Conditional contributions: barriers, right of return and right of release

• Apply the two-part test for a donor-imposed condition
• Evaluate barrier indicators in a grant or pledge agreement
• Record a conditional contribution as a refundable advance until the barrier is met
• Distinguish a condition from a restriction

The two-part test

Once a transfer is a contribution, the next question is whether it is conditional. ASC 958-605-25-5A says a donor-imposed condition must have both:

• one or more barriers that must be overcome before the recipient is entitled to the assets, and
• a right of return of assets already transferred, or a right of release of the promisor from its obligation to transfer assets.

Both must be determinable from the agreement or a document it references. The agreement does not need the words "right of return", but it must be clear enough to support a reasonable conclusion about when the recipient becomes entitled. If nothing indicates that entitlement depends on overcoming a barrier, the contribution is unconditional.

ASU 2018-08 removed the old test that treated a condition as met when the chance of failing was remote. A probability assessment is not part of deciding whether a barrier exists.

Barrier indicators

ASC 958-605-25-5D lists indicators. No single one decides the answer, and some carry more weight than others:

• Measurable performance-related or other measurable barrier. Entitlement depends on a level of service, a number of units of output or a specific outcome, frequently within a time limit. A matching requirement is another measurable barrier.
• Limited discretion on how to conduct the activity. This is more specific than a restriction. Examples are rules on qualifying allowable expenses, a requirement to hire specific people, or a protocol that must be followed.
• Stipulations related to the purpose of the agreement. Delivering a set number of meals is related to the purpose. Administrative or trivial stipulations, such as an annual report or a report summarizing performance, are not barriers.

When the agreement is ambiguous

ASC 958-605-25-5E says that when donor stipulations are not clear about whether a barrier exists and whether the right to receive or retain assets depends on it, a contribution containing stipulations that are not clearly unconditional is presumed conditional.

Accounting

A conditional promise to give is not recognized until the condition is substantially met, when it becomes unconditional (ASC 958-605-25-11). If cash arrives first, ASC 958-605-25-5F requires the NFP to record a refundable advance (a liability) until the conditions are substantially met or explicitly waived by the donor. If an agreement has both a condition and a restriction, it stays a refundable advance until the condition is met; then the revenue goes to net assets with donor restrictions unless the restriction is also met (and the simultaneous release policy applies).

Unrecognized conditional promises still need disclosure under ASC 958-310-50-4, which the update kept in place for recipients.

Condition or restriction?

The simplest test: a restriction limits use of resources the NFP is already entitled to; a condition decides whether it is entitled at all. A gift "for the after-school program" is restricted. A grant that pays only for allowable after-school costs incurred, with unspent money returned, is conditional.

Audit approach

• Read every significant grant and multi-year pledge for barrier language and return or release clauses.
• For cost-reimbursement grants, recompute revenue as qualifying costs incurred and test the costs against allowable cost rules.
• For matching grants, confirm the match raised by year end and vouch it to gifts received.
• Tie the refundable advance to cash received less revenue earned.
• Check the note on unrecognized conditional promises against the agreements.
• Read correspondence with grantors for explicit waivers of conditions, because a waiver also ends the refundable advance.

The contributions and grants guide has more examples. Review contributions versus exchange transactions first if the agreement could be an exchange.

A matching challenge at Cedar Valley Food Bank