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Business and Policy Areas
Business and Policy Areas

NACUBO Responds to FASB Proposal on Grants and Contributions

November 13, 2017

In a November 1 comment letter to the Financial Accounting Standards Board (FASB) on its proposed Accounting Standards Update (ASU), “Clarifying the Scope and the Accounting Guidance for Contributions Received and Contributions Made,” NACUBO agreed with many of the concepts but proposed clarification in several areas. These included transactions outside the scope of the proposed guidance; indicators of barriers to entitlement; grant budgets that require sponsor approval for deviation; contributions with multiple barriers, such as mandatory cost sharing requirements on reimbursement grants; and transition guidance.

Contribution Versus Exchange Transaction

The proposed ASU includes additional guidance to assist in determining whether a transaction is a contribution (non-reciprocal transaction) or an exchange (reciprocal) transaction. It also highlights certain transactions that are outside the scope of the guidance, such as payments by third parties related to existing exchange transactions. The ASU cites the Pell Grant Program as an example. Because the proposed guidance goes on to say that these types of transactions should be accounted for in accordance with other guidance, such as Topic 606, Revenue from Contracts with Customers, NACUBO commented that readers might be misled into thinking that Pell Grants should be treated as exchange transactions. NACUBO requested that the Pell Grant reference be eliminated. (Independent institutions treat Pell Grants as agency transactions, which are neither contributions or exchange transactions.) Additionally, clarifying suggestions concerning “out-of-scope examples” were made.

Conditional Versus Unconditional Contributions

For transactions determined to be contributions, the ASU attempts to refine current guidance in assessing whether a contribution is conditional or unconditional. Specifically, 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 guidance proposes indicators to be considered when assessing whether a barrier exists and contains examples to assist in making that determination. The proposed indicators are:

  • The not-for-profit (NFP) is required to achieve a measurable outcome (e.g., provide a specified level of service, produce an identified number of units, or obtain a specific outcome).
  • 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.

NACUBO found the last two indicators to be problematic and focused our feedback primarily on those.

Limited Discretion by the Recipient

NACUBO commented that, as written, it was difficult to discern how this barrier differs from a restriction–particularly when the term “restricted” is used as part of the explanation. We suggested that the description clearly distinguish between a condition and a restriction as it applies to limited discretion and suggested the following: “The recipient has limited discretion over how the transferred assets may be spent. For example, the funds must be spent only on qualifying expenses or in accordance with a detailed line-item budget from which the recipient cannot deviate without approval from the funder. Limited discretion imposes conditions on the manner in which the funds may be spent. Consequently, limited discretion is different than a stipulation by the donor that restricts the purpose for which the funds may be spent.”

Also of concern was the guidance related to budgets as indicators of a barrier. It seemed that in some cases the guidance was indicating that the existence of a budget subject to approval by the grantor for significant deviations would be considered a barrier that must be overcome in order for the NFP to be entitled to the funds. In other cases, however, it was not considered a barrier. As a result, NACUBO requested that the Board clarify the guidance related to budgets as indicators of a barrier.

Additional Actions

The examples included in the ASU related to this indicator of a barrier appeared to hinge on whether or not the funds received had been solicited by the NFP. NACUBO found this distinction to be troublesome and commented that solicitation of funds by a recipient should not be an indicator of a barrier. We noted, however, that if the Board concluded that solicitation is generally an indication of a barrier, it should be included in the discussion of barrier indicators. Overall, we found this indicator to be too broad to be beneficial in determining whether a barrier exists and recommended that if parameters could not be added to narrow the focus, the indicator should be removed.

NACUBO also suggested that the final ASU include examples of situations in which there may be multiple barriers. For example, a common situation in higher education is when a grant includes a cost-sharing component (in addition to a qualifying expense requirement).  We noted that a question had been raised about whether cost sharing is similar in nature to a matching grant, and therefore, could impact the timing of revenue recognition. We stressed that in making that determination the recipient should look to the terms of the award to determine whether the cost sharing constitutes a barrier to entitlement of the funds provided by the grantor. To assist the Board in its deliberations on this topic, we provided some examples illustrating what should be considered when assessing whether grants with cost sharing arrangements are indicative of a barrier and how that assessment may impact the timing of revenue recognition.

Transition and Effective Date

The ASU proposed a modified prospective approach to application of the new standard. This would require institutions to apply the new guidance to agreements for which revenue had not been fully recognized as of the effective date and for agreements entered into after the effective date. NACUBO noted that under such an approach, an entity would still have to go through all of its grants, gifts, and pledges–which could be in the thousands–to determine the appropriate accounting going forward. Therefore, we recommended that the Board consider prospective application. Under that approach, an entity would only need to assess agreements entered into after the effective date while allowing for current accounting of existing agreements to “play itself out.”

As proposed, the guidance would be effective for public entities (including NFPs that are conduit bond obligors or that have other publicly traded debt) for fiscal years beginning after December 15, 2017 (FY19 for most colleges and universities). Nonpublic entities would apply the guidance for fiscal years beginning after December 15, 2018 (FY20). We noted that for institutions with significant numbers of grants and contributions, certain system and process redesigns may be required that could be labor intensive and time consuming. We therefore recommended that the effective date for all NFP entities (public and nonpublic) be for fiscal years beginning after December 15, 2018, with early adoption allowed.


Sue Menditto
Director, Accounting Policy