The New Accounting Rules for Not-For-Profit Revenues
LARRY SOPHIAN, CPA, MBA
Accounting standards can be confusing. The Financial Accounting Standards Board’s (FASB) Accounting Standards Update (ASU) No. 2014-09, Revenue from Contracts with Customers, raised concerns about which not-for-profit transactions were covered by the new rules. Its 2018 follow-up, ASU No. 2018-08, Not-for-Profit Entities (Topic 958): Clarifying the Scope and Accounting Guidance for Contributions Received and Contributions Made, supplied some answers.
Any changes to accounting for revenues required by either of these pronouncements took effect for years beginning after December 15, 2018, for annual reporting (unless your organization is a conduit bond obligor, in which case the rules are effective for years beginning after June 15, 2018). Some organizations still have questions about how the new standards apply to their revenues.
Recognize exchange transactions
The new revenue recognition rules cover only exchange transactions (also known as reciprocal transactions), not contributions (non-reciprocal transactions). An exchange transaction happens when each party receives and forfeits something of approximately equal value.
Not-for-profit organizations might generate several types of revenue considered exchange transactions, including:
- Membership dues;
- Sales of goods and services;
- Conference and seminar fees;
- Licenses and royalties;
- Sponsorships; and
- Special events.
For multicomponent transactions — such as membership dues that comprise both a contribution and fees for membership benefits — you must separate the contribution and recognize the other revenue under ASU 2014-09’s rules.
Certain grants also could qualify as an exchange transaction. For example, a grant that reimburses expenses based on the number of meals the organization delivers to its clients might qualify as a contract to provide goods or services. A research and development grant could be deemed an exchange transaction if the grantor retains intellectual property rights in the work product.
ASU 2014-09 lays out five steps that organizations following U.S. Generally Accepted Accounting Principles (GAAP) must take to recognize revenue from exchange transactions. The standard does not change the total revenue you recognize from such transactions. However, it may change the timing of such recognition and will almost certainly require fuller disclosures.
We know ASU 2014-09 does not apply to contributions, but what exactly constitutes a contribution? Not-for-profits have struggled with this question regarding grants or similar contracts.
According to ASU 2018-08, to determine the proper treatment for such an arrangement, you must evaluate whether the grantor or other party to the contract receives commensurate value for the assets it transfers to your organization. If so, the arrangement is an exchange transaction and covered by ASU 2014-09. (Note that indirect benefit to the public does not count toward commensurate value received — the benefit must go to the grantor or other party.)
If the grantor does not receive equal value, determine whether the asset transfer is a payment from a third-party payer, for an existing exchange between you and an identified customer (for example, a Medicare payment) covered by other accounting guidance. If not, the transaction is likely a contribution.
The new contributions standard also requires you to determine whether a contribution is conditional. Generally, a conditional contribution includes:
- A barrier the organization must overcome to receive the contribution — for example, a matching requirement or restrictions on allowable expenses; and
- Either a right of return of the transferred assets or a right of release of the promisor’s obligation to transfer assets.
Under ASU 2018-08, you will recognize unconditional contributions when received or pledged. Conditional contributions are not recognized until you overcome the barriers.
The new revenue recognition and contributions rules are extensive and complicated. Your CPA can help you decipher them and follow the provisions that apply to your organization.
Newsworthy Notes for Not-For-Profits
Study uncovers endowments, foundations’ biggest 2019 fears
Endowments and foundations cite a slowdown in global economic growth as their biggest worry this year in the Endowments & Foundations Survey recently released by a U.S. investment consulting firm. Economic fears have tripled since the previous year’s survey. About 60% of the respondents now name a slowdown as the most significant threat to their investment portfolios. Another 36% indicate that they believe the economy already has deteriorated.
The NEPC LLC poll also revealed that impact investing has gained momentum. Another finding: Cryptocurrency donations have fallen short of expectations, with no notable shift from regular cash donations.
Identifying priorities of women’s foundations and funds
New research from the Women’s Philanthropy Institute at Indiana University sheds valuable light on the funding preferences of organizations that award grants to not-for-profits benefiting women, girls, children and families. For example, it turns out that women’s foundations and funds largely support organizations in their local communities.
Because women’s and girls’ causes generally do not represent their own not-for-profit subsector, the funders’ giving covers many areas. The most common is education (63%), followed closely by economic empowerment, security and self-sufficiency (61%) and health (54%).
IRA giving surges post-TCJA
The 2019 Report on Qualified Charitable Distributions from IRAs, from FreeWill Co. finds that qualified charitable distributions (QCDs) from individual retirement accounts grew by an average of nearly 74% from 2017 to 2018. The average QCD gift among the not-for-profit respondents was $9,200. More than half of respondents said the average QCD gift size has grown over the past year.
The report attributes the boom to two factors: Changes in the tax law and demographics. Taxpayers who no longer itemize due to the larger standard deduction can use QCDs, made with pre-tax dollars, to reap tax benefits from charitable contributions. And, while these gifts are an option only for taxpayers who are at least 70-½ years of age, more Baby Boomers are becoming septuagenarians every day.
State to boost not-for-profit security
California Governor Gavin Newsom has proposed an additional $15 million to help with security at what he calls “soft targets,” such as houses of worship and certain other types of not-for-profits. The announcement came in the wake of an attack on a San Diego–area synagogue this past spring.
The funding would go to organizations at higher risk due to their ideology, beliefs or mission (for example, mosques, LGBTQ organizations and those providing women’s health services). Recipients could use the grants to pay for security improvements, including reinforced entrances, alarms and guards. The previous governor and state legislature had slashed the funding to $500,000 in 2018.