Posted by Casey Hagy, CPA
In the first two blogs in this series, we explained guidance found in this new ASU regarding contributions vs exchange transactions, and conditional vs unconditional contributions. In our final blog of this series, we will cover the last main topic: restricted vs unrestricted contribution.
Determining Restricted Contributions from Unrestricted Contributions
Once a contribution is determined to be unconditional, or the barriers to a conditional contribution have been overcome, the last question to address is: “Are there restrictions on this contribution?” The answer to this question will determine the appropriate class of net assets in which the contribution should be recorded.
Donor-imposed restrictions limit the use of a contribution, but do not affect whether the recipient is entitled to the contribution. Under the amendments in this ASU, a donor-imposed restriction is defined as follows:
“A donor stipulation that specifies the use for a contributed asset that is more specific than broad limits resulting from the following: the nature of the not-for-profit entity, the environment in which it operates, or the purposes specified in its articles of incorporation or bylaws.”
Below are some examples of donor-imposed restrictions that are temporary in nature:
- Resources must be used after a specific date
- Resources must be used for particular programs or services
- Resources must be used to acquire buildings or equipment
Other donors may impose restrictions that are perpetual in nature, such as stipulating that resources must be maintained in perpetuity. If it is determined that restrictions are present, the contribution should be recorded in the “with donor restrictions” net asset class. If restrictions are not present, the contribution should be recorded to the “without donor restrictions” net asset class.
Simultaneous Release Option
Under the previous standards, not-for-profit organizations had the option to elect the “simultaneous release accounting policy option,” in which donor-restricted contributions whose restrictions are met in the same period the corresponding revenue is recognized can be reported as “unrestricted net assets/without donor restrictions” as long as the same policy was elected for donor-restricted investment return. This was an all-or-none policy; all donor-restricted support was subject to the simultaneous release policy, if elected. Organizations could not pick and choose which contributions the policy applied to. When the new guidance was proposed, the Financial Accounting Standards Board (FASB) received feedback from respondents who were concerned that recognizing many grants as conditional contributions would significantly increase the amount reported in the “released from restrictions” line on the statement of activities. In response to these concerns, the amendments in this ASU allow not-for-profit organizations the option to elect the simultaneous release policy option for donor-restricted contributions that were initially considered conditional contributions, without applying the policy to all other restricted contributions and restricted investment return. Therefore, under the new guidance there are two “buckets” for restricted contributions: 1.) amounts initially considered conditional and 2). all other.
Below is an example of the simultaneous release option under the new guidance:
- A not-for-profit entity (NFP) runs a homeless shelter and has a 12/31 year end.
- The NFP has elected the simultaneous release option only for restricted amounts that were initially considered conditional.
- On November 1, 2018, NFP was awarded a matching grant of $250,000 to be used specifically towards the construction of an additional homeless shelter residence.
- The grant agreement indicates that in order for NFP to be entitled to receive the $250,000, they must raise an additional $250,000 of funding from other sources. NFP will receive the $250,000 grant payment once the match has been met.
- On February 1, 2019, the matching requirement was met.
- On September 1, 2019, the construction of the new residence was completed.
This grant qualifies for the bucket of “amounts initially considered conditional” and can be reported as “without donor restrictions” without having to apply the policy to all other restricted contributions. Prior to the match being met, the grant was a conditional contribution. Once the match was met, NFP recognized the revenue as a donor-restricted contribution because of the donor-imposed stipulation requiring the construction of a new residence. Because the construction of the residence was completed in the same period in which the matching condition was met/revenue was recognized, NFP can record the grant directly to the “without donor restriction” net asset class. Note that the grant date is not relevant, what matters is that the condition and restriction were met in the same period.
The effective dates for this ASU, as well as a helpful diagram, are detailed in Part I of this blog series, which you can find here. In the first period of adoption, entities are required to disclose: 1) the nature and reason for the accounting change and 2) an explanation of the reasons for significant changes in each financial statement line item in the current annual period compared to the prior period as a result of applying this new ASU. Besides the disclosures in the first period of adoption, this ASU does not require entities to provide any additional disclosures in the notes to the financial statements.
It is important to note that this ASU should be applied on a modified prospective basis. For agreements that are not completed as of the effective date, the new standards will only apply to the portion of revenue that was not recognized before the effective date. Revenue recognized prior to the effective date will not follow the new standards; therefore, no prior period restatements or adjustments to opening net assets are considered necessary. The standards would simply apply to revenue under existing contracts that had not been previously recognized, and to new contracts entered into after the effective date. If an entity elects to apply the ASU on a retrospective basis, they must provide disclosures required by Topic 250, Accounting Changes and Error Corrections.
Below is an example of the modified prospective transition:
- NFP implements ASU 2018-08 for calendar year 2019.
- NFP was awarded a 5-year grant on 1/1/2017; payments are $200k per year.
- Prior to the ASU, NFP accounted for the grant as a conditional contribution, and revenue was recognized as conditions were met ($400,000 through the end of 2018).
- Under the new guidance, NFP determines the grant is an unconditional contribution.
- In 2019 NFP would recognize the remaining $600,000 as donor-restricted contribution revenue, and release donor-restricted net assets as the restrictions are met.
Note that no changes were made to how the revenue was recorded in calendar years 2017 and 2018.
All blog posts are valid as of the date published