Revenue Accounting for Nonprofit Grants and Contracts
By: Pam Lebold, CPA
It has been a year of change for nonprofit organizations. First, there was ASU 2016-14 that changed the presentation of nonprofit financial statements. And now, there is ASU 2018-08, Clarifying the Scope and the Accounting Guidance for Contributions Received and Contributions Made, which changes the way you may have recorded government grants and grants with conditions. The purpose of the new ASU is to provide guidance on accounting for nonprofit grants and contracts and to minimize the diversity in their classification.
There has been a general belief that the government does not give contributions and that any government grant a nonprofit receives creates a benefit to the general public in exchange for that grant and therefore did not qualify as a contribution. ASU 2018-08 makes clear that the benefit received by the general public is not the same as the resource provider receiving that benefit. Therefore, under the new guidance, these transactions are considered nonreciprocal and thus would be considered contributions.
In order to determine whether the contributions should be recorded, the nonprofit needs to identify any conditions that must be met. In the past, if a condition was more than likely to be met, the grant would be recorded as a contribution. Under ASU 2018-08, such conditions must be met before the grant can be recorded. For example, if the grant identifies the number of people the nonprofit needs to serve then the nonprofit has to wait until that number of individuals is serviced before the contribution can be recorded, even if the number of individuals to be serviced is so small in comparison to the nonprofit’s normal service levels. Likewise, if the funding is received in advance and there is a portion of the grant that is subject to a right of return (ie, a condition that needs to be met) then the portion that is subject to return would be recorded as deferred revenue as opposed to a temporarily restricted contribution.
The guidance provided by ASU 2018-08 may create many changes in the way nonprofits are accounting for grants and contracts. This guidance is effective for resource recipients that are public businesses or nonprofits with public debt offerings that are listing on an exchange or an over-the-counter market for fiscal years ending June 30, 2019. For all other resource recipients, the ASU is effective for the December 31, 2019 financial statements. For those entities that provide these types of resources, the effective dates for any public businesses or nonprofits with public debt offerings is for the December 31, 2019 financial statements. For all other resource providers, the effective date is December 31, 2020.
Because this guidance regarding nonprofit grants and contracts can be confusing, please feel free to reach out Pam Lebold or to your Maloney + Novotny associate for any questions you have or assistance you may need. If it is more convenient, you can use this online contact form.