For most nonprofits, revenue is contributions and grants, and the question that decides timing is whether a promise is conditional or unconditional. An unconditional promise is recognized as revenue when made. A conditional one is not recognized until the condition is met.
ASU 2018-08 clarified how that distinction works and added a first step: deciding whether a transfer is a contribution at all. The steps below follow that order. For the broader financial statement framework, see nonprofit financial statements under ASC 958.
Step 1: Contribution or exchange transaction
A contribution is an unconditional transfer of cash or other assets, or a settlement or cancellation of liabilities, in a voluntary nonreciprocal transfer. The resource provider does not receive commensurate value in return. In an exchange transaction, each party receives and sacrifices something of roughly equal value. Exchange transactions fall under ASC 606 for most nonprofits, not ASC 958-605.
The questions that matter after ASU 2018-08:
- Does the resource provider receive commensurate value? Benefits to the public at large from the organization's mission do not count as value received by the provider.
- Is the party providing the resources a government, or a private funder? The type of provider does not decide the answer. A government agency can make a contribution or buy services in an exchange.
- Is the grant a payment for goods or services delivered to the funder, for example a contract to deliver training that the agency will use, or support for the organization's own program?
If the answer is that the funder is buying something, apply ASC 606. If the funder is supporting the mission without receiving commensurate value, apply ASC 958-605. Document the conclusion for each major grant in the file.
Fundraising events and memberships often have both a contribution element and an exchange element. A dinner ticket partly pays for the meal and partly supports the organization, and the portion that is exchange revenue is determined by the fair value of what the attendee receives.
Step 2: Is the contribution conditional
ASU 2018-08 clarified the test. A contribution is conditional when the agreement includes both:
- a barrier that must be overcome before the recipient is entitled to the assets, and
- a right of return of assets transferred, or a right of release of the promisor's obligation to transfer assets, if the barrier is not overcome.
Both must be present. A right of return alone, on a purely administrative or trivial stipulation, does not make the gift conditional. A barrier alone, with no right of return or release, does not either.
Indicators of a barrier
The Codification gives indicators to assess barrier, taken together and with judgment:
- a measurable performance-related barrier or other measurable barrier, for example serving a minimum number of participants, holding an event or reaching a matching amount
- a limited discretion by the recipient in the conduct of the activity, for instance when the funder dictates the method or the budget in detail
- a stipulation that is related to the purpose of the agreement, as opposed to one that is merely administrative, such as a reporting or filing requirement
No single indicator decides. A requirement to file a periodic report, standing alone, is typically administrative. A requirement to spend funds only on reimbursed costs and return unspent funds is more likely a barrier with a right of return.
Cost-reimbursement grants
A common situation for nonprofits is a government or foundation grant that reimburses allowable costs. The usual analysis is that incurring qualifying costs is a barrier, and the funder's right to withhold payment, or to recover unallowable amounts, is a right of release or return. Those grants are often conditional, and revenue is then recognized as qualifying expenses are incurred. The result depends on the terms of the agreement.
Matching and challenge grants
If a gift is payable only if the organization raises matching funds from others, the matching requirement is typically a barrier and the right of release applies if the match is not raised. The revenue is recognized when the match is achieved.
Step 3: Accounting for each case
Unconditional promises
An unconditional promise is recognized when it is received, at fair value, in the class of net assets that matches any donor restriction, purpose or time. Multi-year promises are measured at the present value of expected future cash flows, with the discount accreting as contribution revenue over time. Promises that are not expected to be collected require an allowance. Auditors should test the discount rate, the collectibility and the classification of each promise, including those restricted by time.
Conditional promises
A conditional promise is not recognized until the barrier is overcome. The organization discloses the conditional promises it has received that are not yet recognized, with a description and the total amounts. If cash is received before the barrier is met, it is reported as a refundable advance, a liability, until the condition is met. A common error is recognizing a cash advance on a cost-reimbursement grant as revenue when received.
Recognition of conditional amounts
When the condition is met, the contribution is recognized. If a restriction also applies, the amount enters net assets with donor restrictions and is released when the purpose is accomplished. The policy election for simultaneous release, described in the net assets guide, lets a restricted contribution met in the same period be shown in net assets without donor restrictions.
Donor restrictions
Restrictions are separate from conditions. A restriction limits how the assets may be used, but a restriction alone does not make a gift conditional. A gift restricted to a scholarship program is recognized when promised, in net assets with donor restrictions, even though the funds are restricted until spent.
Government grants and the Uniform Guidance
Federal grants raise both the accounting and the compliance questions. A federal award might be a contribution that is conditional, or it might be an exchange transaction. The accounting conclusion affects revenue recognition, but the compliance requirements, such as allowable costs and procurement, apply regardless. Expenditures of federal awards are also the basis for the single audit threshold. See single audit and Uniform Guidance walk-through.
Audit procedures
AU-C 240 presumes a fraud risk in revenue recognition. For a nonprofit, the auditor considers whether the presumption applies to contributions and grants, and documents the conclusion. The following procedures are typical.
- Obtain a schedule of significant grants and pledges and tie it to the ledger.
- Read the agreements for the largest or most unusual items, and document the contribution versus exchange conclusion, the conditional versus unconditional conclusion and the restriction.
- Test cutoff: revenue recognized in the year against conditions met by year-end; advances against refundable advance balances.
- Confirm significant pledges and grants receivable with donors and funders where practical.
- Test subsequent receipts for receivables.
- Evaluate the allowance and the discount rate for multi-year pledges.
- Check the net asset classification and releases, including the time restrictions.
- Review disclosures for conditional promises, promises receivable maturities, and restricted net assets.
See audit confirmations under AU-C 505 and revenue recognition audit procedures for the general approach.
Errors to look for
- Recognizing a cost-reimbursement grant as revenue before the costs are incurred.
- Treating an advance as revenue instead of a refundable advance.
- Calling a gift conditional because it has a reporting requirement.
- Not discounting multi-year pledges or not recording an allowance.
- Applying ASC 606 to a grant that is a contribution, or ASC 958-605 to a contract for services.
- Releasing restrictions before the purpose is met.
- No disclosure of conditional promises not yet recognized.
Frequently asked questions
What makes a contribution conditional under ASC 958-605?
The agreement includes both a barrier the recipient must overcome and a right of return of assets transferred, or a right of release of the promisor's obligation, if the barrier is not overcome.
Is a donor restriction the same as a condition?
No. A restriction limits how assets are used, and the gift is recognized when promised. A condition must be met before the recipient is entitled to the assets, and the contribution is not recognized until then.
How are cash advances on conditional grants reported?
As a refundable advance, a liability, until the condition is met.
Are government grants contributions or exchange transactions?
Either. The test is whether the funder receives commensurate value. Support for the organization's own mission without commensurate value is generally a contribution. A purchase of goods or services for the funder's use is an exchange transaction under ASC 606.
Must multi-year pledges be discounted?
Unconditional promises to give are measured at fair value, and for multi-year pledges that is usually the present value of expected future cash flows. An allowance is recorded for amounts not expected to be collected.
CORAA prepares ready-to-review audit files for US CPA firms; see /us.
Sources
- FASB ASC 958-605 (contributions, barrier and right of return, conditional promises, refundable advances); FASB ASU 2018-08
- FASB ASC 958-310 (promises to give, discounting, disclosure of conditional promises); ASC 606 for exchange transactions
- FASB ASC 958-205 and ASU 2016-14 (net asset classes; simultaneous release policy)
- AICPA, AU-C Section 240 (revenue recognition presumption), AU-C Section 505, External Confirmations
- 2 CFR 200.501 (single audit threshold): https://www.ecfr.gov/current/title-2/part-200/section-200.501
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