Clarifying Nonprofit Accounting Standards

In June 2018, the Financial Accounting Standards Board (FASB) issued an update for nonprofit enterprises clarifying accounting practices for grants and contributions. As innocuous as that may sound, important clarifications have been made to eliminate confusion and create more accounting consistency in our sector. This article summarizes the changes that are relevant to foundation grantmaking (and, we hope, will spare you from having to comb line-by-line through the FASB’s 68-page document)!

First, why does this matter?

These new standards not only affect financial reporting and budgeting for foundations, they also affect when a grant can be issued and claimed as revenue by a nonprofit organization, which in turn, affects their ability to plan and manage their finances.

So, what has changed?

The updated standards clarify the difference between a:

• contribution and an exchange transaction;
• conditional or unconditional contribution;
• restricted grant and a conditional grant.

The second and third topics are of greatest importance for PFS clients and their nonprofit partners.

What does all that mean? Well, let’s establish a few common definitions:

• Exchange: An exchange transaction is “a reciprocal transfer in which each party receives and sacrifices approximately commensurate value.” Public benefit and positive donor sentiment are not considered of commensurate value, so—while research and government grants may fall into this category—it is very rare for a grant from a PFS client foundation to be considered an exchange transaction.
• Contribution: A contribution is a nonreciprocal transaction in which the donor (foundation) does not receive direct commensurate value in exchange for the resources (grant) provided. This is the most typical kind of grant made by PFS client foundations. For example, a general support grant to the local food bank would be considered a contribution.
• Conditional Grant: A conditional grant is a contribution that includes a donor-imposed condition that must be met or a barrier that must be overcome before the recipient can receive the promised assets (or grant); conditional grants also include right of return language. Examples in this category include: measurable, performance-related barriers such as the number of individuals served or percentage of services increased; matching grants stipulating that an organization must raise a certain amount to receive matching grant funds; or stipulations that limit the discretion of the non-profit organization, such as hiring a specific firm or following a specific protocol. (Administrative tasks such as completing a grant report, complying with IRS rules, or signing and returning a grant agreement are not barriers unless clearly specified as such). As noted above, conditional grants can have challenging impacts on budgets and financial planning both for foundations and nonprofit partners because they cannot be issued or recorded by either entity until the condition is met
• Restricted Grant: A restricted grant carries donor-imposed guidelines on how, when, or for what purpose grant funding can be used, but unless these guidelines are specified as conditions or barriers that must be met, a restricted grant is not considered conditional. A grant awarded to support a specific program or project, for example, would be considered restricted.

What’s the bottom line for PFS clients?

Clarity and transparency are key when it comes to conditional grants. Board, staff, and the non-profit grant recipient must fully understand the condition(s) of the grant, how the condition(s) will be met, and clearly articulate and record the decision in the board meeting, the meeting minutes, and the grant agreement letter.

All of us at PFS believe that philanthropy should be effective, inclusive, and meaningful. In that spirit, we try to be as thoughtful as possible about the terms of a grant to minimize burden and maximize benefit—making the work of our nonprofit partners easier and more impactful.

So, while there are instances when a condition is important to a foundation or to empower a nonprofit, when possible, PFS would advise against making conditional grants so that our nonprofit partners can recognize a grant as revenue as soon as it is approved. Our team works closely with nonprofits, from beginning the application process through to completion of a grant period, ensuring that parameters and guidance are clear, and that grants are deployed as effectively as possible for their intended use.

If you have questions about the accounting standards update 2018-08, please don’t hesitate to email me. Additional details and helpful examples can also be found in this article from PwC.