The procedures to account for contributions and exchanges have been made clearer thanks to recent guidance issued by the Financial Accounting Standards Board (FASB).
ASU 2018-08, Clarifying the Scope and Accounting Guidance for Contributions Received and Contributions Made, clarifies the difference between a contribution (nonreciprocal transaction) and an exchange transaction (reciprocal transaction). This in turn resolves discrepancies on how to record these transactions on your statement of Financial Position.
The new guidance has introduced the term commensurate value to help you determine whether a transaction should be accounted for as a contribution or exchange transaction. Rather than telling you what commensurate value is, it is easier to define what it is not—a benefit received by the public as a result of an asset transfer. Execution of a grantor’s mission or positive sentiment from a donor is also not considered commensurate value.
While the previous standard distinguished a transaction by the “receipt of value by the resource provider,” this lacked clarity for most users. Under ASU 2018-08, a benefit received by the general public due to a transfer of assets does not constitute commensurate value. As a result, such a transaction would be considered a contribution.
For example, a nonprofit called Ocean Saver is awarded a grant toward its efforts to clean the local waterway and support conservation. The grantor solely determined the amount of the funds awarded to the organization. This transaction is a contribution, because the transfer of assets benefits the general public and the grantor has full discretion over the amount transfers to the NFP.
As noted in this example, it is also helpful to see who has discretion in determining the amount of the award. If the resource provider (grantor) has full control over the amount of the transferred asset, the transaction is a contribution.
However, if both the grantor and the resource recipient agree on the amount in exchange for a good or service that is of commensurate value, we would conclude the transaction is an exchange.
Another key difference is the consequence if the nonprofit fails to comply with the contract or agreement between parties. The penalty for non-compliance for a contribution is limited to the delivery of the asset already provided or return of unspent money. With an exchange, however, there could be further penalties such as fines beyond the original amount donated.
To illustrate this, let’s look at another example. Ocean Saver is awarded an amount to re-nourish a local beach. If the work is unsatisfactory, the grantor can require a repayment of grant funds and assess an additional substantial penalty. In this case, the transaction is considered an exchange and not a contribution.
For a little extra practice, let’s do one more example. Ocean Saver has received resources from a local business to finance the cost of a new education building. In return, the business will have naming rights to the education building. The agreement details the terms of how long the facility will carry the name and where signage will be posted. This is an exchange transaction because it has commiserate value and will follow the relevant guidance of ASC 606 for both parties.
It is key to remember that the terms used in an agreement to label a transaction—such as gift, grant or donation—do not automatically determine the type of transaction.
Once it is determined that a transaction is a contribution, the organization must then consider whether there are conditions on the award amount. We’ll discuss this in a future article on conditional and unconditional contributions.
In the meantime, the new guidance takes effect for annual reporting periods beginning after December 15, 2018. So contact your nonprofit CPAs if you have any questions about distinguishing contributions from exchanges.
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