Companies have some new guidance to follow to sort out how to account for contributions they receive and make that are not clearly governed by revenue recognition rules.
The Financial Accounting Standards Board issued Accounting Standards Update No. 2018-08 to clarify how to account for contributions of cash or assets that are typically made by not-for-profit organizations and business enterprises. The amendments provide a framework for determining whether a transaction should be accounted for as a contribution or an exchange.
FASB says it heard from its Not-for-Profit Advisory Committee and an accounting expert panel that companies and not-for-profits had developed some different approaches, especially after the new revenue recognition standard eliminated certain exchange guidance and added disclosure requirements that don’t seem relevant to exchange transactions.
The board says those following that area of accounting most closely began to notice diversity in how entities would account for grants and similar contracts from various types of resource providers, especially government grants and contracts. Entities have been taking different approaches in characterizing grants and other similar contracts as exchanges or contributions and in distinguishing between conditional and unconditional contributions.
To address concerns, FASB’s new ASU clarifies how an entity determines whether a resource provider is participating in an exchange transaction. The entity would evaluate whether the provider is receiving value in return for the cash or asset received based on some specific criteria described in the new standard.
FASB notes that accounting for contributions and exchanges is primarily an issue for not-for-profit organizations, who derive a significant portion of their revenue from such transactions. However, the board emphasizes that the amendments apply to all organizations that make or receive contributions of cash or other assets, including business enterprises. The amendments do not apply, however, to transfers of assets from government entities to business enterprises.