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6.6 Conditions on contributions
Publication date: 27 May 2020
us NFP guide
Once a transaction is determined to be a contribution, the next step is to determine whether that contribution is conditional or unconditional. The presence or absence of a condition affects the timing of revenue recognition by the recipient and expense recognition by the donor. Unconditional contributions are recognized immediately. However, under ASC 958-605-25-11, if a contribution contains a condition, neither revenue nor expense can be recognized until the condition is satisfied (at which time the contribution becomes unconditional).
Excerpt from ASC 958-605-25-11
Conditional promises to give, which contain donor-imposed conditions that represent a barrier that must be overcome as well as a right of release from obligation, shall be recognized when the condition or conditions on which they depend are substantially met, that is, when the conditional promise becomes unconditional.
A donor-imposed condition is described in ASC 958-605-25-5A. It involves a barrier or hurdle stipulated in the grant award or gift agreement that must be overcome in order for the donee to be entitled to the resources. If the donee fails to overcome the barrier, the donor is released from its obligation to transfer the resources (or, if the donor transferred the resources in advance, the donor has the right to demand their return/is entitled to a return of the transferred assets).
A donor-imposed condition must have both:
- One or more barriers that must be overcome before a recipient is entitled to the assets transferred or promised
- A right of return to the contributor for assets transferred (or for a reduction, settlement, or cancellation of liabilities) or a right of release of the promisor from its obligation to transfer assets (or reduce, settle, or cancel liabilities).
A condition that impacts revenue or expense recognition for financial reporting purposes embodies both a barrier that the recipient must overcome (described further in NP 6.6.1) and a right of return of assets or release for the donor if the barrier is not overcome (discussed in NP 6.6.2). If either characteristic is missing (for example, if the agreement contains a right of return but does not specify a barrier), the contribution is unconditional.
A simple example of a conditional contribution is a “challenge grant,” where a donor agrees to make a gift upon the donee’s achievement of a specified level of fundraising (the challenge) set by the donor.
Example NP 6-1 illustrates a challenge grant involving a promise to transfer assets in the future.
EXAMPLE NP 6-1
Challenge grant – funds are promised
Challenge grant – funds are promised
Foundation promises to give $100,000 to City Opera if the City Opera raises at least $100,000 from other donors before the end of its fiscal year.
At what point would City Opera and the Foundation record the promise to give?
Analysis
As the gift is contingently promised. City Opera does not have a right to the resources, and Foundation does not have an obligation to transfer the resources, unless the opera raises $100,000 by the deadline. The requirement to raise the $100,000 is the “barrier” in the agreement. If City Opera is successful (and thus, the barrier is overcome), the gift becomes unconditional, and Foundation is obligated to transfer the resources. When that occurs, City Opera would recognize a contribution receivable and contribution revenue of $100,000, and Foundation would recognize a corresponding contribution payable and contribution expense. If City Opera is unable to raise $100,000 (and cannot overcome the barrier), Foundation is released from its promise to transfer the resources.
Example NP 6-2 illustrates the accounting for a challenge grant when the donor transfers resources in advance.
EXAMPLE NP 6-2
Challenge grant – funds are advanced
Challenge grant – funds are advanced
Foundation agrees to give $100,000 to City Opera if the City Opera raises at least $100,000 on its own before the end of its fiscal year. At the time the agreement is executed, Foundation advances $50,000 to City Opera. If City Opera fails to raise the other funds, the $50,000 will have to be returned to Foundation.
How should City Opera and the Foundation record the advance?
Analysis
When the funds are transferred, City Opera would recognize cash and a refundable advance (a liability) and Foundation would recognize a reduction in cash and a receivable from City Opera. If City Opera ultimately achieves the $100,000 fundraising goal, City Opera would derecognize the refundable advance, recognize the additional $50,000 due from Foundation as a receivable and recognize $100,000 of contribution revenue. Similarly, Foundation would derecognize the receivable for the refundable advance, recognize an additional payable to City Opera for $50,000 and recognize $100,000 of contribution expense. The following are the journal entries:
City Opera (donee) |
Foundation (donor) |
|||||
Dr. Cash |
$50,000 |
Dr. Refundable advance |
$50,000 |
|||
Cr. Refundable advance |
50,000 |
Cr. Cash |
50,000 |
|||
To record funds advanced by donor |
To record funds advanced to donee |
|||||
Dr. Refundable advance |
$50,000 |
Dr. Contribution expense |
$100,000 |
|||
Dr. Contribution receivable |
50,000 |
Cr. Refundable advance |
50,000 |
|||
Cr. Contribution revenue |
100,000 |
Cr. Contribution payable |
50,000 |
|||
To recognize contribution revenue upon meeting condition |
To recognize contribution expense–donee met condition |
|||||
In some cases, a gift might be partly conditional and partly unconditional. Example NP 6-3 illustrates the accounting in such situations.
EXAMPLE NP 6-3
Contribution is partly conditional
Contribution is partly conditional
Donor executes a gift agreement with Hospital to provide $10 million for construction of a new wing. $5 million is paid when the agreement is signed, with no identifiable barriers to entitlement. The remainder will be due upon completion of construction, when the certificate of occupancy is granted.
When would Hospital recognize the revenue associated with this gift?
Analysis
Hospital would bifurcate the $10 million gift. The $5 million received at signing is unconditional and would be recognized as contribution revenue in the period that the gift instrument was executed.
The remaining $5 million is a conditional promise to give. The donor has stipulated a barrier (completion of construction and obtaining the certificate of occupancy) which must be overcome in order for Hospital to be entitled to the remaining funds.
Hospital would recognize the remaining $5 million of contribution revenue in the period when the barrier is overcome.
6.6.1 What is a contribution “barrier”?
A barrier is a stipulation in an agreement that must be overcome (either through a recipient’s own performance or by other means) in order for the recipient to be entitled to funds received or promised.
Barriers are absolute thresholds for donors and donees to assess whether a contribution should be recognized. They are not subject to a probability or likelihood assessment. Barriers are objective and binary – an entity will either meet the barrier (and thus, be entitled to the resources) or it will not. Thus, the stipulation needs to be specific enough to allow both parties to identify the condition or conditions that must be satisfied and to be able to determine when they have been satisfied. Requirements must be substantive to impose a barrier; trivial stipulations (such as certain reporting requirements discussed at NP 6.6.1.3) do not establish barriers.
In practice, grant agreements often contain an array of stipulations ranging from project objectives intended to serve as desirable outcomes or goals to strive for, to requests for information to facilitate the grant maker’s learning and evaluation process. This broad spectrum of requirements can complicate or obscure the process of identifying stipulations that are intended to serve as barriers to revenue or expense recognition for financial reporting purposes. GAAP provides a table of indicators in ASC 958-605-25-5D to assist donors and donees in evaluating whether stipulations included in gift and grant agreements would be considered substantive barriers to entitlement for accounting purposes. They include:
- Does the agreement require the entity to achieve performance levels or goals that are measurable in terms of specified outputs, outcomes, or levels of service? (see NP 6.6.1.1)
- Does the agreement stipulate that a specific external event must occur in order for the entity to be entitled to the resources? (see NP 6.6.1.1)
- Does the agreement require that the recipient perform the activity in a specific manner (and thus, limits its discretion)? (see NP 6.6.1.2)
- Are reporting or administrative requirements directly related to achieving the grant or gift’s purpose (rather than compliance-oriented)? (see NP 6.6.1.3)
Entities must exercise judgment when considering the indicators in the light of the individual facts and circumstances of the arrangement. The indicators are intended to be assessed collectively. While some indicators may be more significant, no single one is determinative, as indicated in ASC 958-605-25-5D.
Question NP 6-3 addresses the consideration of likelihood when evaluating a barrier.
Question NP 6-3
Shelter is evaluating a new grant received. According to the grant agreement, Shelter must provide 10,000 meals to the homeless during the one-year grant period (a measurable barrier) in order to be entitled to the grant funds. This averages roughly 200 meals per week. Because Shelter consistently provides an average of 500 meals each week, its management views meeting the barrier of 10,000 meals in a year as perfunctory. Can Shelter consider the likelihood of achieving the barrier when initially classifying the grant as conditional or unconditional?
Shelter is evaluating a new grant received. According to the grant agreement, Shelter must provide 10,000 meals to the homeless during the one-year grant period (a measurable barrier) in order to be entitled to the grant funds. This averages roughly 200 meals per week. Because Shelter consistently provides an average of 500 meals each week, its management views meeting the barrier of 10,000 meals in a year as perfunctory. Can Shelter consider the likelihood of achieving the barrier when initially classifying the grant as conditional or unconditional?
PwC response
No. Neither the likelihood that a barrier will be met nor the resource provider’s intent to enforce a right of return may be considered in evaluating whether an agreement is conditional. Shelter must initially classify the grant as conditional and thus, would delay recognizing revenue until it overcomes the barrier of providing the 10,000 meals during the performance period.
Question NP 6-4 addresses “satisfactory progress” provisions.
Question NP 6-4
NFP receives a grant from Foundation. The grant agreement states that Foundation may terminate any or all payments if, in its sole discretion, it determines that NFP fails to make satisfactory progress toward the grant's purpose. Does this provision constitute a barrier?
NFP receives a grant from Foundation. The grant agreement states that Foundation may terminate any or all payments if, in its sole discretion, it determines that NFP fails to make satisfactory progress toward the grant's purpose. Does this provision constitute a barrier?
PwC response
Not likely. Standard terms of grant agreements often include “satisfactory progress clauses” as protective language giving the donor or grantor the right to decide to cancel the agreement if the project takes a turn that the funding entity does not like.
A barrier should be objectively determinable by both parties, both as to the specific condition that must be satisfied and the point at which satisfaction will have occurred. A typical “satisfactory progress clause” would meet neither characteristic, as the decision on the part of the Foundation would be based entirely on subjective considerations. While all facts and circumstances would need to be considered, this particular provision, in and of itself, would not appear to establish a clear, objectively determinable hurdle for NFP. Assuming no other barriers are present in the agreement, NFP would recognize the grant as an unconditional contribution. If the provision is exercised, NFP would report a reversal of contribution revenue in that period.
Similar considerations would apply to evaluating “right to rescind” provisions in agreements, when the donor or grantor, in its sole discretion and for any reason, reserves the right to terminate the agreement with appropriate notice.
6.6.1.1 Measurable barriers
Some barriers involve either quantitative metrics that must be accomplished or specified events that must occur in order for a recipient to be entitled to the assets received or promised (see Figure NP 6-3). For example, a resource provider might stipulate that a recipient must achieve performance levels or goals that are measurable in terms of specified outputs, outcomes, or levels of service. Alternatively, a resource provider may state that a gift or grant will be made only if a certain event occurs. In either case, an unambiguous threshold for entitlement is established that will clearly indicate (to both resource provider and resource recipient) whether the threshold has been met and if so, when that occurred.
Some conditions involve a series of barriers that must be overcome, called “milestones.” Milestones are checkpoints established at intervals throughout a grant project that serve as unambiguous indicators of progress (e.g., a recipient must achieve specific levels of services or accomplish identified tasks within specified time intervals). Milestones are also considered performance-related barriers, and gifts or grants involving milestones become unconditional in stages as each milestone is met (ASC 958-605-55-21).
Figure NP 6-3 summarizes the various types of measurable barriers.
Figure NP 6-3
Examples of measurable barriers
Examples of measurable barriers
Type
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To be entitled to the funds…
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Examples
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Performance-related
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External event
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ASC 958-605-55-17D provides a number of other examples of measurable barriers.
Question NP 6-5 addresses whether a grant provision qualifies as a barrier.
Question NP 6-5
Foundation awards a grant to Social Services Organization stating that the organization’s activities “must be directed toward a goal of lowering the high-school dropout rate in a specified area to 10% or less.” Would this provision constitute a measurable performance barrier?
Foundation awards a grant to Social Services Organization stating that the organization’s activities “must be directed toward a goal of lowering the high-school dropout rate in a specified area to 10% or less.” Would this provision constitute a measurable performance barrier?
PwC response
No. It’s important to distinguish between metrics that establish requirements versus those that are goals to strive for. “Best efforts” metrics do not establish barriers. General requirements in an agreement often may be intended to serve merely as guidelines, rather than being intended to impose a barrier that must be overcome.
The metric described in this fact pattern was likely included as an objective toward advancing the goals of the grant, rather than a barrier upon which the organization’s entitlement to funds depends.
6.6.1.2 Award stipulations that limit discretion in how the activity is conducted
Some awards give the recipient broad discretion to conduct the funded activity in any way it sees fit within the parameters of a specified budget. Others, however, require the recipient to perform the grant-funded activity in a specific manner, as described in ASC 958-605-55-17E. The “limited discretion” indicator in ASC 958-605-25-5D focuses on identifying situations when a recipient’s entitlement to resources is conditioned upon performing the funded activity according to instructions stipulated by the resource provider. If the recipient fails to comply with those specifications, it is not entitled to the resources.
Excerpt from ASC 958-605-25-5D
Examples of limited discretion could include a requirement to follow specific guidelines about incurring qualifying expenses, a requirement to hire specific individuals as part of the workforce conducting the activity (such as the hiring of specified employees or an identified professor at a university), and a specific protocol that must be adhered to.
A common example of “limited discretion” is a requirement to carry out the activities funded by a Federal grant in accordance with cost principles issued by the Federal government’s Office of Management and Budget. Those requirements are aimed at ensuring that taxpayers’ money (the source of most federal grant funding) is used prudently and in a manner that also achieves certain federal policy objectives. For example, entities with grants subject to the cost principles:
- are required to use competitive sealed bids or competitive proposals when making certain types of purchases;
- cannot purchase materials or services from organizations that are debarred or suspended from Federal assistance programs, or utilize the services of individuals that are debarred or suspended;
- must use local businesses and contract with small, minority, and/or women-owned businesses to the maximum extent feasible when purchasing materials and supplies; and
- must use US air carriers for foreign travel, to the extent that service by such carriers is available.
Often, these awards are cost-reimbursement grants — that is, the entity will only be entitled to reimbursement for expenditures made in compliance with the guidelines. Annual audits performed under Government Auditing Standards issued by the Government Accountability Office (referred to as the “Yellow Book”) ensure compliance with these requirements.
Because the entity’s discretion in how it carries out the activity is pervasively constrained by these requirements, and the entity is not entitled to the funding unless it complies, these awards are deemed to contain a barrier. However, assuming no other barriers exist, and the organization has reasonable controls in place to ensure compliance with the Federal cost principles, the barrier can be considered to have been met (and contribution revenue recognized) as the qualifying expenditures are made. If, ultimately, the expenditures are deemed not to comply with the cost principles, the recipient must repay the government and recognize negative contribution revenue.
Another example might be a research grant containing a “key person” provision. This type of provision states that if a principal investigator (researcher), project director, or other specified key project team member leaves the funded project for another organization, the unexpended proceeds from the research award follow that individual to their new organization. These provisions are commonly included in situations when an award is made based upon the qualifications of a particular individual.
Example NP 6-4 describes the application of this guidance to a research grant that is conditional due to the requirement that the research be led by a specified individual.
EXAMPLE NP 6-4
Key person provision in grant agreement – grant is cancelled if principal investigator leaves
Key person provision in grant agreement – grant is cancelled if principal investigator leaves
Foundation awards a research grant to University. Foundation’s selection of University was based largely on the qualifications of Dr. Jane Doe, the principal investigator (PI) named in University’s grant application.
The grant agreement stipulates that the research funding is conditioned upon Dr. Doe serving as the PI, and that transfer of the award to another PI is not permitted. If Dr. Doe moves to another organization during the grant term, unexpended grant funds will transfer to Dr. Doe’s new employer. If Dr. Doe does not continue the research at another nonprofit organization, or if the project is terminated for any reason, the award will be cancelled and unused funds must be returned.
Does this stipulation in the agreement limit University’s discretion in how it conducts the research?
Analysis
Yes. University is not entitled to the funds if Dr. Doe moves to another institution during the award period. The award is not transferrable to another PI employed by University, limiting University’s discretion in how the research is conducted and by whom.
Thus, this stipulation in the grant agreement would create a barrier that must be overcome. In this arrangement, University would overcome the barrier as funds are expended under the direction of Dr. Doe.
Example NP 6-5 describes the application of the guidance to a research grant that provides the resource provider with the ability to cancel if a specific individual (key person) leaves the recipient organization.
EXAMPLE NP 6-5
Key person provision in grant agreement – funder reserves right to cancel if PI leaves
Key person provision in grant agreement – funder reserves right to cancel if PI leaves
Foundation awards a research grant to University. Foundation’s selection of University was based largely on the qualifications of Dr. Jane Doe, the principal investigator (PI) named in University’s grant application.
The grant agreement stipulates that Dr. Doe must serve as the PI for the research. If Dr. Doe moves to another organization during the Award period, Foundation reserves its right to transfer unexpended grant funds to Dr. Doe’s new employer. Does this stipulation in the agreement limit University’s discretion in how it conducts the research?
Analysis
Probably not. In this fact pattern, Foundation “reserves the right” to decide to cancel the agreement if the PI moves, which is subjective and discretionary on the part of the Foundation rather than an objective performance criterion.
Although all facts and circumstances would need to be considered, because the key person provision in this situation does not establish a clear, objectively determinable hurdle that University must overcome in order to be entitled to the funds, it would likely not constitute a barrier.
6.6.1.3 Reporting and administrative stipulations
Most grant agreements require some level of reporting to the grantor regarding what was achieved by or learned from the grant-funded project. Most will also specify administrative requirements with which the recipient must comply, for example:
- a requirement to file a report at the conclusion of the grant explaining to the grantor how the resources were spent;
- a requirement to have an audit of the grantee’s spending of the grant funds conducted after the funds are exhausted; or
- a stipulation that an annual report be provided by the donee to receive subsequent annual payments on a multi-year promise.
Often, these requirements are geared towards providing the grantor with information useful in evaluating whether the funds were used in accordance with the terms of the agreement. Historically, there was diversity in practice in evaluating whether a routine reporting requirement constituted a condition that should preclude recognition of revenue and expense. However, in ASU 2018-08, the FASB clarified that these types of routine administrative stipulations are not considered barriers that affect the timing of recognition of contribution revenue or expense. ASC 958-605-25-5D now states that a stipulation in an agreement that is unrelated to the purpose for which the grant or gift was made (for example, administrative tasks or trivial stipulations) is not indicative of a barrier.
Excerpt from ASC 958-605-25-5D
A stipulation that is unrelated to the purpose of the agreement (for example, administrative tasks and trivial stipulations) is not indicative of a barrier. Administrative and trivial stipulations could include routine reporting such as a requirement to provide (a) an annual report or (b) a report that summarizes the recipient’s performance to demonstrate the underlying actions that were taken to meet the barrier(s) specified in the agreement.
However, if a reporting or administrative requirement relates directly to achieving a grant or gift’s purpose, that requirement might constitute a barrier.
6.6.1.4 Ambiguous stipulations
In some agreements, it may be difficult for the donee to determine whether a condition is present because the donor’s requirements are ambiguous. The lack of specificity referred to in ASC 958-605-25-5E might indicate that no barrier exists because no condition would be sufficiently specific or measurable. In some cases, the ambiguous clauses may relate to satisfactory progress clauses or “right to rescind” clauses, (discussed in the response to Question NP 6-4 in NP 6.6.1), which are generally not considered barriers. In other cases, however, it may be more difficult to conclude that a barrier does not exist.
Determining whether a contribution is conditional can be difficult if it contains donor stipulations that do not clearly state whether both:
- One or more barriers exist
- The right to receive or retain payment or delivery of the promised assets depends on meeting those barriers.
In cases of ambiguous donor stipulations, a contribution containing stipulations that are not clearly unconditional shall be presumed to be a conditional contribution.
If the donor’s stipulations in the gift are ambiguous, and the donee is unable to resolve the ambiguity by reviewing the facts and circumstances surrounding the gift or by communicating with the donor, the gift is presumed to be conditional (i.e., subject to satisfaction of the condition prior to recognition as revenue).
6.6.2 Right of return (or release from obligation)
The second characteristic of a conditional contribution in ASC 958-605-25-5A is that if the recipient does not overcome the barrier, the donor or grantor is released from its obligation to transfer the promised resources (or if assets were advanced, has a right to demand their return).
The right of return or release must be determinable from the gift or grant agreement (or another document linked to the agreement, such as a grant making organization’s standard terms and conditions). The presence of both a barrier and a right of return or release from obligation to fund indicates that a recipient is not entitled to the transferred assets or a future transfer of assets until it has overcome the barriers in the agreement.
The specific phrase “right of return” or “release from obligation” does not have to appear in the agreement; however, the right (or release) should be stated sufficiently clearly to be able to support a reasonable conclusion about when a recipient would be entitled to the assets. For example, a grant agreement that requires adherence to the US Federal Office of Management and Budget (OMB) Circular compliance rules when expending grant funds means that the recipient must pay back funds spent inappropriately and must return any unspent funds advanced. In this situation, the “right of return” is evidenced by inclusion of the reference to the OMB rules.
The standard wording used in many grant agreements includes “right of return” language for protective reasons, regardless of whether any barriers are stipulated. The mere inclusion in a grant agreement of “right of return” language is not, by itself, sufficient to make a contribution conditional.
Example NP 6-6 illustrates a situation when a “right of return” clause does not cause a grant to be conditional.
EXAMPLE NP 6-6
Right of return clause without a barrier
Right of return clause without a barrier
Foundation awards University $5M to conduct basic research in astronomy. The grant agreement stipulates that University must file a report with Foundation at the conclusion of the grant that explains how the assets were spent, and also must provide an auditor’s report as to compliance with the terms of the grant. If University is not able to complete the project funded by the grant, University must return the funds to Foundation.
Is this agreement conditional or unconditional?
Analysis
This agreement is unconditional. The requirements to file a report and obtain an audit are compliance requirements that would not be considered barriers. The inclusion of the “right of return” language in the event that University decides to terminate the project is not, by itself, sufficient to make the grant conditional. For a condition to exist, the right of return must be linked to a specified barrier to entitlement.
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