New Rules on the treatment of Contributions Received and Contributions Made
Over the years there has been a lot of confusion about whether to treat certain types of transactions as contributions or as exchange transactions especially when it involves government grants. There has been further confusion if the transactions include donor-imposed dictates called restrictions or conditions. Many people including accountants don’t always know the difference between a restriction or condition and how to treat a transaction that has one or the other or both elements.
The correct treatment of transactions as exchange transactions or contributions, and then as contributions with donor-imposed conditions or restrictions can have a significant impact on the timing of recognizing revenue which is extremely important for accurate financial reporting and comparability. So proper treatment of these transactions is imperative.
Although this update does not make any fundamental changes to the existing rules for how to treat contributions and exchange transactions, it aims to clarify the meaning of these terms and provide more succinct guidance for determining which classification to apply for reporting purposes. It also aims to clearly define and qualify what a donor-imposed condition is and how it is accounted for and how a donor-imposed condition differs from a donor-imposed restriction.
It is believed that the amendments in this update will likely result in more grants and contracts being accounted for as either unconditional or conditional contributions instead of exchange transactions.
In addition to providing clearer definitions and examples of how to treat cash and other resources received and paid through grants and contracts, the update suggests a methodology for determining the proper classification and treatment of these type of transactions. The methodology involves a step-down approach as follows:
1. Has the resource provider (e.g. Not-For-Profit entity) received commensurate value in return for the resources transferred? If Yes, then the transaction is an Exchange Transaction and one must follow the appropriate accounting rules for Exchange Transactions. If no, go to #2.
2. Is the transaction a nonreciprocal transaction (i.e. Contribution)? If Yes, follow contribution (non-exchange) accounting rules and go to #3.
3. Determine if there is a donor-imposed condition or conditions (i.e. a barrier). If yes, only recognize revenue when the condition or conditions are met. If no, then go to #4.
4. If it is determined that there are no donor-imposed conditions the transaction is deemed an unconditional contribution and a determination must be made if there are donor-imposed restrictions. Then depending on whether there are or aren’t donor-imposed restrictions, recognize revenue as either contributions with or without donor restrictions.
The update provides the following definitions or clarifications:
Exchange Transaction – Reciprocal transfers in which each party receives and sacrifices approximately commensurate value
Conditional Contribution – A contribution with a donor/contributor/grantor stipulation that represents a barrier that must be overcome before the recipient is entitled to the assets transferred or promised. Failure to overcome the barrier gives the donor/contributor a right of return of the assets it has transferred or gives the promisor a right of release from its obligation to transfer its assets.
Unconditional Contribution – A transfer of cash or other assets, as well as promises to give, with no donor-imposed conditions, to an entity or a reduction, settlement, or cancellation of its liabilities in a voluntary nonreciprocal transfer by another entity acting other than as an owner.