Nonprofits received long-awaited clarification on a key accounting question from the Financial Accounting Standards Board (FASB) at the end of June. The FASB released a final accounting standards update (ASU), Not-for-Profit Entities (Topic 958): Clarifying the Scope and the Accounting Guidance for Contributions Received and Contributions Made. The ASU aims to standardize how grants and other contracts are classified across the sector, as either an exchange transaction or a contribution.
What does this new guidance change for nonprofit organizations, stakeholders, and donors?
The latest guidance from the FASB arrives at a time when nonprofit chief financial officers (CFOs), controllers, and other key financial players are facing a fast-approaching deadline to implement new revenue recognition requirements (Topic 606). The revenue standard aims to improve accounting for contracts with customers, but it also introduces a layer of complexity and challenge to nonprofits of every size. The newly released second edition of Nonprofit Standards, BDO’s benchmarking survey, offers a glimpse of the administrative burden regulatory changes place on nonprofits: 45 percent of organizations say the time and effort required to deal with regulatory and legislative changes pose a moderate- or high-level challenge.
Revenue recognition brought to light a diversity of practice in the way that nonprofit organizations and funders classified grants and contracts from federal, state and local governments and other funding sources such as foundations in the financial statements, with some categorizing them as contributions and some as exchange transactions.
What makes standardizing practices so important now? Contributions, defined as an unconditional transfer of cash or assets in a voluntary non-reciprocal transfer, are scoped out of revenue recognition. Exchange transactions—a reciprocal transaction in which two parties exchange something of commensurate value—are within the scope and need to be accounted for following the new revenue recognition requirements.