In June 2018 the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) No. 2018-08, Not-for-Profit Entities-Clarifying the Scope and Accounting Guidance for Contributions Received and Contributions Made. The ASU clarifies and improves guidance for contributions received and contributions made by clarifying whether to account for transactions as contributions or exchange transactions. The ASU is effective for nonpublic companies for annual reporting periods after December 15, 2019.
When it comes to non-profits, determining whether funding is actually a contribution or exchange transaction can get a bit tricky. ASU No. 2018-08 was issued to help make the determination between a contribution and exchange transaction a bit more black and white and not so grey.
The first question you might have is why does the determination between contribution and exchange transaction matter? The answer is that contributions are accounted for differently than exchange transactions when recognizing revenue.
Contributions are defined by the FASB as “nonreciprocal transfers of cash or noncash items, as well as promises to give”. In other words, if a person or organization decides to give cash or a noncash item to a nonprofit organization without receiving any sort of benefit, the transaction is considered a contribution.
Exchange transactions are defined by the FASB as “reciprocal transfers in which each party receives and sacrifices approximately commensurate value”. What this means is if Organization A provides cash to nonprofit Organization B and Organization A receives a benefit (such as a service) equal in value to the amount of cash given to nonprofit Organization B, the transaction is considered an exchange transaction as both organizations are benefiting from the transaction.
This is not always clear, as sometimes Organization A may provide funding to nonprofit Organization B where A does not receive the benefit directly, but instead the general public receives the benefit. In this scenario, since Organization A is not directly receiving a benefit, the funding would be a contribution (possibly restricted for a specific purpose or possibly conditional).
The clues as to whether the funded amount is an exchange transaction versus a contribution are in the wording of the grant agreement, so it is very important to read these agreements carefully in making the determination.
Please contact your Henry + Horne tax professional with any questions.
Colette Kamps, CPA