce conducting the activity

• A specific protocol that must be adhered to

Related to Purpose of Agreement

• Administrative tasks and trivial stipulations are not indicative of a barrier

• For example, a report that indicates the number of meals that a homeless shelter provided to the homeless would not contribute to achieving the purpose of the agreement

• A research report that summarizes the findings from a grant would contribute to achieving the purpose of the agreement

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Donor-Imposed Condition—Amended

A donor stipulation (donors include other types of contributors, including makers of certain grants)that represents a barrier that must be overcome before the recipient is entitled to the assets transferred or promised. Failure to overcome the barrier gives the contributor a right of return of the assets it has transferred or gives the promisor a right of release from its obligation to transfer its assets.

Terminology

• The type of resource provider does not dictate whether a transfer of assets is accounted for as an exchange transaction or a contribution

• Determining whether a transaction is a contribution depends on whether commensurate value was received in exchange and not upon the terminology used

• Contribution revenue can be presented in the financial statements using different terms

Presentation Example—Facts

NFP A provides daycare services. NFP A received a grant from City B to provide daycare services for children of city employees. The grant is determined to be an exchange transaction and NFP A recognized $25,000 in revenue. NFP A also received a $15,000 grant for teacher education from a foundation. The grant is determined to be a contribution and the restrictions were met in the current year. Additional revenue received during the year was $125,000 in program service fees.

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Presentation Example—Option #1

Contributions $ 15,000

Government grants 25,000

Program service fees 125,000

Total contributions and other support 165,000


Contributions $ 15,000




Grants $ 40,000



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Example 5—Facts

• University D was awarded a grant from the federal government

• Must follow the rules and regulations established by the Office of Management and Budget

• Required to incur qualifying expenses

• Any unspent money is forfeited and return any advanced funding not spent

• Submit a summary of research finding

• University D retains the rights to the findings

Example 5—Conclusion

• Commensurate value is not being exchanged

• University D retains all rights to the research findings and receives the primary benefit along with the public

• Federal government receives an indirect benefit

• The grant agreement limits University D’s discretion because of the requirement to incur qualifying expenses

• There is a right of return and release

Example 15—Facts

• NFP E performs research on various diseases and allergies including gluten-related allergies

• NFP E receives a $100,000 grant from a foundation to perform research on gluten-related allergies

• The grant agreement includes a right of return

• At the end of the grant period a report must be filed with the foundation that explains how the assets were spent

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Example 15—Conclusion

• The grant is an unconditional contribution

• While there is a right of return there are no requirements that would indicate a barrier exists

• The reporting requirement is an administrative requirement and not related to the purpose of the agreement

• There is a donor-imposed restriction because the purpose is narrower than the overall mission of NFP E

Budgets

• Assume the same facts as Example 15

• In addition the grant agreement includes a statement that approval must be obtained from the foundation for any significant deviations in spending from the general budget

• The general budget included in the grant agreement is not a barrier to entitlement because adherence to a general budget allows for broad discretion

Potential Impact

• ASU 2018-08 likely will result in more grants being accounted for as contributions and more contributions being considered conditional

• If a NFP currently accounts for grants as exchange transactions using a cost-reimbursement model the timing of revenue recognition likely would be the same underASU 2018-08

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Disclosures

• No additional recurring disclosures have been added by ASU 2018-08

• Recipients of conditional promises to give are required to disclose the total of the amounts promised and a description and amount for each group of promises having similar characteristics

• Total fundraising (grant-writing) expenses must be disclosed in the financial statements

Example Disclosure

Note X—Conditional Promises to Give

NFP A has numerous grants for which the grantor agencies’ promises to give are conditioned upon NFP A incurring certain qualifying expenses under the grant programs. At December 31, 2019, these conditional promises to give totaled approximately $1,000,000. These promises will be recognized as revenue when the respective conditions are met in future years.

Example Expenses by Function

Program services

Program A $ 430,000

Program B 240,000

Supporting activities

Management and general 70,000

Grant-writing 10,000

Total expenses 750,000

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Example Grant-Writing Disclosure

The costs of program services and supporting activities have been summarized on a functional basis in the statements of activities. Accordingly, certain costs have been allocated amount the program services and supporting activities benefited. Immaterial amounts of grant-writing expenses are included in management and general expenses.

Effective Date of ASU 2018-08

• Annual periods beginning after December 15, 2018 for transactions in which the entity serves as a resource recipient (same as ASU 2014-09)

• Annual periods beginning after December 15, 2019 for transactions in which the entity serves as the resource provider

• Early adoption is permitted

Thank You

David Odahl, CPA, Senior Manager

Wegner CPAs

2921 Landmark Pl Ste 300

Madison, WI 53713

(608) 442-1944

[email protected]

www.wegnercpas.com

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