To help one another to thrive during the pandemic, some companies are making donations while others are fortunately receiving one. While this has significant impact in the continued existence of the business, it is also important to know how to account for this properly to be able to report reliable and timely financial information to stakeholders. Wondering how? This topic is the right read for you.
Accounting* Standards Update (ASU) 2018-08, Not-for-Profit Entities (Topic 958): Clarifying the Scope and Accounting* Guidance for Contributions Received and Contributions Made, can help you digest the considerations in appropriately recording and presenting contributions.
1. Nonreciprocal Transaction
Has the resource provider received a direct commensurate value in return for the resources transferred? If NO, then it is a contribution.
Contributions are transfers of cash and/or assets or promise to give that do not require commensurate value in exchange of the benefit to be received. Determining the nature of the benefit to be received paves the way for the succeeding considerations. If the transaction is a nonreciprocal one, then it will be of your best interest to be mindful of the guidance we will tackle below. Otherwise, if it is reciprocal or exchange transaction you need to refer to the Financial Accounting* Standards Board (“FASB”) Accounting* Standards Codification (“ASC”) 606, Revenue from contracts with customers.
2. Conditions
The revenue recognition for nonreciprocal contributions received or made by government or other entities is affected by the conditions and restrictions embodied in the grant agreement. Conditions affect the timing of revenue recognition while restrictions have an influence on how the contributions will be presented as net assets with donor restrictions or net assets without donor restrictions.
The FASB ASU requires meeting both of the following conditions to be classified as a conditional grant:
a. A barrier that must be overcome.
To assess whether an agreement contains a barrier, the organization would consider the following indicators:
The inclusion of a measurable performance-related barrier or other measurable barrier (e.g., number of villages served, number of production output, sales target, etc.)
The extent to which a stipulation limits discretion by the recipient on the conduct of an activity (e.g., the first tranche of funds should just be used to purchase face masks, sanitizers, etc.)
Whether a stipulation is related to the purpose of the agreement (e.g., COVID-19 response)
b. Either a right of return of assets transferred or a right of release of a promisor’s obligation to transfer assets.
The revenue from contributions must be recognized once it has overcome the barriers in the agreement that is why it is very critical to ascertain if the contributions have underlying conditions.
Below is a pro forma journal entry to recognize the revenue upon meeting the conditions:
| Cash/Grant Receivable | XXX |
| Grant Income | XXX |
| Grant Expense | XXX |
| Cash/Grant Liability | XXX |
3. Donor-imposed Restrictions
After all the conditions have been fulfilled, the next step is to identify if there are donor-imposed restrictions as to the purpose it can be utilized, and the period indicated on the grant. Restricted grants are presented under net assets with donor restrictions in the balance sheet and will be released to net assets without donor restrictions based on the terms on the contract.
The ASU 2018-08 also allows the not-for-profit organization to recognize a restricted contribution directly in net assets without donor restrictions if the restriction is met in the same period that the revenue is recognized. This election may now be made for all restricted contributions that were initially classified as conditional without having to elect it for all other restricted contributions and investment returns.
It is worth stating that the guidelines on contributions is not only applicable for NPOs but also to those commercial entities making or receiving contributions. Please take note this guidance does not apply to transfers of assets from governments to business.
Sharing you also the pro forma journal entry in net assets when the contributions have restrictions (required only for not-for-profit entities):
| Net Assets Without Donor Restrictions | XXX |
| Net Assets With Donor Restrictions | XXX |
| Upon release from restrictions: | |
|---|---|
| Net Assets With Donor Restrictions | XXX |
| Net Assets Without Donor Restrictions | XXX |
We’d love to help. Proper determination and assessment of the nature of transactions affecting your business lead to an accurate depiction of the status where you at and reliable financial reporting. Our technical accounting* group is keenly studying any accounting* updates to make sure they will be able to cater your business needs. For immediate questions and professional guidance, please email us at [email protected] or discuss it with your Scrubbed professional.
Disclaimer
The information contained herein is of a general nature and is not intended to address the circumstances of any particular individual or entity. It is not intended to be relied upon as accounting*, tax, or other professional service. Please refer to your advisors for specific advice. Although we endeavor to provide accurate and timely information, there can be no guarantee that such information is accurate as of the date it is received or that it will continue to be accurate in the future. No one should act upon such information without appropriate professional advice after a thorough examination of the particular situation.
