By Su Rim, Manager, Assurance
It has been two years since the Financial Accounting Standards Board (FASB) issued new requirements for how not-for-profit organizations should recognize a donation on a balance sheet. These FASB nonprofit accounting changes took effect for fiscal year 2019, so it was in 2020 that we saw many charities grappling with these changes for the first time. Unfortunately, there remains some confusion over the new FASB 958 nonprofit accounting standards — especially when nonprofits receive contribution that comes with conditions or restrictions. Under FASB new nonprofit accounting standards, conditional gifts affect when the transaction can be recognized as revenue or an expense by the recipient (i.e., the nonprofit) and the provider (i.e., the donor). It can all be a bit hard to unwind.
FASB 958 Nonprofit Accounting Standards: Conditional vs. Restricted Donations
First off, it is important to understand the differences between conditional and restricted donations. Conditional donations involve a donor imposing one or more barriers that a charity must overcome to get the gift's total value. The most common type of donation condition is a matching grant. This happens when a donor promises to make a gift — say, for a million dollars — so long as the charity can raise a matching amount of money by other means. If the nonprofit fails to overcome the barrier, the donor can demand the return of the money or give a lower amount.
By comparison, donors who make restricted contributions impose rules on the for how the gift can be used, including how the money is spent or when it is used. For example, the donor might want all of the funds to be used further the nonprofit’s core mission, such as buying food to feed the homeless, but not on administrative expenses. Or, a person could make a $500,000 donation, but specify that the charity can only use $100,000 per year for the next five years to ensure that it is funded over that period.
How FASB New Nonprofit Accounting Standards Affect Conditional and Restricted Donations
The biggest thing to be aware of with regard to the FASB nonprofit accounting changes is that FASB new nonprofit accounting standards only affect conditional donations. Previously, when a nonprofit was offered a conditional donation, it could immediately recognize the gift on the balance sheet if there was a solid chance to overcome the barriers threshold. Under the updated standard, the nonprofit should list conditional contributions as liabilities if the money is transferred in advance and only recognize it as revenue when the requirements for the cash are met or waived. Donations without conditions should be classified immediately as assets.
Having a clear understanding of this part of the new standard can help a charity avoid the embarrassment of issuing a tax credit for the total amount of a conditional donation, only to let the donor know later that nonprofit did not overcome the barrier. As mentioned above, there’s always the chance that the donor could rescind the gift or give a lower amount of money.
Stay Compliant With All FASB New Nonprofit Standards With BPM Assurance and Audit
Charities must adhere to all FASB nonprofit accounting changes in order to remain compliant with Generally Accepted Accounting Principles (GAAP). Failing to do so could be an institutional risk and could trigger costly errors. Thankfully, BPM’s Assurance professionals have the talent and the resources your nonprofit needs to ensure your financial statements adhere to all FASB 958 nonprofit accounting standards. To learn more about how we can help you stay in compliance with nonprofit GAAP requirements, contact Su Rim, Assurance Manager, today.