Disclosure Guidance Vague for Nonprofits in Revenue Rules

By Denise Lugo

March 9 — Not-for-profit entities said disclosure requirements under the Financial Accounting Standards Board's new revenue rules have caused them to question whether they've been properly accounting for certain grants—primarily those from governments—that they have viewed as procurements, according to discussions by FASB's not-for-profit advisory committee (NAC).

Some NAC members March 7 and 8 said issuance of Revenue from Contracts with Customers (Topic 606) didn't cause the problem, but it heightened the need for clarity around certain terminology used to account for some grants. They noted that certain revenue disclosures don't seem relevant to certain grants or contracts that some entities have accounted for as procurements, but for which the grantor doesn't seem to be a customer.

Contribution or Procurement?

NAC members were split, however, regarding whether FASB needs to add a project to its standard-setting agenda to clarify the rules.

Some felt improvements should be made to current guidance on distinguishing a “contribution” from a “procurement,” and a “condition” versus a “restriction.”

Others felt the diversity was a natural result of the topic and the board should allow nonprofits to assess their specific contracts and make the judgment of whether the grant should be accounted for as a contribution—meaning financial support or assistance—or a procurement and then just disclose what their accounting treatment is.

Ambiguity, Interchangeability of Descriptions

There's a level of ambiguity in the accounting for grants and contracts because many nonprofits use the words interchangeably, the discussions indicated. Some private nonprofit foundations use of the word “grants” to mean “a financial assistance arrangement” and “procurement contracts” to mean the purchase of services.

Some nonprofits say in terms of federal government grants that they have difficulty determining whether the arrangement should be accounted for as a financial support arrangement—meaning contribution—or a procurement arrangement. For example, the government is generally thought of as the customer when it contracts with suppliers such as Boeing or Lockheed Martin.

But with a contract with a local nonprofit, the question arises as to whether it is a purchase of services or a financial assistance arrangement. Often the confusion occurs when the objective is to serve a societal need that is mutually beneficial to both the government and nonprofit in meeting a mission.

Government Grants a Long-Standing Concern

The area of grants and contracts—especially government grants and contracts—has been one of long standing concern among nonprofits. The issue was brought to FASB by the American Institute of CPAs nonprofit expert panel and its revenue recognition task force, and others.

The groups said there is difficulty and diversity in practice among nonprofits regarding whether certain grants, primarily those from governments, should be accounted for under (Topic 606) or whether they're more like a donation or contribution and therefore should be accounted for under FAS 116, Accounting for Contributions Received and Contributions Made, which has been codified as part of Topic 958.

To contact the reporter on this story: Denise Lugo in Norwalk, Conn., at dlugo@bna.com

To contact the editor responsible for this story: Laura Tieger Salisbury at lsalisbury@bna.com