The question of whether a transaction should count as an exchange or a contribution—and whether a contribution is conditional or unconditional—is one that has long challenged not-for-profit accountants, with no real consensus as to the proper treatment. A new proposed accounting standards update, issued on Aug. 3 by the Financial Accounting Standards Board (FASB), aims to end this ambiguity by providing a consistent methodology. While it’s relevant mainly for nonprofits, if approved, it would apply to every entity that receives or makes contributions of cash and other assets.

The FASB developed the proposed update, Clarifying the Scope and Accounting Guidance for Contributions Received and Contributions Made, in response to a wide diversity of practice in how nonprofit organizations accounted for grants and other contracts. This lack of uniformity stems from differing interpretations about whether a particular transfer of assets is an exchange transaction or a contribution. Organizations will use entirely different methodologies based on how they define the transaction. Further, when a transaction is identified as a contribution, the organization must make further judgment calls to determine whether the contribution is conditional.

Travis Carey, the chair of the NYSSCPA’s Not-for-Profit Organizations Committee, said that organizations have wrestled with this issue for years, with little progress.

“I think the issue is that, in different parts of the country, and in different organizations, the interpretations are just too different. We don’t have the consistency we generally like in accounting. Here we get the same set of facts, but come to different conclusions,” he said.

This issue comes into play particularly when it pertains to government grants, said Allen L. Fetterman, who also sits on Carey’s committee.

“Most people tend to feel that governments do not give contributions, that they are buying a service from the nonprofit, and I have felt with a certain type of contract, [where] the government will reimburse the nonprofit for expenses incurred up to a maximum for a period of time, I always felt that is a contribution from the government to support the program, that the government is not buying a service,” he said.

What made the FASB decide to concentrate on this matter now was the implementation of another standard, Revenue from Contracts with Customers, due to the new disclosure rules it introduced that deal with identifying just who the customer ultimately is. Fetterman said that, considering the standard concerns about contracts with customers, this plays right into the ongoing question of whether or not the government counts as a customer. This, in turn, determines whether something is a transaction or a contribution, which, in turn, determines whether a contribution is conditional or unconditional.

The proposed standard states that, in instances in which a resource provider is not itself receiving commensurate value for the resources provided, an entity must determine whether the transfer of assets represents a payment from a third-party payer on behalf of an existing exchange transaction between the recipient and identified customer. If so, then the transfer is an exchange transaction. If not, it is a contribution. So, a government grant to maintain a nonprofit clinic would be a contribution; that same clinic getting money to directly perform a service for the government would be an exchange.

The FASB proposal notes that a resource provider such as a private foundation or government agency is not synonymous with the general public, and the indirect benefit received by the general public as a result of the asset transfer does not count as value received in exchange for that transfer. Neither does the execution of a resource provider’s mission, or the positive sentiment from acting as a donor.

In determining whether a contribution is conditional or unconditional, the entity would judge whether the agreement includes both a barrier that must be overcome and a right for the contributor to either release itself from obligations to transfer assets or to take back assets already transferred. The presence of these two conditions indicates that a recipient is not entitled to the transfer of assets, and the contribution is therefore conditional. If the contribution is unconditional, though, the entity would still need to determine whether there are donor restrictions on that contribution.

While the FASB did not explicitly lay out what would count as a “barrier,” examples include measurable performance-related barriers, such as achieving a specific outcome or producing a certain number of units of output, or stipulations that limit discretion by the recipients or require additional actions that it otherwise would not have taken.

Fetterman said this proposal is long overdue, and added that he likes the approach the FASB is recommending.

Carey said that members of the Society’s Not-for-Profit Organizations and Financial Accounting Standards committees will collaborate on a comment letter laying out the Society’s position on the proposal.