Navigating Guidance on Grants & Contributions How ASU Is Impacting Not-for-Profit Entities

Transcription

1 Navigating Guidance on Grants & Contributions How ASU Is Impacting Not-for-Profit Entities October 16, 2018 To Receive CPE Credit Individuals Participate in entire webinar Answer polls when they are provided Groups Group leader is the person who registered & logged on to the webinar Answer polls when they are provided Complete group attendance form Group leader sign bottom of form Submit group attendance form to within 24 hours of webinar If all eligibility requirements are met, each participant will be ed their CPE certificate within 15 business days of webinar 1

2 Presenters Tondeé Lutterman, CPA National Industry Partner Not-for-Profit, Higher Education & Public Sector Kansas City Brian Pavona, CPA Managing Director Health Care Chicago Kimberly Marshall, CPA Director Not-for-profit Chicago Background Project added to FASB s Technical Agenda to improve & clarify existing guidance ASU , Revenue from Contracts with Customers, including related disclosures, heightened the issue Raised question as to whether grants & contracts are in scope of that guidance (reciprocal or nonreciprocal) Long-standing diversity in practice in classifying grants & contracts, particularly from governmental entities Issue 1: reciprocal vs. nonreciprocal Issue 2: conditional vs. unconditional 2

3 Funding Potentially Impacted Federal agency awards State & local awards Public charities & foundations Individual contributions Private foundations Corporate giving Scope Applies to all entities (NFPs & business entities) that receive or make contributions Excludes transfers of assets from the government to business entities The term used in arrangements or in the presentation of financial statements is not a factor, e.g., contribution, grant, donation, service Applies to both contributions received by a recipient & contributions made by a resource provider 3

4 Overview Step 1: exchange vs. nonexchange Exchange transaction when resource provider is receiving commensurate value in return for the resources transferred Step 2: conditional vs. unconditional Conditional contributions when there is a barrier to overcome & right of return/release Step 1: Exchange vs. Nonexchange Current Practice Direct Commensurate Value to Resource Provider Exchange Specified Third Parties General Public Clarified Rules Exchange Direct Commensurate Value to Resource Provider Specified Third Parties Nonexchange General Public 4

5 Step 1: Exchange vs. Nonexchange Direct commensurate value received by the resource provider in exchange for the resources provided The resource provider, e.g., government, is not synonymous with the general public Furthering a resource provider s mission, a feel good sentiment, or receiving name recognition does not constitute commensurate value Type of resource provider or name of award should not override the substance of the transaction If the beneficiary of a grant or contract is a third party, judgment is required Example 1: Grant Tuition Student enrolled at university Student is charged tuition of $40K for semester Student received grant of $10K to use for tuition, paid directly to university, e.g., Pell Grant How should university account for $10K? 5

6 Example 1: Answer How should university account for $10K? Student is already an existing customer with revenue recognition under Topic 606 Resource is simply payment on behalf of identified customer $10K does not create additional revenue Tuition revenue is $40k of which $30k is paid by student & $10k is paid by grant Transactions on Behalf of Specified Third Parties Judgment required to determine whether a transaction is a third-party payment on behalf of an identified customer or a contribution restricted for groups of beneficiaries with eligibility criteria Examples A social service NFP provides drug rehabilitation service to individuals who sign up for the service but payment for the service is made under local government contract An affordable housing NFP receives two forms of government payments to support the housing of individuals at a specific building Rent voucher payments associated with individual residents An operating subsidy for housing individuals that meet income criteria 6

7 Step 2: Conditional vs. Unconditional Contributions Barrier that must be overcome Right of return/release Donorimposed condition Indicators to Determine a Barrier Indicators of barriers include, but are not limited to Inclusion of a measurable performance-related barrier or other measurable barrier Extent to which a stipulation limits discretion by the recipient on the conduct of an activity Extent to which a stipulation is related to the purpose of the agreement Administrative requirements, e.g., reporting or obtaining an audit, is not an example of a condition under the clarified guidance In cases of ambiguous donor stipulations presume conditional 7

8 Right of Return/Release The agreement need not have exact wording of right of return/release & could be communicated in another document referenced by the agreement Must be a legal right of return If not apparent from the agreement whether there is a right of return/release, it is presumed the agreement does not include a right or return/release NFP Revenue Recognition Decision Process Transaction in which each party directly receives commensurate value? NO YES Reciprocal transaction. Apply rev rec (ASC 606) or other guidance Nonreciprocal transactions. Apply contribution (nonexchange) guidance Conditions present, i.e., right of return/release & barrier? NO Restrictions present, i.e., limited purpose or timing? YES NO YES Conditional recognize revenue when condition is met Unconditional & without restrictions (unrestricted) Unconditional & restricted 8

9 Example 2: Grant from Federal Government University is awarded grant from federal government Agreement requires university to Follow OMB regulations & cost principles Obtain an annual audit Submit summary of research findings to federal government Unused assets are forfeited & unallowed costs are required to be refunded University retains rights to findings Exchange or nonexchange? If nonexchange, conditional or unconditional? Example 2: Answer Nonexchange transaction Federal government rights are indirect because research findings benefit general public University retains rights to findings So commensurate value not exchanged Conditional Grant limits discretion on how assets may be spent Right of return & release Audit requirement alone is not a barrier because it is not related to the purpose of the agreement 9

10 Example 3: Grant from Private Foundation NFP receives grant from private foundation of $400K to provide specific career training to disabled veterans Requires NFP to provide training to at least 8K disabled veterans during FY, with specific minimum targets quarterly Right of release included in agreement Exchange or nonexchange? If nonexchange, conditional or unconditional? Example 3: Answer Nonexchange & conditional Foundation does not receive commensurate value Foundation requires NFP to achieve a specific level of service that would be considered a measurable performance-related barrier Agreement has right of release 10

11 Example 4: Grant from a Corporate Foundation NFP is a charity that works with gluten-related allergies as part of its mission Receives $100K grant from corporate foundation for research on glutenrelated allergies over next year. Agreement includes Statement that approval must be obtained for any significant deviations from budget Right of return Requirement to submit report on how funds were spent Exchange or nonexchange? If nonexchange, conditional or unconditional? Example 4: Answer Nonexchange & unconditional General budget is not a barrier because agreement allows for broad discretion No additional requirements that would indicate a barrier exists Reporting requirement is administrative & not related to the purpose of the agreement Grant is donor-restricted revenue because gluten-related allergies is more narrow than NFP s overall mission 11

12 Example 5: Best Effort Metrics NFP H provides sports programs to children in the community. NFP receives $40K upfront grant to use toward tennis program Grant includes stipulations on how NFP should use the assets (hire 10 tennis instructors or provide a summer camp for nine weeks) Grant does not specify that NFP s entitlement to the $40K is dependent upon meeting any of the stipulations as long as funds are used toward tennis program Contains a right of return for funds not spent on the tennis program Conditional or unconditional? Example 5: Answer NFP determines grant is unconditional Does not contain a barrier to overcome to be entitled to assets Grant agreement contains stipulations for how NFP could spend money, but agreement does not specify that entitlement is dependent on meeting any of the stipulations Because stipulations were not required to be met, the agreement does not contain a barrier 12

13 NFP Revenue Recognition Decision Process Transaction in which each party directly receives commensurate value? NO YES Reciprocal transaction. Apply rev rec (ASC 606) or other guidance Nonreciprocal transactions. Apply contribution (nonexchange) guidance Conditions present, i.e., right of return/release & barrier? NO Restrictions present, i.e., limited purpose or timing? YES NO YES Conditional recognize revenue when condition is met Unconditional & without restrictions (unrestricted) Unconditional & restricted Simultaneous Release Option Allows for the NFP to recognize a restricted contribution directly into UR net assets/net assets without donor restriction if restriction is met in same period that the revenue is recognized ASU allows for a second & separate election to be made relating to restricted & conditional contributions Could have different elections for Restricted/conditional Restricted/other 13

14 Example: Simultaneous Release NFP runs animal shelter with 12/31 YE Awarded matching grant of $100K on 12/1/18 for construction of a new dog playroom NFP must raise $100K of funding from other sources. NFP will receive payment on the grant when the 1:1 matches Simultaneous release option elected only for those restrict amounts that were initially condition. Does this grant qualify? Answer: Simultaneous Release NFP determines grant does qualify Prior to match being met, grant was conditional When condition was met, revenue recognized as donor restricted Restriction met (completion of dog playroom) in the same period in which the revenue was recognized Note: Grant award date isn t relevant. What s relevant is the date on which the revenue was recognized (condition met) 14

15 Disclosure Considerations ASU does not create additional disclosures for recipients or resource providers, but Expect more arrangements to be considered conditional, e.g., government grants Existing disclosure requirements for conditional contributions for recipients Total of the amounts promised Description & amount for each group of promises having similar characteristics Resource providers have existing disclosure requirements on contingencies Effective Date Recipients Resource Providers Annual periods beginning after June 15, 2018, including interim periods 1. PBEs 2. NFP with conduit debt (not private placement) Annual periods beginning after December 15, 2018, & interim periods beginning after December 15, 2019, for all other entities Annual periods beginning after December 15, 2018, including interim periods 1. PBEs 2. NFP with conduit debt (not private placement) Annual periods beginning after December 15, 2019, & interim periods beginning after December 15, 2020, for all other entities 15

16 Transition Approach Modified prospective Apply to all agreements Existing at the effective date (only apply to the portion of existing agreements not previously recognized) Entered into after the effective date No restatement of prior amounts recognized Retrospective application permitted Modified Prospective Transition Example NFP implements ASU in calendar year 2019 Three-year grant awarded on 1/1/18; payments are $50K/year from 2018 through 2020 Accounting prior to ASU Exchange transaction revenue recognized as billed ($50K through end of 2018) Accounting in year of implementation & future Not a completed contract (still more revenue to recognize) NFP determines it to be conditional contribution 2019 & 2020 recognize revenue as conditions are met Add to conditional contribution footnote 16

17 What to Do Now Read the standard & related resources. Identify a champion & assign a working group to study & implement the standard Evaluate population of arrangements needing analysis. Determine if resource bandwidth & competencies exist within the organization or if outside assistance is needed Engage operations (research, philanthropy, etc.), finance/accounting staff (& third parties if deemed necessary) Obtain, read & analyze arrangements. Document considerations & conclusions Determine change management needed to revise accounting & accumulate disclosures. Record accounting change Communicate changes to stakeholders including operations, senior management, audit committee & board 17

18 Continuing Professional Education (CPE) Credit BKD, LLP is registered with the National Association of State Boards of Accountancy (NASBA) as a sponsor of continuing professional education on the National Registry of CPE Sponsors. State boards of accountancy have final authority on the acceptance of individual courses for CPE credit. Complaints regarding registered sponsors may be submitted to the National Registry of CPE Sponsors through its website: CPE Credit CPE credit may be awarded upon verification of participant attendance For questions, concerns or comments regarding CPE credit, please the BKD Learning & Development Department at training@bkd.com 18

19 The information contained in these slides is presented by professionals for your information only & is not to be considered as legal advice. Applying specific information to your situation requires careful consideration of facts & circumstances. Consult your BKD advisor or legal counsel before acting on any matters covered 19