By Jeff Drew in Journal of Accountancy, June 21, 2018
FASB on Thursday issued an Accounting Standards Update clarifying when a transfer of cash or other assets received and made, primarily by not-for-profits, qualifies as a contribution or an exchange transaction.
The ASU, which amends FASB ASC Topic 958, Not-for-Profit Entities, updates current guidance about whether a transfer of assets — or the reduction, settlement, or cancellation of liabilities — should be accounted for as a contribution or an exchange transaction. Specifically, the ASU establishes criteria for determining whether the asset provider is receiving commensurate value in return for those assets. That determination then dictates whether the organization follows contribution guidance or exchange transaction guidance found in the revenue recognition and other applicable standards.
The new guidance is expected to be particularly helpful in the accounting for grants and similar contracts awarded by governments to not-for-profits. FASB proposed the changes last year after receiving feedback that not-for-profits had run into difficulty deciding whether to characterize grants as exchanges or contributions.
The ASU also provides an enhanced framework for determining whether a contribution is conditional or unconditional, and for distinguishing a donor-imposed condition from a donor-imposed restriction. This is important because such classification affects the timing of contribution revenue and expense recognition.
“The new ASU clarifies whether certain transactions should be characterized as contributions or exchanges,” FASB Chairman Russell Golden said. “It will improve financial reporting by reducing diversity in practice among not-for-profits and other businesses and organizations that make or receive contributions of cash or other assets — most notably in accounting for grants and similar contracts received by not-for-profits from governments.”
The new standard does not apply to transfers of assets from governments to businesses.