Gifts-in-Kind

Fixed assets (land, buildings, and equipment) and supplies. Contributions of fixed assets can be accounted for in one of two ways. GAAP permits such gifts to be reported as either unrestricted or temporarily restricted income at the time received. If the gift is initially reported as temporarily restricted, the restriction is deemed to expire ratably over the useful life of the asset; that is, in proportion to depreciation for depreciable assets. The expiration is reported as a reclassification from the temporarily restricted to the unrestricted class of net assets. Nondepreciable assets such as land would remain in the temporarily restricted class indefinitely—until disposed of. (Recognizing the gift as income in proportion to depreciation recognized on the asset is not in conformity with generally accepted accounting principles.) ASU 2016-14 only permits reporting gifts of fixed assets as part of net assets with donor restrictions if the donor's restriction of the time that the asset is to be used is explicit. Under current GAAP, the donor's time restriction could be implied in order to obtain the matching of depreciation expense with release of assets from temporarily restricted to unrestricted. Under ASU 2016-14, this time restriction can no longer be implied. If a not-for-profit organization has previously implied time restrictions on donated fixed assets, it will need to reclassify these amounts to net assets without donor restrictions.

Supplies and equipment should be recorded at the amount which the organization would normally have to pay for similar items. A value for used office equipment and the like can usually be obtained from a dealer in such items. The valuation of donated real estate is more difficult, and it is usually necessary to get an outside appraisal to determine the value.

Museum collections. GAAP makes an exception for recording a value for donated (and purchased) museum collection objects, if certain criteria are met and certain disclosures are made. Owners of such objects do not have to record them, although they may if they wish. (Chapter 15 describes the accounting options available for collections.)

Fundraising and informational materials or advertising. The AICPA issued guidance in the form of a Technical Practice Aid 6140.24 regarding situations where entities other than the not-for-profit organization use for the not-for profit organization's benefit certain nonfinancial assets that encourage the public to contribute to the organization or help communicate its mission. This guidance is now also included in the AICPA Guide in paragraph 5.153. Examples provided include:

• An advertising agency, television station, or newspaper provides design services or professional talent services.
• A radio or television station gives the not-for-profit organization (or uses for the organization's benefit) commercial airtime at no charge.
• A not-for-profit organization distributes a public service announcement to several radio or television stations and asks the stations to air the announcement. (Some stations air the announcement and report information about the airings to the not-for-profit.)
• A magazine, newspaper, or other print medium gives the not-for-profit organization (or uses for the organization's benefit) advertising space at no charge.
• An Internet site gives a not-for-profit organization (or uses for the organization's benefit) advertising space at no charge.

The question addressed by the AICPA is in circumstances in which fundraising material, informational material, or advertising, including media time or space for public service announcements or other purposes, is used for the not-for-profit organization's benefit (or provided to the organization at no charge) and encourages the public to contribute to the not-for-profit organization or help the not-for-profit organization communicate its message or mission, should the not-for-profit organization report a contribution? If so, how should that contribution be measured and reported?

The answer provided by the AICPA is—“yes.” If they have received a contribution, it should be measured at fair value and the related expense, at the time the expense is recognized, should be reported by function, based on the nature of the contributed item.

Contributed services of volunteers. Many organizations depend almost entirely on volunteers to carry out their programs, and sometimes supporting functions. Should such organizations place a value on these contributed services and record them as “contributions” in their financial statements?

Criteria for recording. The answer is “yes,” under certain circumstances. These circumstances exist only when either of the following conditions is satisfied:

1. The services create or enhance nonfinancial assets; or
2. The services:
   1. Require specialized skills,
   2. Are provided by persons possessing those skills, and
   3. Would typically have to be purchased if not provided by donation.

If neither criterion is met, GAAP precludes recording a value for the services, although disclosure in a footnote is encouraged. These criteria differ considerably from criteria in the earlier audit guides/statement of position.

Creating or enhancing fixed assets. The first criterion is fairly straightforward. It covers volunteers constructing or making major improvements to buildings or equipment. It would also cover things like building sets or making costumes for a theater or opera company, and writing computer programs, since the resulting assets could be capitalized on the balance sheet. The criterion says “nonfinancial” assets so as not to cover volunteer fundraisers who, it could be argued, are “creating” assets by soliciting gifts.

Specialized skills. The second criterion has three parts, all of which must be met for recording to be appropriate. The first part deals with the nature of the services themselves. The intent is deliberately to limit the types of services that must be recorded, thus reducing the burden of tracking and valuing large numbers of volunteers doing purely routine work, the aggregate financial value of which would usually be fairly small. GAAP gives very little guidance about how to identify, in practice, those skills which would be considered “specialized,” as opposed to nonspecialized. There is a list of skills that are considered specialized, but it merely recites a list of obvious professions such as doctors, lawyers, teachers, carpenters. What is lacking is an operational definition of “specialized” that can be applied to all types of services. Appendix C contains a checklist to help readers make this distinction in practice.

The second part of the criterion will usually cause no problems in practice, as persons practicing the types of skills contemplated should normally possess the skills. (If not, it could be asked why are they performing the services?)

Would otherwise purchase. The third part of the criterion will be the most difficult of all to consider, as it calls for a pure judgment by management. Would the organization or would it not purchase the services? This is similar to one previously found in SOP 78-10, which read as follows:

The services performed are significant and form an integral part of the efforts of the organization as it is presently constituted; the services would be performed by salaried personnel if donated services were not available. . .; and the organization would continue the activity.

Probably the most important requirement is that the services being performed are an essential part of the organization's program. The key test is whether the organization would hire someone to perform these services if volunteers were not available.

This is a difficult criterion to meet. Many organizations have volunteers involved in peripheral areas which, while important to the organization, are not of such significance that paid staff would be hired in the absence of volunteers. But this is the acid test: If the volunteers suddenly quit, would the organization hire replacements? Appendix D contains a checklist to help readers assess this criterion.

Basis on which to value services. An additional criterion that is not explicitly stated in GAAP in connection with donated services is that there must be an objective basis on which to value these services. It is usually not difficult to determine a reasonable value for volunteer services where the volunteers are performing professional or clerical services. By definition, the services to be recorded are only those for which the organization would, in fact, hire paid staff if volunteers were not available. This suggests that the organization should be able to establish a reasonable estimate of what costs would be involved if employees had to be hired.

In establishing such rates, it is not necessary to establish individual rates for each volunteer. Instead, the volunteers can be grouped into general categories and a rate established for each category.

Some organizations are successful in getting local businesses to donate one of their executives on a full- or part-time basis for an extended period of time. In many instances, the amount paid by the local business to the loaned executive is far greater than the organization would have to pay for hired staff performing the same function. The rate to be used in establishing a value should be the lower rate. This also helps to get around the awkwardness of trying to discern actual compensation.

An organization may wish not to record a value unless the services are significant in amount. There is a cost to keep the records necessary to meet the reporting requirements and, unless the resulting amounts are significant, it is wasteful for the organization to record them.

Accounting treatment. The dollar value assigned to contributed services should be reflected as income in the section of the financial statements where other unrestricted contributions are shown. In most instances, it is appropriate to disclose the amount of such services as a separate line.

On the expense side, the value of contributed services should be allocated to program and supporting service categories based on the nature of the work performed. The amounts allocated to each category are not normally disclosed separately. If volunteers were used for constructing fixed assets, the amounts would be capitalized rather than being charged to an expense category. Unless some of the amounts are capitalized, the recording of contributed services will not affect the excess of income over expenses, since the income and expense exactly offset each other.

Exhibit 2 shows a simplified example of reporting for contributed services. The footnotes to the financial statements should disclose the nature of contributed services and the valuation techniques followed.

Use of facilities. Occasionally a not-for-profit organization will be given use of a building or other facilities either at no cost or at a substantially reduced cost. A value should be reflected for such a facility in the financial statements, both as income and as expense. The value to be used should be the fair market value of facilities, which the organization would otherwise rent if the contributed facilities were not available. This means that if very expensive facilities are donated, the valuation to be used should be the lower value of the facilities, which the organization would otherwise have rented. Implicit in this rule is the ability to determine an objective basis for valuing the facilities. If an organization is given the use of facilities that are unique in design and have no alternative purpose, it may be impossible to determine what they would have to pay to rent comparable facilities. This often occurs with museums that occupy elaborate government-owned buildings.

Where a donor indicates that the organization can unconditionally use such rent-free facilities for more than a one-year period, the organization should reflect the arrangement as a pledge, and record the present value of the contribution in the same way as other pledges.

Services provided by other organizations. Some not-for-profit organizations are the beneficiaries of services provided at no cost by other organizations, often organizations with which the reporting organization is affiliated in some way. An example is a corporate foundation that occupies office space belonging to the company, uses office equipment belonging to the company, and has its functions performed by personnel on the company payroll, for which no charge is made by the company to the foundation. In separate financial statements of the foundation, the value of the “free” services should be reported as both a contribution and an expense. The expense would be reported in the categories appropriate to the nature and purpose of the services provided.

Fair value is defined as “… the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at a measurement date.” This is not that much different from the definition of fair value that has historically been used by accountants. GAAP now does provide additional definitions and clarifications on each of the components of this definition. It also introduces the concept of the “higher and best use” of an asset by market participants, considering the use of the asset that is physically possible, legally permissible, and financially feasible at the measurement date. Note that highest and best use is determined for a “market participant,” even if the intended use by the organization that is reporting the fair value is different.

There are three valuation techniques for measuring fair value that are now prescribed by GAAP. These are:

• Market approach. This approach uses prices and other relevant information generated for market transactions involving identical or comparable assets. For example, shares of donated stock that are traded on a stock exchange would normally use the valuation approach of determining the stock share price on the date of the gift to value the gift.
• Income approach. This approach uses valuation techniques to convert future amounts (such as cash flows or earnings) to a single present amount (i.e., discounted). For example, a not-for-profit organization receiving a long-term unconditional pledge uses the discounted value of the expected cash flows to determine the value of the pledge.
• Cost approach. This approach is based on the amount that currently would be required to replace the service capacity of an asset. This approach is often referred to as the current replacement cost. For example, a not-for-profit organization might value donated legal services at the value that equates to the costs of those services if it actually had to hire a lawyer to perform them.

In some cases, using a single valuation technique may be sufficient. In other cases, multiple valuation techniques may be appropriate, with fair value being determined by evaluating and weighing the range of values indicated by the different techniques.

In applying these valuation techniques, the reporting organization uses certain “inputs” to the valuation method. FASB ASC 820-10 defines two broad categories of inputs and also establishes a hierarchy of three levels of inputs that prioritizes the inputs to the valuation approaches. The two categories of inputs are:

1. Observable inputs are inputs that reflect the assumptions market participants would use in pricing an asset or liability developed based on market data obtained from sources independent of the reporting entity.
2. Unobservable inputs are inputs that reflect the reporting entity's own assumptions about the assumptions that market participants would use in pricing the asset or liability based on the best information available in the circumstances.

The hierarchy of inputs prioritizes the inputs to the valuation techniques, not to the valuation techniques themselves. The hierarchy gives the highest priority to quoted prices (unadjusted) in active markets for identical assets and liabilities (Level 1) and the lowest priority to unobservable inputs (Level 3).

Level 2 inputs are those other than quoted market prices included in Level 1 that are observable for an asset or liability, either directly or indirectly. Level 2 inputs include:

1. Quoted prices for similar assets or liabilities in active markets;
2. Quoted prices for identical or similar assets in markets that are not active;
3. Inputs other than quoted prices that are observable, such as interest rates, volatilities, credit risks, and default rates;
4. Inputs that are derived principally from or corroborated by correlation or other means.

Disclosure requirements regarding fair value measurements differ based on whether the fair value measurement is done on a recurring basis or whether the measurements are nonrecurring. The fair value disclosure requirements are included in the Disclosure Checklist at the end of this book.

In January 2010, the FASB issued Accounting Standards Update No. 2010-6 (Fair Value Measurements and Disclosures [Topic 820] Improving Disclosures about Fair Value Measurements) (FASB ASU 2010-6), which provides new and amended disclosure requirements about fair value measurements.

The new disclosure requirements of FASB ASU 2010-6 are as follows:

1. Transfers in and out of Levels 1 and 2. A reporting entity should disclose separately the amounts of significant transfers in and out of Level 1 and Level 2 fair value measurements and describe the reasons for the transfers. (This requirement was later modified by ASU 2011-04 so that it does not apply to nonpublic entities.)
2. Activity in Level 3 fair value measurements. In the reconciliation for fair value measurements using significant unobservable inputs (Level 3), a reporting entity should present separately information about purchases, sales, issuances, and settlements (that is, on a gross basis rather than as one net number).

The amended disclosure requirements of FASB ASU 2010-6 are as follows:

1. Level of disaggregation. A reporting entity should provide fair value measurement disclosures for each class of assets and liabilities. FASB ASU 2010-6 provides that a class is often a subset of assets or liabilities within a line item in the statement of financial position. (In other words, to meet the requirements to disclose by “class,” a financial statement line item may need to be broken into two or more classes of assets or liabilities.) FASB ASU 2010-6 also acknowledges that a reporting entity needs to use judgment in determining the appropriate classes of assets and liabilities.
2. Disclosures about inputs and valuation techniques. A reporting entity should provide disclosures about the valuation techniques and inputs used to measure fair value for both recurring and nonrecurring fair value measurements. These disclosures are required for fair value measurements that fall in either Level 2 or Level 3 and include a description of the valuation technique (or multiple valuation techniques) used, such as the market approach, income approach, or the cost approach, and the inputs used in determining the fair values of each class of assets or liabilities. If there has been a change in the valuation technique(s) (for example, changing from a market approach to an income approach or the use of an additional valuation technique), the reporting entity shall disclose that change and the reason for making it. These requirements are more specific than the more general requirements about disclosing inputs and valuation techniques.

The FASB continues to fine-tune accounting standards related to fair value measurements and disclosures by the issuance of Amendments to Achieve Common Fair Value Measurement and Disclosure Requirements in US GAAP and IFRS (ASU 2011-04). Although this ASU will affect all fair value measurements and disclosures, it is further discussed in Chapter 10.

Support Not Currently Expendable

Endowment gifts. Donor-restricted endowment fund contributions should be reported as revenue upon receipt in a restricted class of net assets: temporary in the case of a term endowment gift, otherwise permanent. Upon implementation of ASU 2016-14, both of these would be reported as part of net assets with donor restrictions. There are different approaches for reporting endowment gifts in a statement of activities. Usually a multicolumn presentation is followed to separate unrestricted from restricted income, as shown here.

Another approach, which was described in the AICPA Statement of Position 78-10, is the use of a “nonexpendable additions” section in the statement. In this approach, such gifts are reflected in a section titled “Nonexpendable Additions” or “Capital Additions.” Current GAAP does not discuss this approach, but it does not prohibit it either. Thus, an organization that wishes to follow it may do so, as long as the gift is clearly identified as restricted.

Gifts of term endowment are later reclassified to the unrestricted class when the term of the endowment expires. (If, upon expiration of the endowment restriction, the gift is still restricted—likely for some operating purpose—it would not be reclassified until money was spent for that purpose. If, upon expiration of the term endowment restriction, the gift becomes permanently restricted, it should be recorded in that class initially.)

Pledges (promises to give). A pledge² is a promise to contribute a specified amount to an organization. Typically, fundraising organizations solicit pledges because a donor either does not want to or is not able to make a contribution in cash in the amount desired by the organization at the time solicited. In giving, as with consumer purchases, the “installment plan” is a way of life. For example, a donor may pledge to pay an organization $20 per month, each month, for the next year. Organizations find donors are more generous when the payments being contributed are smaller and spread out over a period of time. The term “pledge,” however, also applies to one-time payments. For example, a donor may call a telephone operator during a telethon and pledge to make a $100 contribution.

A pledge may or may not be legally enforceable. The point is largely moot because few organizations would think of trying to legally enforce a pledge. The unfavorable publicity that would result would only hurt future fundraising. The only relevant criteria are: Will the pledge be collected and are pledges material in amount?

If these criteria are satisfied, then there are two accounting questions: Should a pledge be recorded as an asset at the time the pledge is received? If the answer is “yes,” the next question is: When should the pledge be recognized as income?

Recording as an asset. For many organizations, a significant portion of their income is received by pledge. The timing of the collection of pledges is only partially under the control of the organization. Yet over the years most organizations find they can predict with reasonable accuracy the collectible portion of pledges, even when a sizable percentage will not be collected. Accounting literature requires that unconditional pledges the organization expects to collect be recorded as assets and an allowance established for the portion that is estimated to be uncollectible.

Conditions versus restrictions. The requirement in current GAAP is to record unconditional pledges as assets. Unconditional means without conditions. What is meant by conditions? FASB defines a condition as “a future and uncertain event” that must occur for a pledge to become binding on the pledgor. There are two elements to this definition: future and uncertain. Future means it hasn't happened yet; this is fairly clear. Uncertain is, however, more subject to interpretation. How uncertain? This will be a matter of judgment in many cases.

If a donor pledges to give to a charity “if the sun rises tomorrow,” that is not an uncertain event; the sun will rise tomorrow, at a known time. If a donor pledges to give $10,000 to the Red Cross “if there's an earthquake in California,” that is very uncertain (a geologist will say the eventual probability of an earthquake happening is 100%, but the timing is completely uncertain). This latter pledge would be conditional upon an earthquake occurring. Once an earthquake occurs, then the donor's pledge is unconditional (the condition has been removed), and the pledge would be recorded by the Red Cross.

Another example of a condition is a matching pledge (also known as a challenge grant). A donor pledges to give an amount to a charity if the charity raises a matching amount from other sources. (The “match” need not be one for one; it can be in any ratio the donor specifies.) In this case, the charity is not entitled to receive the donor's gift until it has met the required match. Once it does, it will notify the donor that the pledge is now due.

A third type of donor stipulation sounds like a condition, but it may or may not actually be one. A donor pledges to contribute to a symphony orchestra “if they will perform my favorite piece of music [specified by name].” Yes, this is an uncertain future event, since the piece of music has not yet been performed, but how uncertain is it? If the orchestra might very well have played the piece anyway, then the “condition” is really trivial, and the event would not be considered uncertain. However, if the piece were one that the orchestra would be very unlikely to perform without the incentive represented by the pledge in question, then the event would be considered uncertain, and the pledge conditional. In this case, the condition is fulfilled when the orchestra formally places the music on its schedule and so informs the donor.

Note that the concept of a condition is quite different from that of a restriction. Conditions deal with events that must occur before a charity is entitled to receive a gift. Restrictions limit how the charity can use the gift after receipt. Unconditional pledges can be either unrestricted or restricted; so can conditional pledges. Donor stipulations attached to a gift or pledge must be read carefully to discern which type of situation is being dealt with. For example, “I pledge $20,000 if you play my favorite music” is conditional but unrestricted (the donor has not said the gift must be used to pay for the performance). However, “I pledge $20,000 for [the cost of] playing my favorite piece of music” is restricted, but unconditional. In the latter case, the donor has said the pledge will be paid, but can only be used for that performance. The difference in wording is small, but the accounting implications are great. The conditional pledge is not recorded at all until the condition is met; the unconditional restricted pledge is recorded as revenue (in the temporarily restricted class) upon receipt of notification of the pledge. Appendix E contains a checklist to help readers determine whether an unconditional pledge actually exists. Appendix F contains a checklist to help distinguish conditions from restrictions.

Discounted to present value. Prior to current GAAP, pledges were recorded at the full amount, which would ultimately be collected. None of the accounting literature for not-for-profit organizations talked about discounting pledges to reflect the time value of money. There had been for many years an accounting standard applicable to business transactions that does require such discounting, but not-for-profit organizations universally chose to treat this as not applicable to them, and accountants did not object.

Recipients (and donors) of pledges payable beyond the current accounting period are required to discount the pledges to their present value, using an appropriate rate of interest. Thus, the ability to receive $1,000 two years later is really only equivalent to receiving about $900 (assuming about a 5% rate of interest) now, because the $900 could be invested and earn $100 of interest over the two years. The higher the interest rate used, the lower will be the present value of the pledge, since the lower amount would earn more interest at the higher rate and still be worth the full $1,000 two years hence.

The appropriate rate of interest to use in discounting pledges will be a matter of some judgment. In many cases, it will be the average rate the organization is currently earning on its investments or its idle cash. If the organization is being forced to borrow money to keep going, then the borrowing rate should be used.

As the time passes between the initial recording of a discounted pledge and its eventual collection, the present value increases since the time left before payment is shorter. Therefore, the discount element must be gradually “accreted” up to par (collection) value. This accretion should be recorded each year until the due date for the pledge arrives. The accretion is recorded as contribution income. (This treatment differs from that specified in GAAP for business debts for which the accretion is recorded as interest income.)

The present valuing techniques described above provide a means of recording contributions receivable at their fair value, which is a requirement of GAAP. Recent changes to GAAP regarding fair value calculations would apply. This is discussed in the AICPA Guide, paragraphs 3.138 to 3.171, on which the following discussion is based.

FASB ASC 820-10-55-6 provides the general principles that govern any present value technique, as follows:

• Cash flows and discount rates should reflect assumptions that market participants would use in pricing the asset or liability.
• Cash flows and discount rates should consider only factors attributed to the asset (or liability) being measured.
• To avoid double counting or omitting the effects of risk factors, discount rates should reflect assumptions that are consistent with those inherent in the cash flows. For example, a discount rate that reflects expectations about future defaults is appropriate if using the contractual cash flows of a loan, but is not appropriate if the cash flows themselves are adjusted to reflect possible defaults.
• Assumptions about cash flows and discount rates should be internally consistent. For example, nominal cash flows (that include the effects of inflation) should be discounted at a rate that includes the effects of inflation.
• Discount rates should be consistent with the underlying economic factors of the currency in which the cash flows are denominated.

GAAP provides several different present value techniques that differ in how they adjust for risk and in the type of cash flows they use. The discount rate adjustment technique (which is the traditional present value technique described above) uses a risk-adjusted discount rate and contractual, promised, or most likely cash flows. In contrast, expected present value techniques use the probability-weighted average of all possible cash flows (referred to as expected cash flows).

The AICPA Guide, paragraph 3.154, specifies that it includes guidance about measuring assets (promises to give and beneficial interests in trusts) and liabilities (split-interest obligations) using traditional present value techniques. The same paragraph of the AICPA Guide also specifies that guidance is not intended to suggest that the income approach is the only one of the three approaches that is appropriate in the circumstances, nor is it intended to suggest that the traditional present value technique described in the guide is preferred over other present value techniques. Rather, the inclusion of that guidance in the AICPA Guide merely reflects that prior to the issuance of FASB Statement 157, Fair Value Measurements, present value techniques were specifically mentioned in SFAS 116, Accounting for Contributions Received and Contributions Made, and FASB Statement 136, Transfers of Assets to a Not-for-Profit Organization or Charitable Trust That Raises or Holds Contributions for Others, as appropriate for measuring promises to give cash and beneficial interests in trusts, and the guide had been drafted reflecting those standards.

Accordingly, the traditional present value techniques discussed above are still appropriate; however, expected present value techniques recognized by current GAAP may also be considered. Additional information may be obtained at FASB ASC 820-10.

Pledges for extended periods. There is one limitation to the general rule that pledges be recorded as assets. Occasionally, donors will indicate that they will make an open-ended pledge of support for an extended period of time. For example, if a donor promises to pay $5,000 a year for twenty years, would it be appropriate to record as an asset the full twenty years’ pledge? In most cases, no; this would distort the financial statements. Most organizations follow the practice of not recording pledges for future years’ support beyond a fairly short period. They feel that long-term, open-ended pledges are inherently conditional upon the donor's willingness to continue making payments, and thus are harder to collect. These arguments have validity, and organizations should consider very carefully the likelihood of collection before recording pledges for support in future periods beyond five years.

Allowance for uncollectible pledges. Not all pledges will be collected. People lose interest in an organization; their personal financial circumstances may change; they may move out of town. This is as true for charities as for businesses, but businesses will usually sue to collect unpaid debts; charities usually won't. While businesses will still suffer from uncollected receivables, not-for-profit organizations tend to have a poorer collection experience with pledges receivable. Thus, another important question is how large the allowance for uncollectible pledges should be. Most organizations have past experience to help answer this question. If, over the years, 10% of pledges are not collected, then unless the economic climate changes, 10% is probably the right figure to use. Care must be taken, however, because while an organization's past experience may have been good, times do change—as many organizations have discovered to their sorrow.

Another factor to consider is the purpose for which the pledge will be used. Some people will hesitate to default on a pledge for a worthwhile current year's project but may be less conscientious about a pledge for a building fund or a long-term project.

GAAP is silent about how to present the allowance in the financial statements. There is no question about the presentation in the balance sheet: it is an offset to the receivable amount. Thus, if the organization has outstanding pledges totaling $75,000, and it estimates that 10% of that amount will be uncollectible, the allowance of $7,500 is deducted from the $75,000 and the new amount of $67,500 is shown.

What is not clear is how to present the reduction in the amount recorded in the statement of activities to reflect the fact that not all of the recorded revenue will actually ever become available to the organization. One obvious possibility is to reduce the reported revenue amount by the uncollectible percentage. Another is to report the full amount of the pledges as revenue and the uncollectible amount as an expense. Because expenses are deducted from revenue, either method of reporting results in the same net excess of revenue over expenses for the year.

FASB ASC 958-605-30-6 provides that unconditional promises to give that are expected to be collected in less than one year may be measured at the realizable value as an estimate of fair value. Similarly, recording long-term unconditional promises to give at fair value takes into consideration the quantity and nature of consideration expected to be received, as well as the creditworthiness of the donor. In other words, in both cases, the contribution revenue recorded initially is reduced by consideration of uncollectible amounts. The authors agree, believing that this method better reflects the reality of the way not-for-profit organizations manage pledges. Any increases to an allowance for uncollectible accounts subsequently required are reported as expenses or losses.

Another point to keep in mind in setting up an allowance is that a pledgor who defaults on an installment once is likely to do so again. If the default brings no notice from the organization, the pledgor assumes the contribution is not really needed, and it will be easier to skip the next payment. So, once a donor becomes delinquent on even a single installment, a 100% allowance for that total pledge, not just for the delinquent portion, should be considered. In addition, the organization should review the amount of allowance needed for other nondelinquent pledges; once there are signs of any delinquency, the overall collection assumptions may be in doubt. If so, the organization should be conservative and set up additional allowances.

Consideration of discounting and collectibility for cash contributions. The AICPA Guide (paragraphs 3.138 through 3.171 on discounting and paragraphs 5.180 through 5.215 regarding contributions) provides extensive guidance on applying the two concepts of discounting and consideration of collectibility in recording contributions receivable and the related revenue for cash contributions receivable. Should the gross amount of the contribution be discounted and then the discounted amount evaluated for collectibility? Or, should the gross amount of the contribution be evaluated for collectibility and then the amounts expected to be collected be discounted? In addition, should any adjustments be made when a donor extends payment terms longer than what was called for in the original gift?

Contributions revenue should be measured at fair value (using quoted market prices, if available) of the assets or services received or promised or at the fair value of liabilities satisfied. (Net realizable value may be used when the contributions arise from unconditional promises to give that are expected to be collected within one year of the financial statement date.)

The fair value of contributions arising from unconditional promises to give cash should be determined based on the present value of the estimated future cash flows. A not-for-profit organization should first determine the estimated future cash flows from the promise to give cash. In estimating future cash flows, the following should be considered:

• When the receivable is expected to be collected;
• The creditworthiness of the other parties;
• The organization's past collection history;
• The organization's policies in connection with the enforcement of promises to give;
• Any other factors concerning the receivable's collectibility.

After the amount of the estimated future cash flows is determined, the present value of this amount should be measured using a risk-free rate of return appropriate for the expected term of the promise to give. Note that a risk-free rate of return is used since the donor's credit rating and other factors affecting the donor's ability to honor the promise to give would be already considered in determining the estimated future cash flow from the promise to give.

The AICPA Guide also addresses the situation in which a donor extends the payment terms over a period longer than what was called for in original gifts. It notes that the fair value of unconditional promises to give may change if the following conditions occur: (1) changes in the quantity or nature of assets expected to be received, such as changes in the amounts of future cash flows, and (2) changes in the timing of assets expected to be received. Decreases in the fair value of unconditional promises to give due to changes in the quantity or nature of assets expected to be received should be recognized in the period(s) in which the expectation changes. Those decreases should be reported as expenses or losses from bad debts in the net asset class in which the net assets are represented. Decreases in contributions because of changes in the amounts of assets expected to be received should be reported as losses if they are decreases in temporarily restricted net assets or permanently restricted net assets.

Recognition as income. The second, related question is: When should a pledge be recognized as income? The answer is easy: immediately upon receipt of an unconditional pledge. This is the same rule that applies to all kinds of gifts. Conditional pledges are not recorded until the condition is met, at which time they are effectively unconditional pledges. Footnote disclosure of unrecorded conditional pledges should be made.

Under the earlier audit guides/statement of position, pledges without purpose restrictions were recorded in the unrestricted class of net assets. Only if the pledge has a purpose restriction would it be recorded in a restricted class. Even pledges with explicit time restrictions were still recorded in the unrestricted class, to reflect the flexibility of use that would exist when the pledge was collected. All pledges are considered implicitly time-restricted, by virtue of their being unavailable for use until collected. Additionally, time-restricted gifts, including all pledges, are now reported in the temporarily restricted class of net assets. They are then reclassified to the unrestricted class when the specified time arrives.

This means that even a pledge not payable for ten years, or a pledge payable in many installments is recorded as revenue in full (less the discount to present value) in the temporarily restricted class in the year the pledge is first received. This is a major change from earlier practice, which generally deferred the pledge until the anticipated period of collection.

Sometimes a charity may not want to have to record a large pledge as immediate revenue; it may feel that its balance sheet is already healthy and recording more income would turn off other donors. If a pledge is unconditional, there is no choice: the pledge must be recorded. One way to mitigate this problem is to ask the donor to make the pledge conditional; then it is not recorded until some later time when the condition is met. Of course, there is a risk that the donor may not be as likely ever to pay a conditional pledge as one that is understood to be absolutely binding, so not-for-profit organizations should consider carefully before requesting that a pledge be made conditional.

GAAP requires that donors follow the same rules for recognition of the expense of making a gift as recipients do for the income; that is, immediately upon payment or of making an unconditional pledge. Sometimes a charity will find a donor reluctant to make a large unconditional pledge, but willing to make a conditional pledge. Fundraisers should be aware of the effect of accounting principles on donors’ giving habits, as well as on recipients’ balance sheets.

Bequests. A bequest is a special kind of pledge. It is the ultimate conditional pledge: a very uncertain future event must occur for it to become payable. Accordingly, bequests should never be recorded before the donor dies—not because death is uncertain, but because a person can always change a will, and the charity may get nothing. (There is a special case: the pledge payable upon death. This is not really a bequest, it is just an ordinary pledge, and should be recorded as such if it is unconditional.)

After a person dies, the beneficiary organization is informed that it is named in the will, but this notification may occur long before the estate is probated and distribution made. Should such a bequest be recorded at the time the organization first learns of the bequest or at the time of receipt? The question is one of sufficiency of assets in the estate to fulfill the bequest. Since there is often uncertainty about what other amounts may have to be paid to settle debts, taxes, other bequests, claims of disinherited relatives, and so on, a conservative, and recommended, approach is not to record anything until the probate court has accounted for the estate and the amount available for distribution can be accurately estimated. At that time, the amount should be recorded in the same manner as other gifts.

Thus, if an organization is informed that it will receive a bequest of a specific amount, say $10,000, it should record this $10,000 as an asset. If, instead, the organization is informed that it will receive 10% of the estate, the total of which is not known, nothing would be recorded yet although footnote disclosure would likely be necessary if the amount could be sizable. Still a third possibility exists if the organization is told that while the final amount of the 10% bequest is not known, it will be at least some stated amount. In that instance, the minimum amount would be recorded with footnote disclosure of the contingent interest.

Exchange Transactions

In addition to the support received as contributions and pledges, not-for-profit organizations often obtain revenues by obtaining fees for services that they provide. These types of revenues are often called “fee-for-service” activities or “exchange transactions.” Appendix B provides a checklist of factors that can be considered in determining whether a particular item of revenue is a contribution (gift) or a fee-for-service activity (purchase of goods or services) from the not-for-profit organization. Appendix G provides a checklist of factors that can be considered in determining whether a program largely funded by an outside funder is really a program of the funder that they have engaged the not-for-profit to conduct on their behalf—in which case the revenue is an exchange transaction—or is a program of the not-for-profit that the funder is helping to pay for—in which case the revenue is likely a restricted contribution.

In the simplest form, the sale of an item from a museum's gift shop is an exchange transaction. The purchaser pays the museum money in consideration for the item purchased. There is no gift involved. A bit more complicated example would be social service contracts that not-for-profit organizations sometimes have with state or local governmental agencies to provide specific types of social services. For example, the not-for-profit organization may provide temporary shelter to homeless individuals, care for individuals with developmental disabilities, or run after-school programs for young students. In these cases, the not-for profit organization is compensated based on the services performed (i.e., number of days service provided to a number of clients, compensated at a contractually agreed upon rate per day). These types of activities are considered fee-for-service activities and not contributions or gifts.

The accounting standards discussed in this chapter focus primarily on contributions and gifts. Determining when to recognize revenue for fee-for-service activities or exchange transactions is not based on these principles, but rather revenue recognition principles inherent in GAAP. Essentially, revenue is recognized when the earnings process is complete. In other words, when the not-for-profit organization has done everything it needs to do to keep the funds it has earned, revenue is recognized in the financial statements. In the examples above, revenue would be recognized at the time of sale of the item from the museum gift shop (perhaps subject to an allowance for returns, if they are historically significant). Revenue for the fee-for-service contracts is recognized at the time the services are provided to the not-for-profit organization's clients.

In more complex, longer-term contracts, revenue recognition may not be as straightforward. Practices in GAAP have developed whereby revenue may be recognized after the achievement of certain “milestones” that are met, even though the services under the entire contract have not been met. The FASB issued ASU 2010-17 (Revenue Recognition—Milestone Method [Topic 605] Milestone Method of Revenue Recognition—A Consensus of the FASB Emerging Issues Task Force). ASU 2010-17 provides guidance on defining a milestone and determining when it may be appropriate to apply the milestone method of revenue recognition for research and development activities.

The requirements of ASU 2010-17 specifically apply to vendors that provide research and development deliverables in an arrangement in which one or more payments are contingent upon achieving certain future events or circumstances. This may conceptually apply to situations where the not-for-profit organization is acting as a vendor in a research and development contract, such as a not-for-profit college or university.

Essentially, ASU 2010-17 provides that a vendor can recognize consideration that is contingent upon achievement of a milestone in its entirety as revenue in the period in which the milestone is achieved only if the milestone meets all criteria to be considered substantive.

Determining whether a milestone is substantive is a matter of judgment made at the inception of the arrangement. ASU 2010-17 provides that the following criteria must be met for a milestone to be considered substantive. The consideration earned by achieving the milestone should:

1. Be commensurate with either of the following:
   1. The vendor's performance to achieve the milestone;
   2. The enhancement of the value of the item delivered as a result of a specific outcome resulting from the vendor's performance to achieve the milestone.
2. Relate solely to past performance.
3. Be reasonable relative to all deliverables and payment terms in the arrangement.

ASU 2010-17 further provides that a milestone should be considered substantive in its entirety. An arrangement may include more than one milestone, and each milestone should be evaluated separately to determine whether the milestone is substantive. Accordingly, an arrangement may contain both substantive and nonsubstantive milestones.

A vendor's decision to use the milestone method of revenue recognition for transactions within the scope of ASU 2010-17 is considered a policy election. Other proportional revenue recognition methods also may be applied as long as the application of those other methods does not result in the recognition of consideration in its entirety in the period the milestone is achieved.

ASU 2010-17 provides disclosure requirements for vendors that are affected by its provisions. Specifically, the following disclosures are required:

• A description of the overall arrangement;
• A description of each milestone and related contingent consideration;
• A determination of whether each milestone is considered substantive;
• The factors that the entity considered in determining whether the milestone or milestones are substantive;
• The amount of consideration recognized during the period for the milestone or milestones.

In May 2014, the FASB issued ASU 2014-09 Revenue from Contracts with Customers (Topic 606), which is a very significant (and lengthy) document that may have significant impacts on industries that earn revenue from customers. While accounting standards for revenue recognition were contained in various topics of the FASB ASC, particularly for specific industry guidance, there was no general topic that covered revenue recognition with customers. ASU 2014-09 creates Topic 606 to provide such guidance.

While most revenues recorded by not-for-profit organizations are not from customers, but from donors, it is conceivable that this ASU might impact certain revenue contracts. In addition, some of the very straightforward ways in which not-for-profit organizations earn and record exchange transaction revenues (providing service days to people with disabilities, for example) will likely not be impacted by ASU 2014-09.

ASU 2014-09 bases revenue recognition on the core principle that an entity should recognize revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services.

To achieve that core principle, an entity should apply the following steps:

• Step 1 Identify the contract(s) with a customer.
• Step 2 Identify the performance obligations in the contract.
• Step 3 Determine the transaction price.
• Step 4 Allocate the transaction price to the performance obligations in the contract.
• Step 5 Recognize revenue when (or as) the entity satisfies a performance obligation.

ASU 2014-09 includes summaries of each of these steps, which are provided as follows:

Step 1: Identify the Contract with a Customer

A contract is an agreement between two or more parties that creates enforceable rights and obligations. An entity should apply the requirements to each contract that meets the following criteria:

1. Approval and commitment of the parties.
2. Identification of the rights of the parties.
3. Identification of the payment terms.
4. The contract has commercial substance.
5. It is probable that the entity will collect the consideration to which it will be entitled in exchange for the goods or services that will be transferred to the customer.

In some cases, an entity should combine contracts and account for them as one contract. In addition, there is guidance on the accounting for contract modifications.

Step 2: Identify the Performance Obligations in the Contract

A performance obligation is a promise in a contract with a customer to transfer a good or service to the customer. If an entity promises in a contract to transfer more than one good or service to the customer, the entity should account for each promised good or service as a performance obligation only if it is (1) distinct, or (2) a series of distinct goods or services that are substantially the same and have the same pattern of transfer.

A good or service is distinct if both of the following criteria are met:

1. Capable of being distinct—The customer can benefit from the good or service either on its own or together with other resources that are readily available to the customer.
2. Distinct within the context of the contract—The promise to transfer the good or service is separately identifiable from other promises in the contract.

A good or service that is not distinct should be combined with other promised goods or services until the entity identifies a bundle of goods or services that is distinct.

Step 3: Determine the Transaction Price

The transaction price is the amount of consideration (for example, payment) to which an entity expects to be entitled in exchange for transferring promised goods or services to a customer, excluding amounts collected on behalf of third parties. To determine the transaction price, an entity should consider the effects of:

1. Variable consideration—If the amount of consideration in a contract is variable, an entity should determine the amount to include in the transaction price by estimating either the expected value (that is, probability-weighted amount) or the most likely amount, depending on which method the entity expects to better predict the amount of consideration to which the entity will be entitled.
2. Constraining estimates of variable consideration—An entity should include in the transaction price some or all of an estimate of variable consideration only to the extent it is probable that a significant reversal in the amount of cumulative revenue recognized will not occur when the uncertainty associated with the variable consideration is subsequently resolved.
3. The existence of a significant financing component—An entity should adjust the promised amount of consideration for the effects of the time value of money if the timing of the payments agreed upon by the parties to the contract (either explicitly or implicitly) provides the customer or the entity with a significant benefit of financing for the transfer of goods or services to the customer. In assessing whether a financing component exists and is significant to a contract, an entity should consider various factors. As a practical expedient, an entity need not assess whether a contract has a significant financing component if the entity expects at contract inception that the period between payment by the customer and the transfer of the promised goods or services to the customer will be one year or less.
4. Noncash consideration—If a customer promises consideration in a form other than cash, an entity should measure the noncash consideration (or promise of noncash consideration) at fair value. If an entity cannot reasonably estimate the fair value of the noncash consideration, it should measure the consideration indirectly by reference to the standalone selling price of the goods or services promised in exchange for the consideration. If the noncash consideration is variable, an entity should consider the guidance on constraining estimates of variable consideration.
5. Consideration payable to the customer—If an entity pays, or expects to pay, consideration to a customer (or to other parties that purchase the entity's goods or services from the customer) in the form of cash or items (for example, credit, a coupon, or a voucher) that the customer can apply against amounts owed to the entity (or to other parties that purchase the entity's goods or services from the customer), the entity should account for the payment (or expectation of payment) as a reduction of the transaction price or as a payment for a distinct good or service (or both). If the consideration payable to a customer is a variable amount and accounted for as a reduction in the transaction price, an entity should consider the guidance on constraining estimates of variable consideration.

Step 4: Allocate the Transaction Price to the Performance Obligations in the Contract

For a contract that has more than one performance obligation, an entity should allocate the transaction price to each performance obligation in an amount that depicts the amount of consideration to which the entity expects to be entitled in exchange for satisfying each performance obligation.

To allocate an appropriate amount of consideration to each performance obligation, an entity must determine the standalone selling price at contract inception of the distinct goods or services underlying each performance obligation and would typically allocate the transaction price on a relative standalone selling price basis. If a standalone selling price is not observable, an entity must estimate it. Sometimes, the transaction price includes a discount or variable consideration that relates entirely to one of the performance obligations in a contract. The requirements specify when an entity should allocate the discount or variable consideration to one (or some) performance obligation(s) rather than to all performance obligations in the contract.

An entity should allocate to the performance obligations in the contract any subsequent changes in the transaction price on the same basis as at contract inception. Amounts allocated to a satisfied performance obligation should be recognized as revenue, or as a reduction of revenue, in the period in which the transaction price changes.

Step 5: Recognize Revenue When (or As) the Entity Satisfies a Performance Obligation

An entity should recognize revenue when (or as) it satisfies a performance obligation by transferring a promised good or service to a customer. A good or service is transferred when (or as) the customer obtains control of that good or service.

For each performance obligation, an entity should determine whether the entity satisfies the performance obligation over time by transferring control of a good or service over time. If an entity does not satisfy a performance obligation over time, the performance obligation is satisfied at a point in time.

An entity transfers control of a good or service over time and, therefore, satisfies a performance obligation and recognizes revenue over time if one of the following criteria is met:

1. The customer simultaneously receives and consumes the benefits provided by the entity's performance as the entity performs.
2. The entity's performance creates or enhances an asset (for example, work in process) that the customer controls as the asset is created or enhanced.
3. The entity's performance does not create an asset with an alternative use to the entity, and the entity has an enforceable right to payment for performance completed to date.

If a performance obligation is not satisfied over time, an entity satisfies the performance obligation at a point in time. To determine the point in time at which a customer obtains control of a promised asset and an entity satisfies a performance obligation, the entity would consider indicators of the transfer of control, which include, but are not limited to, the following:

1. The entity has a present right to payment for the asset.
2. The customer has legal title to the asset.
3. The entity has transferred physical possession of the asset.
4. The customer has the significant risks and rewards of ownership of the asset.
5. The customer has accepted the asset.

For each performance obligation that an entity satisfies over time, an entity shall recognize revenue over time by consistently applying a method of measuring the progress toward complete satisfaction of that performance obligation. Appropriate methods of measuring progress include output methods and input methods. As circumstances change over time, an entity should update its measure of progress to depict the entity's performance completed to date.

However, the applicability of the provisions of ASU 2019-09 to government and foundation grants in determining whether the government (or other entity, such as a foundation) is a “customer” or more like a donor will also need to be addressed as a practice issue. As such, the FASB issued ASU 2018-08 Clarifying the Scope and the Accounting Guidance for Contributions Received and Contributions Made to clarify the FASB's issuance of ASU's (2014-09 and 2015-14) dealing with revenue recognition. The FASB excluded contributions from the requirements of the revenue recognition standard. The question is whether governmental and other grants are contributions or transactions with customers and subject to the new revenue recognition standards.

ASU 2018-08 will assist not-for-profit organizations in (1) evaluating whether transactions should be accounted for as contributions (nonreciprocal transactions) within the scope of Topic 958, Not-for-Profit Entities, or as exchange (reciprocal) transactions subject to other guidance, and (2) distinguishing between conditional contributions and unconditional contributions.

ASU 2018-08 clarifies how an entity determines whether a resource provider is participating in an exchange transaction by evaluating whether the resource provider is receiving commensurate value in return for the resources transferred on the basis of the following:

1. A resource provider (including a foundation, a government agency, or other) is not synonymous with the general public. A 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 providers’ mission or the positive sentiment from acting as a donor does not constitute commensurate value received by a resource provider for purposes of determining whether a transfer of assets is a contribution or an exchange.

The amendments in ASU 2018-08 clarify that, consistent with current GAAP, in instances in which a resource provider is not itself receiving commensurate value for the resources provided, an entity must determine whether a transfer of assets represents a payment from a third-party payer on behalf of an existing exchange transaction between the recipient and an identified customer. If so, other guidance (for example, Topic 606) applies.

ASU 20018-08 provides that an entity determines whether a contribution is conditional on the basis of whether an agreement includes a barrier that must be overcome and either a right of return of assets transferred or a right of release of a promisor's obligation to transfer assets. Either a right of return of the assets transferred or a right of release of the promisor from its obligation to transfer assets, as described in the current FASB Accounting Standards Codification Master Glossary definition of the term donor-imposed condition, must be determinable from the agreement (or another document referenced in the agreement). The presence of both a barrier and a right of return or a right of release indicates that a recipient is not entitled to the transferred assets or a future transfer of assets until it has overcome the barrier(s) in the agreement.

After a contribution has been deemed unconditional, an entity would then consider whether the contribution is restricted on the basis of the current definition of the term donor-imposed restriction, which includes a consideration of how broad or narrow the purpose of the agreement is, and whether the resources are available for use only after a specified date.

Indicators are used to guide the assessment of whether an agreement contains a barrier. Depending on the facts and circumstances, some indicators may be more significant than others, and no single indicator is determinative. The indicators include:

1. The inclusion of a measurable performance-related barrier or other measurable barrier. Examples of measurable performance-related barriers include a requirement that indicates that a recipient's entitlement to transferred assets is contingent upon the achievement of a certain level of service, an identified number of units of output, or a specific outcome. An example of another measurable barrier is a stipulation that the recipient is entitled to the assets only upon the occurrence of an identified event (for example, a matching requirement).
2. The extent to which a stipulation limits discretion by the recipient on the conduct of an activity. Limited discretion by the recipient is more specific than the general activity being conducted by the recipient or the time frame in which the contribution must be used. Examples of limited discretion could include a requirement to follow specific guidelines about qualifying allowable expenses, a requirement to hire specific individuals as part of the workforce conducting the activity, or a specific protocol that must be adhered to.
3. Whether a stipulation is related to the purpose of the agreement. This indicator generally excludes administrative tasks and trivial stipulations.

ASU 2008-08 likely will result in more grants and contracts being accounted for as either contributions or conditional contributions than observed in practice under current guidance. For this reason, clarifying the guidance about whether a contribution is conditional is important because such classification affects the timing of contribution revenue and expense recognition. Recipients of conditional promises to give are required to comply with current disclosure requirements in paragraph 958-310-50-4.

For recipients, what is generally known as the simultaneous release accounting policy option is in paragraphs 958-605-45-4A through 45-4B. Specifically, the amendments allow an NFP to elect that policy option for donor-restricted contributions that were initially conditional contributions without also having to elect the policy for other donor-restricted contributions.

ASU 2018-08 should be applied on a modified prospective basis. Retrospective application is permitted. Under a modified prospective basis, in the first set of financial statements following the effective date the amendments should be applied to agreements that are either:

1. Not completed as of the effective date;
2. Entered into after the effective date.

A completed agreement is an agreement for which all the revenue (of a recipient) or expense (of a resource provider) has been recognized before the effective date in accordance with current guidance (for example, Topic 605, Topic 958, or other Topics).

The requirements of ASU 20018-08 should be applied only to the portion of revenue or expense that has not yet been recognized before the effective date in accordance with current guidance. No prior-period results should be restated, and there should be no cumulative-effect adjustment to the opening balance of net assets or retained earnings at the beginning of the year of adoption. Under this approach, an entity is required to disclose both:

1. The nature of and reason for the accounting change;
2. An explanation of the reasons for significant changes in each financial statement line item in the current annual or interim period resulting from applying the amendments instead of the previous guidance.

For transactions in which an entity is either a public business entity or a not-for-profit that has issued, or is a conduit bond obligor for, securities that are traded, listed, or quoted on an exchange or an over-the-counter market and serves as a resource recipient, the entity should apply the amendments in this ASU on contributions received to annual periods beginning after June 15, 2018, including interim periods within those annual periods. All other entities should apply the amendments for transactions in which the entity serves as the resource recipient to annual periods beginning after December 15, 2018, and interim periods within annual periods beginning after December 15, 2019.

For transactions in which an entity is either a public business entity or an NFP that has issued, or is a conduit bond obligor for securities that are traded, listed, or quoted on an exchange or an over-the-counter market and serves as a resource provider, the entity should apply the amendments in this ASU on contributions made to annual periods beginning after December 15, 2018, including interim periods within those annual periods. All other entities should apply the amendments for transactions in which the entity serves as the resource provider to annual periods beginning after December 15, 2019, and interim periods within annual periods beginning after December 15, 2020. Early adoption of the amendments is permitted.

Costs to Obtain or Fulfill a Contract with a Customer

ASU 2014-09's guidance also specifies the accounting for some costs to obtain or fulfill a contract with a customer.

Incremental costs of obtaining a contract—An entity should recognize as an asset the incremental costs of obtaining a contract that the entity expects to recover. Incremental costs are those costs that the entity would not have incurred if the contract had not been obtained. As a practical expedient, an entity may expense these costs when incurred if the amortization period is one year or less.

Costs to fulfill a contract—To account for the costs of fulfilling a contract with a customer, an entity should apply the requirements of other standards (for example, Topic 330, Inventory; Subtopic 350-40; Internal-Use Software; Topic 360, Property, Plant, and Equipment; and Subtopic 985-20, Costs of Software to Be Sold, Leased, or Marketed), if applicable. Otherwise, an entity should recognize an asset from the costs to fulfill a contract if those costs meet all of the following criteria:

1. Relate directly to a contract (or a specific anticipated contract).
2. Generate or enhance resources of the entity that will be used in satisfying performance obligations in the future.
3. Are expected to be recovered.

Disclosures—An entity should disclose sufficient information to enable users of financial statements to understand the nature, amount, timing, and uncertainty of revenue and cash flows arising from contracts with customers. Qualitative and quantitative information is required about:

1. Contracts with customers—including revenue and impairments recognized, disaggregation of revenue, and information about contract balances and performance obligations (including the transaction price allocated to the remaining performance obligations).
2. Significant judgments and changes in judgments—determining the timing of satisfaction of performance obligations (over time or at a point in time), and determining the transaction price and amounts allocated to performance obligations.
3. Assets recognized form the costs to obtain or fulfill a contract.

In August 2015, the FASB issued ASU 2015-14 Revenue Contracts with Customers (Topic 606) Deferral of the Effective Date to defer the implementation timetable for ASU 2014-09.

For public entities, certain not-for-profit entities and certain employee benefit plans, ASU 2014-09 is effective for annual reporting periods beginning after December 15, 2017. Not-for-profit organizations that must comply with this implementation date are those that have issued, or are a conduit debt obligor for, securities that are traded, listed, or quoted on an exchange or an over-the-counter market.

All other entities (including not-for-profit organizations not meeting the requirement above), ASU 2014-09 is effective for annual reporting periods beginning after December 15, 2018.

In April 2016 the FASB issued ASU 2016-10 Revenue Contracts with Customers (Topic 606), which includes implementation clarification of ASU 2014-09 based on consensus of the FASB Emerging Issues Task Force. ASU 2016-10 clarifies two aspects of ASU 2014-09—identifying performance obligations and licensing.

While licensing is outside the scope of this book, as to performance obligations, ASU 2016-10 provides that:

• An entity is not required to assess whether promised goods or services are performance obligations if they are immaterial in the context of the contract with the customer.
• An entity is permitted, as an accounting policy election, to account for shipping and handling activities that occur after the customer has obtained control of a good as an activity to fulfill the promise to transfer the good rather than as an additional promised service.

ASU 2016-10 also provides additional guidance for determining whether promises to transfer goods and services are separately identifiable or whether the promise is to transfer a combined item to which the promised goods are inputs.

Similarly, the FASB issued ASU 2016-12 Revenue from Contracts with Customers (Topic 606) FASB Accounting Standards Codification—Narrow-Scope Improvements and Practical Expedients to address specific issues in Topic 606 related to addressing the collectibility criterion at contract inception, sales and other taxes collected from customers, contract modifications and completed contracts at transition, as well as various technical corrections.

For not-for-profit organizations, the most important provisions of ASU 2016-12 concern sales taxes. The transaction price under Topic 606 excludes amounts collected on behalf of third parties, commonly most sales taxes. However, there was a concern that analyzing taxes on a jurisdiction by jurisdiction basis to determine which taxes were considered collected on behalf of their parties and hence, which would be reported gross and which would be reported net was seen to be complex and cost prohibitive. Accordingly, ASU 2016-12 permits an entity, as an accounting policy election, to exclude amounts collected from customers for all sales (and other similar) taxes from the transaction price.

The FASB also issued ASU 2016-20 Technical Corrections and Improvements to Topic 606, Revenue from Contracts with Customers to provide, as its title states, technical corrections and improvements to Topic 606. The topic areas it addresses include loan guarantee fees, contract costs, construction and production type contracts, etc. Most of its provisions are very narrow in scope and would not impact the majority of not-for-profit organizations.

The effective dates for ASU 2016-10, ASU 2016-12, and ASU 2016-20 are the same as for ASU 2014-09, as deferred.

Two for the main provisions of the Proposed ASU are the following:

1. A resource provider (including a private foundation, a government agency, or other) is not synonymous with the general public. 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 providers’ mission or the positive sentiment from acting as a donor would not constitute commensurate value received by a resource provider for purposes of determining whether a transfer of assets is a contribution or an exchange.

If a final ASU incorporates these provisions, it will likely result in many governmental contracts being considered contributions, rather than revenue contracts with customers.

Troubled Debt Restructurings—Creditors

Some not-for-profit organizations loan funds to other organizations for various reasons, based on their particular missions. For example, a not-for-profit organization may be a microlender to start-up businesses as part of an economic development grant from a state or local government.

Given the recent economic downturn, the volume of debt restructured (modified) by creditors has increased. The FASB has issued additional guidance, A Creditor's Determination of Whether a Restructuring Is a Troubled Debt Restructuring (ASU 2011-02), to help creditors in determining whether a creditor has granted a concession and whether a debtor is experiencing financial difficulties, for purposes of determining whether a restructuring constitutes a troubled debt restructuring.

Distinguishing a troubled debt restructuring from a refinancing or other restructuring of debt in the normal course of business is important because of the specific accounting rules for measuring and recording losses for troubled debt restructuring contained in ASC 310.

In evaluating whether a restructuring constitutes a troubled debt restructuring, a creditor must separately conclude that both of the following exist:

1. The restructuring constitutes a concession.
2. The debtor is experiencing financial difficulties.

The amendments to Topic 310 clarify the guidance on a creditor's evaluation of whether it has granted a concession as follows:

1. If a debtor does not otherwise have access to funds at a market rate for debt with similar risk characteristics as the restructured debt, the restructuring would be considered to be at a below-market rate, which may indicate that the creditor has granted a concession.

   If a creditor determines that it has granted a concession, the creditor must make a separate assessment about whether the debtor is experiencing financial difficulties to determine whether the restructuring constitutes a troubled debt restructuring.

2. A temporary or permanent increase in the contractual interest rate as a result of a restructuring does not preclude the restructuring from being considered a concession because the new contractual interest rate on the restructured debt could still be below the market interest rate for new debt with similar risk characteristics. If a creditor determines that it has granted a concession, the creditor must make a separate assessment about whether the debtor is experiencing financial difficulties to determine whether the restructuring constitutes a troubled debt restructuring.
3. A restructuring that results in a delay in payment that is insignificant is not a concession. However, an entity should consider various factors in assessing whether a restructuring resulting in a delay in payment is insignificant. The amendments include examples illustrating the assessment of whether a restructuring results in a delay in payment that is insignificant.

The amendments to Topic 310 also clarify the guidance on a creditor's evaluation of whether a debtor is experiencing financial difficulties.

The FASB believes that there is currently diversity in practice in identifying restructurings of receivables that constitute troubled debt restructuring for a creditor. The clarifying guidance in ASU 2011-02 should result in more consistent application of US GAAP for debt restructurings.

Factors to Be Considered in Deciding Whether a Particular Gift (for Operating Purposes) Should Be Classified as Purpose-Restricted or Not

The following list of factors is to be considered by:

• Not-for-profit organizations, in deciding how to classify operating gifts;
• Auditors, in assessing the appropriateness of the client's decision.

In some cases, none of these factors will be determinative by itself; all applicable factors should be considered together. These factors are intended to facilitate consideration of the appropriate classification of operating gifts that may be purpose-restricted. This list is intended to deal with neither how to account for gifts, nor with questions regarding time-restricted gifts or nonoperating gifts, although some factors may be helpful in those areas.

Factors to Be Considered in Distinguishing Contracts for the Purchase of Goods or Services from Restricted Grants (prior to implementation of ASU 2018-08)

The following is a list of factors that may be helpful to:

• Not-for-profit organizations, in deciding how to account for the receipt of payments that might be considered as being either for the purchase of goods or services from the organization, or as restricted-purpose gifts or grants to the organization (as contemplated by FASB guidance at FASB ASC 720-25-15);
• Auditors, in assessing the reasonableness of the client's decision.

Additional discussion of this distinction can be found in the instructions to IRS Form 990. Not one of these factors is normally determinative by itself; all relevant factors should be considered together.

Factors to Be Considered in Assessing Whether Contributed Services Are Considered to Require Specialized Skills (per FASB ASC 958-605-25-16, “Accounting for Contributions Received …”)

The following is a list of factors that may be helpful to:

• Recipients of contributed services of volunteers, in assessing whether the skills utilized by the volunteers in the performance of their services are considered to be “specialized” within the meaning of the GAAP requirements in this area, contained at FASB ASC 958-605;
• Auditors, in assessing the appropriateness of the client's judgment.

This list of factors is not intended to be used in determining how to value or account for such services. In some cases, no single factor is necessarily determinative by itself; all relevant factors should be considered together.

Factors whose presence is often indicative that skills are “specialized”:

1. Persons who regularly hold themselves out to the public as qualified practitioners of such skills are required by law or by professional ethical standards to possess a license or other professional certification, or specified academic credentials. Alternatively, if possession of such license/certification/credentials is optional, the person performing the services does possess such formal certification.
2. Practitioners of such skills are required, by law or professional ethics, to have obtained a specified amount of technical prejob or on-the-job training, to obtain specified amounts of continuing professional education, a specified amount of practical work experience, or to complete a defined period of apprenticeship in the particular type of work.
3. Proper practice of the skills requires the individual to possess specific artistic or creative talent and/or a body of technical knowledge not generally possessed by members of the public at large.
4. Practice of the skills requires the use of technical tools or equipment. The ability to properly use such tools or equipment requires training or experience not generally possessed by members of the public at large.
5. There is a union or professional association whose membership consists specifically of practitioners of the skills, as opposed to such groups whose members consist of persons who work in a broad industry, a type of company, or a department of a company. Admission to membership in such organization requires demonstrating one or more of the factors 1, 2, or 3 above. (Whether or not the person whose skills are being considered actually belongs to such organization is not a factor in assessing whether the skills are considered to be specialized; it may be relevant in assessing whether the person possesses the skills.)
6. Practitioners of such skills are generally regarded by the public as being members of a particular “profession.”
7. There is a formal disciplinary procedure administered by a government or by a professional association, to which practitioners of such skills are subject, as a condition of offering their skills to the public for pay.
8. Practice of the skills by persons who do so in their regular work is ordinarily done in an environment in which there is regular formal review or approval of work done by supervisory personnel or by professional peers.

Factors to Be Considered in Determining Whether an Organization Would Typically Need to Purchase Services if Not Provided by Donation

The following is a list of factors that may be helpful to:

• Not-for-profit organizations, in deciding whether or not contributed services meet the criterion in FASB ASC 958-605-25-16;
• Auditors, in assessing the reasonableness of the client's decision.

None of these factors is normally determinative by itself; all relevant factors and the strength of their presence should be considered together.

The following is a list of factors that may be helpful to:

• Donees, in assessing whether a pledge (unconditional promise to give—as contemplated in FASB ASC 958-605-25-8, 9, and 10) has, in fact, been made;
• Auditors, in assessing the appropriateness of the client's judgment.

This list of factors is not intended to be used in deciding on proper accounting (for either the pledge asset or the related revenue/net assets), or to assess collectibility, although some of the factors may be relevant to those decisions as well. In many cases, no single factor is necessarily determinative by itself; all relevant factors should be considered together.

Factors to Be Considered in Deciding Whether a Gift or Pledge Subject to Donor Stipulations Is Conditional or Restricted (as Discussed in FASB ASC 958-605-25-14, 15)

Donors place many different kinds of stipulations on pledges and other gifts. Some stipulations create legal restrictions that limit the way in which the donee may use the gift. Other stipulations create conditions that must be fulfilled before a donee is entitled to receive (or keep) a gift.

FASB defines a condition as an uncertain future event that must occur before a promise based on that event becomes binding on the promisor. In some cases, it is not immediately clear whether a particular stipulation creates a condition or a restriction. (Some gifts are both conditional and restricted.) Accounting for the two forms of gift is quite different, so it is important that the nature of a stipulation be properly identified so that the gift is properly categorized.

Following is a list of factors to be considered by:

• Recipients (and donors) of gifts, in deciding whether a pledge or other gift that includes donor stipulations is conditional or restricted;
• Auditors, in assessing the appropriateness of the client's decision.

In many cases, none of these factors will be determinative by itself; all applicable factors should be considered together.

Factors to Be Considered in Judging “Whose Program Is It?”

Many programs conducted by not-for-profit organizations are partly or wholly funded by one or a few outside funders, rather than by proceeds of the organization's own fundraising efforts or by fees paid by the beneficiaries of the program. These outside funders are often governmental units or other not-for-profit organizations. In some cases such programs are really the organization's own program, which the funder is helping to fund; in other cases such programs are really the funder's program, which it is paying the organization to run on its behalf.

Following is a list of factors that may be helpful in those cases, to:

• Such organizations, in assessing whether the outside funding should be considered to be payment for services rendered, or as a restricted contribution to the organization;*
• Auditors, in assessing the appropriateness of the client's judgment.

In many cases no one of these factors is necessarily determinative by itself; all relevant factors should be considered together.

See also the list of factors in Appendix B to help judge generally whether revenue should be considered a contribution or an exchange transaction.

* This distinction is important because contributions are always reported as revenue immediately upon receipt of a gift or of an unconditional promise to make a gift (a “pledge”), while payments for services rendered (“exchange transactions”) are not reported as revenue until the services being paid for are provided to the recipients of those services, who—especially in the case of a government funder—are often not the same as the provider(s) of the funding in question. In the case of exchange transactions, advance payments are initially recorded as deferred revenue; amounts due under cost-reimbursement contracts are recorded as receivables and revenue as costs are incurred.

** Factors that would generally be considered more significant.