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Business and Policy Areas
Business and Policy Areas

FASB Seeks Comments on Accounting for Grants and Contributions

August 11, 2017

The Financial Accounting Standards Board (FASB) issued a proposed Accounting Standards Update (ASU) Clarifying the Scope and the Accounting Guidance for Contributions Received and Contributions Made on August 3.

The proposed ASU refines current guidance for conditional contributions and addresses a gap in the literature created when ASU 2014-09, Revenue from Contracts with Customers (Topic 606), replaced exchange guidance followed by not-for-profit entities in Accounting Standards Codification (ASC) 958-605. Consequently, the proposal provides additional guidance for classifying transactions as contributions (non-reciprocal transactions) or as exchange (reciprocal) transactions. Of greatest significance to higher education is that the amendments in the proposed update address nonreciprocal grants: typically, sponsored research grant arrangements that do not have commercial value to the sponsoring organization and therefore are not considered contracts with customers.

The main tenets of the proposed ASU are as follows:

Is the transaction an exchange or a contribution?
An entity must determine whether a grant is an exchange transaction by evaluating whether the grantor is receiving commensurate value in return for the resources transferred to the not-for-profit (NFP). The proposed ASU provides two key considerations to be used in making this assessment:

  1. A resource provider is not synonymous with the general public. An indirect benefit received by the public as a result of the assets transferred is not equivalent to commensurate value received by the resource provider.
  2. Execution of a resource provider’s mission or the positive sentiment from acting as a donor does not constitute commensurate value.

Therefore, since the vast majority of higher education’s sponsored research grants advance knowledge for academic or public benefit and because universities retain the rights to research results in these cases, sponsored research grants would typically be considered nonreciprocal. Nonreciprocal transactions are not exchange transactions and are therefore a type of contribution.

Are contributions conditional or unconditional?
If a transaction is deemed to be a contribution, the institution must determine whether or not it is conditional. For a contribution to be considered conditional, it must have both of the following:

  1. Either a right of return of assets transferred or a right of release of a promisor’s obligation to transfer assets;
  2. A barrier that must be overcome before the recipient is entitled to the assets transferred or promised.

The proposed ASU contains the following indicators to be considered when determining whether a barrier exists.

  • The NFP is required to achieve a measurable outcome (e.g., incur certain allowable expenses, help a specific number of beneficiaries, or produce a certain number of units).
  • The agreement contains stipulations related to the primary purpose of the asset transfer. This excludes trivial or administrative requirements.
  • The NFP has limited discretion over how the resources are spent.
  • The NFP is required to take significant additional actions that it otherwise would not have taken.

The indicators, as proposed, are likely to require significant judgment in applying them to individual contributions. However, some general assumptions may be applied. For example, FASB has indicated that it believes a right of return (or release from the promisor’s obligation) is inherent in all grants awarded through federal agencies subject to the Office of Management and Budget’s Uniform Administrative Guidance (Uniform Guidance) requirements, which stipulate a return of funds or grant withdrawal for non-compliance. Although there may be several barriers, at the very least, a barrier is created when institutions must perform grant work according to the agreement—at cost to the university—before reimbursement is requested.

Institutions may receive grants from private foundations, corporations, and others that are not subject to the Uniform Guidance but that may still meet the definition of a conditional contribution. For example, a private foundation may award a grant to be used in the development of a new program. Any funds remaining at the end of the grant period must be returned to the foundation. Under the proposed guidance, this would be considered a conditional contribution as a right of return exists and the institution must spend the funds to develop the new program. As the funds are spent, the condition is met and revenue is recognized.

NACUBO has observed that many institutions currently account for grants awarded by  non-governmental grantors as unconditional contributions and recognize all of the revenue up front. With the clarifications provided by the proposed ASU, this treatment may no longer be appropriate. Additionally, because many grants will be considered conditional promises to give under the proposed guidance, institutions will need to disclose total award amounts promised with appropriate descriptive information (ASC 958-310-50-4). 

Finally, regarding pledges (promises to give), although donor agreements can include clauses that relieve the promised obligation under specified circumstances, a barrier must also exist for the pledge to be considered conditional. Examples of barriers could include things like matching fund requirements, stipulated zoning use changes, or the addition of new and unplanned or out-of-the-ordinary programs. Barriers would be assessed within the overall context of the agreement and the NFP entity’s operating environment.

Next Steps

The proposed ASU is available on the FASB website. Comments are due on the proposed changes by November 1. NACUBO staff and its Accounting Principles Council will be submitting comments to FASB on the proposed guidance. In addition, NACUBO encourages independent institutions to submit comments by submitting a letter directly to FASB, via the Electronic Feedback Form on the FASB website or by contacting NACUBO to include your thoughts in the industry comment letter.

NACUBO members can read more about contributions and revenue in the Financial Accounting and Reporting Manual, available online. To access the resource, sign in to MY NACUBO and navigate to "Online Subscriptions – FARM."


Sue Menditto
Director, Accounting Policy