By: William Bauder, CPA, CGMA, CITP- Manager

Which would you prefer, a grant or a contract? To many, they are both equally good things to have.   Obtaining either a grant or a contract means that your organization has money!  They also both mean that someone recognizes your organization for the value it can provide with the proper funding.  For your accountant however, the difference between the two can be very complex even in a seemingly simple situation.  When the complexities of accounting for these funding sources are paired with the current complexity of the upcoming changes to the revenue recognition rules – the accounting can become nearly impossible to decipher.  However, a hopeful fix for these complexities was just made with the Financial Accounting Standards Board’s (FASB) recent release of Accounting Standard Update (ASU) (No. 2018-08)

The purpose of the release of ASU 2018-08 is to help clarify the difference between a grant and a contract for financial reporting purposes.  Using a decision tree, both parties must first determine if they both are receiving commensurate value (i.e. exchanging items or services of equivalent value).  If it’s determined that an exchange has in fact occurred, the organization should follow the standard revenue recognition guidance.  It should be noted that one item that has often led to inconsistency in practice is the consideration of societal benefits. Societal benefits include general benefits to society based upon the work you are performing. These benefits are specifically excluded from the decision tree and should not be considered as commensurate value for the transacting parties. 

The next step in determining if a transaction should be treated as a grant or contract is to determine whether or not the transaction is considered a contribution (i.e. nonreciprocal). If this is the case, you must then consider if there are any special conditions placed upon the contribution.  Conditions can affect the timing of revenue and expense recognition by the resource recipient and resource provider.  For a contribution to be conditional, the answer to both the following questions is expected to be “yes”:

1.       Does the contributor retain either a right of return to the resource provider or a right of release of promisor from its obligation to transfer resources?

2.       Is there a barrier the not-for-profit (NFP) organization must overcome to be entitled to the resources provided?

To help define a “barrier” the FASB has also provided the following indicators as part of ASU 2018-08:

“The NFP is required to achieve a measurable outcome (e.g., help a specific number of beneficiaries or produce a certain number of units).”

  “The NFP is required to overcome a barrier related to the primary purpose of the agreement. (Note: This excludes trivial or administrative requirements.)”

 “The NFP has limited discretion over how the resources are spent (e.g., a requirement to follow specific guidelines about incurring qualifying expenses).”

If a contribution is determined to be conditional, any funds transferred in advance are to be recognized as a liability and revenue is not to be recognized until all conditions have been substantially met.

If your organization’s accountant has been struggling to fully understand how to implement the new Accounting Standard, ASU 2018-08 should be a helpful tool in clarifying what it will mean to have a grant or contract on your books. Contact us today for more information and assistance.