Asc 720-25 Contributions Made

[Ara Kistner]

InBriefNot-for-profit organizations receive financial donations as a matter of course, but the accounting for that revenue depends on whether the transaction is classified as a contribution or an exchange, and the distinction between the two is not always easy to make. FASB has recently released new guidance on how to determine whether a transaction is a contribution or an exchange. The authors explain how the new guidance works and provide examples of how nonprofits should apply it when recognizing revenue from these transactions.

In June 2018, FASB issued Accounting Standards Update (ASU) 2018-08, Clarifying the Scope and Accounting Guidance for Contributions Received and Contributions Made, with the stated purpose of providing guidance in evaluating whether transactions should be accounted for as contributions or exchanges. In addition, the update introduces the concept of barriers in providing additional guidance on identifying conditions that would preclude the recognition of a contribution as revenue.

ASU 2018-08 changes the reasoning process behind classification of transactions, the nuances of which may affect the timing of revenue recognition. Contributions and exchanges are governed by different accounting pronouncements, and therefore may be recognized in different accounting periods and require different disclosures.

ASU 2018-08 applies to all entities that receive or make contributions, including both business and not-for-profit entities (NFPs). The update is expected to have a greater impact on NFPs because contributions are a significant source of their revenue.

Public business entities or NFPs that are conduit bond obligors for securities quoted on an exchange should apply ASU 2018-08 for fiscal years beginning after June 15, 2018. All other entities should apply the update in fiscal years beginning after December 15, 2018.

This article outlines the basic principles of ASU 2018-08 and presents examples of application by NFP recipients of contributions. It presumes the NFPs have adopted ASU 2016-14, Presentation of Financial Statements of Not-for-Profit Entities.

Under ASU 2018-08, any type of entity can be a resource provider or recipient. For example, a provider may be a government agency, a foundation, a corporation, or another entity. A recipient may be either a for-profit business or an NFP.

Pursuant to Accounting Standards Codification (ASC) 720-25, providers should recognize unconditional contributions as expenses in the period made. Providers should defer recognizing any conditional contributions as expenses until all conditions are satisfied. As with revenue recognition, a contribution expense should not be recognized based on an expectation that the recipient is likely to satisfy the condition.

Recipients need to understand the terms of each of their contribution agreements, because none of the indicators listed above definitively distinguish a contribution from an exchange. For example, the sale of goods or services at significantly below-market prices may be deemed to be a partial contribution. Such contributions are measured at the difference between the fair value of the products provided or services performed and the consideration received.

Omega Agency provides residential, rehabilitation, and day programs to individuals with disabilities and their families. Programs are funded by state government grants, Social Security Administration (SSA) and Medicaid fees, customer payments, and contributions. SSA and Medicaid fees are based on the number of qualified individuals and days of service. The state bases the amounts of its grants on costs it deems allowable. Omega submits a report listing allowable costs proposed for the upcoming year, which the state reviews in accordance with its regulations. Based on its review and any of its required revisions, the state authorizes the amounts of its grants.

In determining whether the state grants and the SSA and Medicaid fees are exchanges or contributions, Omega applies the terms of the funding agreements to the indicators noted above. At first glance, it would appear that these grants and fees are contributions. The providers appear to have full discretion in determining the amount of the transferred assets, and also determine the eligibility of individuals to participate in the various programs and the type and amounts of costs that are allowable. Finally, ASU 2018-08 specifically asserts that any public benefit derived from this funding is not an indicator of an exchange.

ASU 2018-08 also specifically asserts, however, that transfers of assets that are part of an existing exchange between a recipient and an identified customer are generally not contributions. In evaluating the agreements, Omega determines that it is providing services to specified individuals who are receiving a benefit of commensurate value. Payments made by the state, SSA, and Medicaid are third-party funding arrangements of this transaction between the agency and specified individuals, which are analogous to health insurance contracts. Accordingly, this is an exchange by definition.

In this instance, Omega applies the applicable guidance, such as Topic 606 or the AICPA Audit and Accounting Guide, Revenue Recognition, to the underlying transaction with the customers and accounts for the payments from the third parties as payments on behalf of those customers.

ABC Foundation is dedicated to achieving gender equality and empowerment. Every year, the network holds an advocacy event that includes performances by major entertainers. This event generates contributions and sponsorships by major corporations. ABC engaged in the following transactions during the year ending December 31, 2019.

This pledge meets the definition of a contribution in that it is an unconditional transfer of cash that is both voluntary and nonreciprocal. By definition, any societal benefit received by Alpha is not considered to be of commensurate value.

As discussed below, the progress reports do not create a barrier that would defer revenue recognition; ASU 2018-08 considers these to be administrative matters that do not rise to the level of a barrier. The payments due on March 1, 2020, and March 1, 2021, however, are subject to a time restriction because the donor does not make these funds available until those dates. As a consequence, ABC Foundation would post the following journal entry on March 5, 2019:

Bravo Corporation (Bravo), a manufacturer of industrial products, pledged $750,000 for the event. The pledge document required ABC to perform specific activities, all of which are consistent with its normal operations. ABC agreed to identify Bravo as a sponsor of the event on its website and in other communications and to permit Bravo to publicize its participation in its corporate advertising. Bravo did not receive any other benefits, such as free tickets to the event, as a result of this sponsorship.

Charlie Corporation (Charlie), a manufacturer of consumer products, pledged $3.5 million for the event. As with Bravo, the pledge document required ABC to perform specific activities, all of which are consistent with its normal operations. It agreed to identify Charlie as a sponsor of the event on its website and in other communications and to permit Charlie to publicize its participation in its corporate advertising.

Any positive sentiment from acting as a donor does not constitute commensurate value received by the provider for purposes of determining whether the transfer of assets is a contribution or an exchange.

One indicator in concluding whether a transfer of assets is a contribution or an exchange is that the positive sentiment from acting as a donor does not constitute commensurate value received by the resource provider. This indicator was the basis for concluding the contribution from Bravo was not an exchange. Charlie, however, receives more than positive sentiment, such as greater visibility than Bravo and the means to promote itself and its products. Accordingly, Charlie is receiving commensurate value as the provider. ABC Foundation would thus apply Topic 606 in accounting for this transaction.

A theoretical question is whether the fair value of the benefits received by Charlie is less than the $3.5 million grant. As discussed below, this circumstance would result in bifurcating the grant into an exchange (publicity) and contribution (the difference between the fair value of the publicity and total amount provided). Given the described circumstances, this contract would be recognized in the same period regardless of whether it was classified as an exchange or contribution. In addition, the determination of the fair value of publicity is highly subjective. Thus, any allocation between exchange and contribution revenue would provide little benefit.

Delta Council coordinates fundraising and other activities with NFPs with similar missions and objectives. Every year, Delta conducts a gala that features dinner and entertainment. During the year ending December 31, 2019, the council receives proceeds of $3.2 million from gala participants and incurs expenses of $700,000.

In the absence of any donor restrictions, the contribution would be classified as without such restrictions; however, if the advertised purpose of the gala is restricted to some purpose, such as a specific research project or capital campaign, the contribution would be classified as with donor restrictions.

These criteria are achieved by the contribution agreement specifying that the recipient must meet the stipulations before becoming entitled to the transferred assets. The agreement does not need to specifically refer to a right of return or release from obligation; it only has to be sufficiently clear to support a reasonable conclusion about when a recipient would be entitled to the contribution. Agreements that have donor-imposed restrictions (as opposed to barriers) and a right of return are not conditional.

Assets received in a conditional contribution should be accounted for as a refundable advance until the conditions have been substantially met or explicitly waived by the donor. Revenue is recognized on the date the condition was met; it is not recognized on the grant date.

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