In June 2018, the Board issued Accounting Standards Update No. 2018-08, Not-for-Profit Entities (Topic 958): Clarifying the Scope and the Accounting Guidance for Contributions Received and Contributions Made. This staff document discusses a few frequently asked questions about the application of the limited discretion indicator and the accounting for cost-sharing provisions.
Subtopic 958-605, Not-for-Profit Entities—Revenue Recognition, provides guidance on determining whether a contribution is conditional on the basis of whether an agreement includes a barrier that must be overcome to be entitled to funds and either a right of return of assets transferred or a right of release of a promisor's obligation to transfer assets.
Subtopic 958-605 provides indicators to guide an entity in assessing whether an agreement contains a barrier to entitlement:
The indicators to describe a barrier included in paragraph 958-605-25-5D are intended to provide additional guidance for preparers to exercise judgment on the basis of individual facts and circumstances to determine whether the agreement includes a barrier to entitlement.
Some stakeholders have indicated that additional guidance may be useful in applying the limited discretion indicator, particularly in determining the meaning of limited discretion on the conduct of an activity by the recipient. A line-item budget (that is, a schedule of the estimated costs to be incurred in support of a project being funded, disaggregated by type of expense) is one example of a requirement that may be interpreted differently in practice depending on the facts and circumstances of a particular grant agreement. Those stakeholders expressed different views about how a line-item budget requirement would be analyzed in connection with the indicators (specifically the limited discretion indicator) that describe a barrier in paragraph 958-605-25-5D. Some stakeholders have a view that budget requirements would generally fit within the context of the limited discretion indicator, therefore indicating that a barrier to entitlement may exist. Other stakeholders view a budget as a general requirement that could be perceived as a guideline that is a routine administrative task and, therefore, would not be considered a barrier to entitlement.
The amendments in the Update include guidance intended to clarify the difference between a barrier to entitlement and a donor-imposed restriction when considering the limited discretion indicator. The amendments also provide guidance on how the limited discretion indicator should be used in connection with the examination of the three indicators as a whole. The guidance describing the limited discretion indicator focuses on specific requirements about how an activity must be conducted (for example, by incurring qualifying expenses), which would indicate the existence of a barrier that must be overcome for the recipient to be entitled to the assets. This description of what qualifies as a barrier to entitlement under the limited discretion indicator emphasizes its difference from a restriction, which typically places limits only at the level of activity being funded. Moreover, in the case of a restriction, while funds may be directed for a particular purpose, the recipient is considered to be entitled to the funds. The limited discretion indicator also would often complement the measurable performance-related barrier indicator, which focuses on barriers to entitlement involving the outputs, outcomes, or level of service needed to be achieved by the activity being conducted. The guidance indicates that determining whether a condition exists ultimately depends on when entitlement occurs, which is a matter of some judgment.
Grantors often conduct due diligence before a cost-sharing provision is stipulated in an agreement to ensure the recipient is financially capable of meeting a cost-sharing requirement. Some stakeholders suggested that this due diligence (done before a grant award) results in a cost-sharing provision that is related to routine compliance rather than a separate barrier to entitlement. Other stakeholders suggested that a cost-sharing provision is an example of a measurable barrier.
Some stakeholders indicated that they view cost-sharing provisions as being similar to matching provisions. Paragraph 958-605-55-17 includes an example of a matching provision that is a condition. The example involves a challenge grant. In a matching provision, a recipient is typically not entitled to the resource provider's funds until the recipient also raises funds from another outside source. Sometimes entitlement is pro rata from the first dollar raised from such sources; in other instances, entitlement occurs only after a threshold amount is raised.
Sometimes grant agreements use the terms match or matching to describe a cost-sharing provision. A cost-sharing provision, however, typically differs from a matching provision in that cost sharing involves the spending of a recipient's resources other than the grant resources on the funded activity.2 Indeed, the recipient may already have, and often does have, the required resources as of the date of the grant agreement. Thus, depending on the specific facts and circumstances, a cost-sharing provision may be a compliance requirement or it may be a prerequisite for entitlement to the resource provider's funds for that activity.
How should the limited discretion indicator be applied when determining whether a budget and related stipulations within a grant agreement are deemed to be a barrier to entitlement?
An entity should focus on determining whether a requirement within an agreement limits the discretion of a recipient on the conduct of an activity and represents a barrier to entitlement of the assets. Such a limitation is more specific than a donor-imposed restriction, which limits the use of a contribution to a specific activity or time but does not necessarily place requirements on how the activity is performed for a recipient to be entitled to those resources. In addition, paragraph 958-605-55-70B provides guidance on determining whether an agreement involves incurring qualifying expenses.
The staff is aware that grant agreements often contain a budget (a schedule of the estimated costs to be incurred in support of the project being funded). The existence of a budget and a requirement for adherence to it within deviation limits would not indicate by themselves that a barrier to entitlement exists. For example, the requirement to gain preapproval for a significant deviation in spending (for example, a line-item deviation of more than 10 percent) would not be a factor for considering whether a barrier exists (which depends on when entitlement occurs).
Budgets typically are produced by a not-for-profit (NFP) entity and submitted to a funding source as part of an overall grant proposal. The line items in the budget are the NFP's plans for how it expects to spend the funds provided to accomplish its proposed activity and normally are not barriers to entitlement imposed on the NFP by the funding source. This differs from the litany of cost principles and other requirements, often driven by public policy and other considerations, that underpin the concept of "incurring qualifying expenses." A funder's requirement that a budget be followed within a deviation limit normally would be viewed by the funder as a guardrail (or guidepost) for the NFP to do, within reason, what it said it would do and not as indication of a barrier to entitlement. Thus, stipulations other than adherence to a budget (for example, the need to incur qualifying expenses) would normally need to be present for a barrier to entitlement to exist.
The limited discretion indicator is one of the three indicators in determining whether an agreement contains a barrier to entitlement. Paragraph 958-605-25-5D states that "depending on the facts and circumstances, some indicators may be more significant than others, and no single indicator shall be determinative." The unique facts and circumstances of each grant agreement must be analyzed within the context of the indicators to conclude whether a barrier to entitlement exists.
How should an entity determine whether a cost-sharing provision in an agreement is a barrier to entitlement? Should cost-sharing provisions in an agreement be analogized to matching provisions when determining how to account for the timing and pattern of revenue recognition?
A cost-sharing provision (a provision in which the grantee must use a certain amount of funds other than the grantor's toward a program or project in order to be entitled to the granted funds) should be considered a barrier if it is clear that entitlement to grant funds is contingent on the recipient meeting a cost-sharing requirement. The consideration about whether a recipient is likely to meet the cost-sharing requirement should not be a factor in determining whether a barrier to entitlement exists, since the guidance in Subtopic 958-605 does not allow the use of a probability assessment in the determination.
Because of the wide variety and types of cost-sharing provisions, it may or may not be appropriate to analogize cost-sharing provisions to the challenge grant example in Subtopic 958-605, especially regarding timing of revenue recognition of the associated grant funding. The specific requirements in a grant agreement should be analyzed to determine (1) whether the grant requires raising incremental funds from an outside source (a matching provision) or simply spending resources other than the grant resources provided (a cost-sharing provision), (2) whether entitlement depends on meeting that requirement (that is, whether a barrier to entitlement is indeed present), and (3) the appropriate timing and pattern of revenue recognition resulting from that requirement. A careful review of the wording used in the agreement is important in making this determination.
Depending on the specifics of a cost-sharing provision in an agreement, an analogy to the matching example could lead to a deferral of revenue and timing of recognition that may not be appropriate for those circumstances. The timing of revenue recognition would depend on whether the cost-sharing provision represents a barrier to entitlement and, if so, the time frame over which the cost-sharing provision in the agreement is satisfied. In its analysis, the staff considered the following two scenarios involving grant funding:
Scenario 1: The organization must provide, from its own resources (other than the funds received from the grant), an amount equal to a certain percentage of the grant award in each year of a multiyear grant in order to be entitled to the grant funds for that year. The grant agreement states that if the cost share is not met in a particular year, the grantor has the right to have the recipient return the grant funds (or a portion of the grant funds).
Scenario 2: The organization must provide, from its own resources (other than the funds received from the grant), an amount equal to a certain percentage of the total grant award by the end of the last year of a multiyear grant in order to be entitled to the grant funds. The grant agreement does not contain a specific requirement that must be met each year to be entitled to funds for that year. However, it states that if the cost share has not been met by the end of the agreement, the grantor has the right to have the recipient return the grant funds (or a portion of the grant funds).
Under Scenario 1, somewhat similar to a matching provision, there would be a barrier to a recipient's entitlement to a resource provider's funding each year if there is an annual cost-sharing requirement as described. In those instances, grant fund revenue should be deferred until the cost-sharing provision is met each year if entitlement to annual grant funds is contingent on meeting the annual cost share. An entity should review the grant agreement carefully to determine the amount of grant funding that would be at risk, which is the amount subject to the right of return or right of release from the resource provider's obligation in the event of any unmet cost share.
A similar, year-to-year deferral of revenue would not be necessary for grant agreements with cost-sharing provisions such as the one in Scenario 2. In this scenario, although, like Scenario 1, a barrier would exist, the timing of having to meet that barrier and the timing of the specific grant funds at risk of return or right of release would be different. It would be appropriate to defer grant revenue in a particular year only if the remaining portion of the award that is for future years does not exceed the amount at risk of being returned or released. An entity should review the agreement carefully to determine the amount of funding that would be at risk after accounting for any portion of the cost-sharing requirement that the recipient has already met.
For example, a grantor awards a 5-year grant at $100,000 per year, with a requirement that the grantee provide $200,000 of cost share before the end of the grant term. The agreement indicates that failure to meet the cost-sharing requirement may result in grant funds being returned to the funder in an amount equal to that by which the actual cost share is less than the required cost share. In this example, at maximum, only the last two years of grant revenue would be at risk if the cost-sharing provision is not met. The grant funds awarded in the first three years would not be at risk of being returned to the funder and would be recognized as revenue in those years as long as any other barriers to entitlement present in the agreement have been met, even if the cost-sharing provision has not yet been met. If, by the end of the fourth year, at least $100,000 of cost share has already been met by the recipient, recognition of that year's grant funding would likewise be appropriate as long as any other barriers have been met. On the other hand, if only $60,000 of cost share has been met by the recipient, recognition of $60,000 of the fourth year's funding would be appropriate, but the other $40,000 would remain at risk.