Contribution Revenue Recognition in Nonprofits Under ASU

Contribution Revenue Recognition: Key Lessons Learned Since ASU 2018-08

Filed under: FASB, Not-for-Profits, Revenue Recognition

Since the implementation of FASB’s Accounting Standards Update (ASU) No. 2018-08, not-for-profit accountants have seen significant changes in how contribution revenue is recognized. ASU 2018-08 revised ASC 958-605, clarifying the distinctions between contributions and earned revenue and providing new guidance for recognizing resource inflows. In the years since the introduction of the ASU, it has become clear that understanding the steps necessary to evaluate an inflow or future inflow of resources is paramount to accurate accounting. This article summarizes each of the steps a not-for-profit accounting professional should consider when determining how to account for assets transferred, or to be transferred, from a resource provider.

Step 1: Contribution vs. Earned Revenue

The first step in evaluating a resource inflow is to determine whether it should be recognized as a contribution under ASC 958-605 or as earned revenue under ASC 606 or other applicable ASC Topic. The key question is whether the resource provider receives direct commensurate value in exchange for the transferred resources. If the provider receives goods, services, or other benefits equal to the amount given, the inflow is considered earned revenue. If not, it is a contribution under ASC 958-605. For example, a governmental grant to fund a community program benefiting the general public, with no direct return to the granting agency, is a contribution; a contract to deliver a specific service to the agency for payment is earned revenue. This distinction helps ensure revenue is reported and disclosed in the correct category, improving clarity and consistency.

Step 2: Intention to Give vs. Promise to Give

Once a resource inflow is identified as a contribution, the next step is to determine if it qualifies as a promise to give under U.S. GAAP. According to the FASB Master Glossary definitions and ASC 958-605-25-9, a promise to give is received when the maker of the promise “has a social and moral obligation, and generally a legal obligation, to make the promised transfer” of assets. Further, if it is unclear whether a communication constitutes a promise, it should be considered one only when there is a legally enforceable intention to give. In summary, a promise to give must represent a binding commitment, not merely an expression of intent or goodwill.

An intention to give lacks this binding commitment. It is simply a statement, such as “We hope to support your organization with a $10,000 gift next year,” that expresses willingness or plans to provide future resources but does not obligate the donor. Available guidance in ASC 958-605-25-10 helps further clarify that if a donor’s communication or response to a solicitation for donation allows them to freely rescind or withdraw the commitment, it is not considered a promise to give. For example, language such as “for budget purposes only,” “intend,” “contingent on approval,” “hope,” or “anticipate” should not be recognized as revenue because the donor retains discretion to withdraw. Only binding commitments, in which the donor cannot unilaterally revoke the agreement, qualify as promises to give.

An organization that receives a promise to give should account for the transaction under the contribution guidance contained in ASC 958-605. In contrast, an intention to give does not meet the criteria for recognition and disclosure under ASC 958-605.

Step 3: Conditional vs. Unconditional Contributions

Barriers to Entitlement

A promise to give is considered conditional if it contains a barrier, meaning something the recipient must overcome to be entitled to the funds, and a “right of return” to the donor or a “right of release” from the donor’s obligation if the barrier is not met. Conversely, a promise is unconditional when no such barriers exist or there is no right of return or release of the funds, and the recipient is entitled to the funds simply by virtue of the promise.

Understanding Rights of Return or Release

The presence of a right of return or release is a key indicator of a conditional promise. This means that if the recipient fails to meet certain requirements, the donor can reclaim the funds or is released from the obligation to provide them. For example, if a donor pledges $100,000 to a housing agency on the condition that it breaks ground on a project by a certain date and includes a right of release to provide the funds if the milestone is not met, this is a conditional promise.

Measurable Performance Related Barriers

Barriers are most often measurable performance-related requirements or other objectively verifiable conditions. Examples of these may include:

• Achievement of a specific milestone: A donor promises $50,000 to a research foundation only if it completes a particular study or publishes results in a peer-reviewed journal. If the milestone is not achieved, the donor can reclaim the funds.
• Matching funds: The promise is contingent on the recipient raising a matching amount from other donors.
• Completion of a program: Funds are provided only after the successful delivery of a training program to a set number of participants.

Limited Discretion by the Recipient

Another key factor is the level of discretion the recipient has in carrying out the funded activity. Limited discretion, meaning the donor specifies how the activity must be conducted, may indicate that a promise is conditional. For example, a grant that requires the recipient to use funds only for specified costs incurred under defined protocols and includes a right of return or release if those requirements are not met represents a conditional promise to give. Unlike a donor restriction, which limits the purpose for which resources may be used, a limited discretion requirement affects how a program must be carried out.

Summary

Determining whether a promise to give is conditional or unconditional depends on the existence of barriers to entitlement and the presence of a right of return or release. Conditional promises require the recipient to overcome specific barriers before they become entitled to the funds. Understanding these distinctions is crucial for accurate financial reporting as conditional promises to give should not be recognized until they become unconditional. Unconditional promises to give are recorded at the time the gift is received. Further, promises to give that are subject to conditions are subject to disclosure requirements.

Step 4: Contributions With Donor Restrictions vs. Without Donor Restrictions

Once a promise to give is determined to be unconditional, accountants must assess whether the donor has provided an unrestricted or restricted gift. Restrictions can be for a specific purpose (e.g., “Funds must be used for behavioral health research”), for a specific time (e.g., “Funds to be used in 2027”), or a combination of both purpose and time. Inherent time restrictions exist in pledges that are payable in the future. For example, a pledge to pay $10,000 in two years is inherently restricted by the donor to support the period in which the payment is scheduled to be made, absent any other communication. Both purpose and time restrictions affect how revenue is reported and tracked, helping ensure funds are used as intended and recognized appropriately in financial statements.

Key Takeaways and Practical Tips

Not-for-profit accountants must carefully evaluate resource inflows to distinguish between contributions and earned revenue, identify intentions versus promises, assess conditions, and determine restrictions. Using clear, plain language in donor communications and applying ASC 958-605 guidance ensures accurate and compliant revenue recognition. Review donor agreements for commitment language, document barriers or restrictions, and consult the AICPA Not-for-Profit Audit and Accounting Guide for examples and clarification. By following these steps, accountants can confidently navigate contribution revenue recognition and support their organization’s financial integrity.

Every contribution agreement tells a different story, and the accounting treatment matters. Whether you’re reviewing donor restrictions, evaluating grant agreements, or assessing promises to give, Clark Nuber can provide practical guidance tailored to your organization’s needs. Connect with our not-for-profit team to start the conversation.

This article contains general information only and should not be construed as accounting, business, financial, investment, legal, tax, or other professional advice or services. Before making any decision or taking any action, you should engage a qualified professional advisor.