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Proposed Accounting Standards Update: Not-for-Profit Entities (Topic 958)

The FASB is issuing this proposed Update to clarify and improve the scope and the accounting guidance for contributions received and contributions made. The amendments in this proposed Update would assist entities in (1) evaluating whether transactions should be accounted for as contributions (nonreciprocal transactions) within the scope of Topic 958, Not-for-Profit Entities, or as exchange (reciprocal) transactions subject to other guidance and (2) distinguishing between conditional contributions and unconditional contributions.

Many stakeholders have noted difficulty in characterizing grants and similar
contracts with resource providers as either exchange transactions or contributions and in distinguishing between conditional contributions and unconditional contributions when applying the guidance in Subtopic 958-605, Not-for-Profit Entities—Revenue Recognition. These challenges, which result in diversity in practice when applying current generally accepted accounting principles (GAAP), have been long-standing; however, the amendments in Accounting Standards Update No. 2014-09, Revenue from Contracts with Customers (Topic 606), place an increased focus on the issues because those amendments add new disclosure requirements and eliminate certain limited exchange transaction guidance in Subtopic 958-605.

Distinguishing between contributions and exchange transactions determines
which guidance is applied. For contributions, an entity should follow the guidance in Subtopic 958-605, whereas for exchange transactions, an entity should follow other guidance (for example, Topic 606, Revenue from Contracts with Customers). Thus, the accounting may be different depending on the guidance applied. Diversity in practice occurs for grants and other similar contracts from various types of resource providers, but it is most prevalent for government grants and contracts.

In addition, once a transaction is deemed to be a contribution, stakeholders have noted that it can be difficult in practice to distinguish between conditional contributions and unconditional contributions, particularly when an entity receives assets accompanied by certain stipulations but with no specified return policy for when the stipulations are not met. Diversity also exists in assessments of whether the likelihood of failing to meet a condition is remote and in evaluating whether and how remote provisions affect the timing of when a contribution is recognized. Differences in these conclusions can affect the timing of revenue recognized. The guidance in Subtopic 958-605 indicates that if the possibility that a condition will not be met is remote, a conditional promise to give is considered unconditional, and contribution revenue is recognized immediately.

The contribution guidance in Subtopic 958-605 requires an entity to determine whether a transaction is conditional or unconditional, which affects the timing of the revenue recognized. Unconditional contributions are recognized immediately and classified as either net assets with restrictions or net assets without restrictions. Conditional contributions received are accounted for as a liability or are unrecognized initially, that is, until the barriers to entitlement are overcome, at which point the transaction is recognized as unconditional and classified as either net assets with restrictions or net assets without restrictions.

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