FASB 2018-08 and its Impact on Nonprofit Organizations’ Financial Reporting
As the summer wanes and the fall season marks its arrival, and with it the start of many municipal budget cycles, Grantmakers in the Arts is presenting an overview of an important change made by the Financial Accounting Standards Board (FASB) that will have a significant impact on fiscal year 2020 financial reporting. Many nonprofit organizations’ financial statements for 2020 will look different than they have in the past, and we think it’s important to highlight this change and provide some context for arts and culture funders so that funding decisions can be made with clarity and sensitivity.
GIA is sharing this information as it will change the substance of the nonprofit field’s financial reporting, making the practice of securing money for future years appear risky, as grants for future use will no longer appear as Assets in a nonprofit’s financial reporting but will now appear as Liabilities. GIA is being explicit that this should not change the grantmaking field’s assessment of this practice. Your granting multi-year support and support for organizations’ work in future years is a positive practice. Organizations’ securing grants for use in the future is a practice that must be embraced positively regardless of this change in financial reporting standards.
In 2018, FASB, the governing body for accounting standards and practices in the US, issued accounting guidance on contributions received by nonprofits, FASB 2018-08. Originally intended to take effect with 2019 financial statements but suspended due to the COVID pandemic, this ruling changes revenue reporting for non-profits in a number of substantive ways.
Although FASB 2018-08 concerns various types of revenue for non-profit entities, the part that will impact the arts and culture field most profoundly has to do with what FASB calls conditional contributions. These are contributions that meet two criteria:
- Contributions with a barrier to be met in order to realize the funding
- Contributions with a stated or implied right of return if the condition is not met
With regards to GIA, conditional contributions represent most of our grants, and essentially all of what we currently report as “temporarily restricted” funds. As an example, grants for our conference are conditional because they have a barrier to be met – we have to hold the conference to recognize the funds. Grants we receive for future year support – such as general operating support, racial equity programming, the Arts Education Funders Coalition, etc. – have time as the barrier to recognizing the funds; we need to be operating in the specified time period in order to recognize the revenue. Contributions are to be recognized when the conditions are satisfied, which is generally when the expenditures are incurred.
Under the new ruling, conditional grants that are awarded but not received, i.e., pledges, are not entered onto the nonprofit’s books at all. This is different from our current reporting, where pledges are recorded on the books as temporarily restricted Net Assets in our Equity at the time of the award and as open “grants receivable” on the Asset side of our balance sheet. Of course, GIA will continue to track and report on grants that are awarded but not received, but this reporting will be parallel to our standard financial reporting (most likely, represented on a notes page), and not part of our standard financial reporting.
Conditional grants for which we do receive the funds ahead of the condition being met, such as grants for a future period, will now be recorded as “deferred income” on the Liability side of the balance sheet until such time as the condition is met, at which point the contribution is recognized as current year revenue. Right now, we show funds for grants received on the Asset side of our balance sheet in our “cash and cash equivalents”, and as temporarily restricted Net Assets in our Equity. Under the new ruling, funds from grants we have received for which we have not met the conditions will no longer be part of our Equity, but instead will be listed as a Liability, to offset the cash, which is an Asset.
In short, the balance sheet for GIA under the new ruling will look different than it has in the past.
- Our Assets will go down, because we won’t be listing as many open grants receivable as before.
- We will have a new Liability category, “deferred income”, which will represent grant funds received that can’t be used yet.
- Our Equity will also go down, because we won’t be recording nearly as much in temporarily restricted Net Assets. Most of what had been recorded in that line will now be in the “deferred income” line under Liabilities.
This is going to be true for many nonprofits, and probably many grantmaking organizations as well. It’s why we feel it is important to message out about this new change, so that grantmakers can make funding decisions with the changes in context, and not make assumptions about what might otherwise look like poor performance.
Here is some insight into the rationale for this new FASB ruling: A balance sheet is a statement of what a company or organization is worth at a given moment. If we look at GIA’s balance sheet, we have our Assets – our cash in hand, accounts receivable and anything else we own, such as furniture and equipment, buildings, etc. – and our Liabilities – accounts payable, lines of credit, loans, etc., that we need to pay out. Anything left is our Equity – what we’re worth. Under the old reporting standards, GIA would show as an Asset some money that is pledged to us which we would not collect if we shut our doors. It is not accurate to say that that money is an Asset for these purposes because it is only collectible if we were to continue operations. We are also showing money we have received for specific purposes and/or operations in the future which we would have to give back if we were to cease operations. Since we would have to give that money back, it is more accurate to think of that money as a Liability and not part of our Equity.
This new FASB ruling also has the effect of eliminating big spikes and swings in revenue that multi-year grants can cause in a nonprofit’s financial reporting. Our auditors gave us an example of a client with a large NSF research grant for $25M for a 5-year project. The client recorded all the revenue of $25M in the first year of the grant period, and their Equity shot up by $25M. After two years, and two payments of $5M, the grant was cancelled because the research results were not promising. At that point, the client had to write off $15M (the uncollected portion of the grant) as “bad debt”. Under this new ruling, those kinds of spikes and drops in Equity would be avoided because the future portion of the grant would not be included in the organization’s Equity.
GIA does not support the practice of retracting grants when organizations’ plans change. GIA instead advocates for negotiating a different use of the resources. We hope that this overview provides some insight for you as you work with your grantees and applicants to support their work.