hello I'm Alice Antonelli a director of advisory services at nonprofit finance fund in this video we will briefly highlight a Fafi accounting update on revenue recognition that will most likely affect you and all other not-for-profit organizations we'll talk briefly about what is happening regarding revenue recognition so that you have a clearer picture of what to expect we are going to take the step by step and we're going to use this flow chart as our guide first we are going to figure out whe
ther a grant or contract is an exchange transaction or contribution next if we have determined that we have a contribution when we must decide whether it's conditional or unconditional lastly once we have determined that our contribution is unconditional then we can make a determinate restriction level first we need to establish the difference between an exchange transaction and a contribution this is important because the answer will determine the timing of when revenue can be recognized an exc
hange transaction is a reciprocal transfer between two parties it's also an exchange of equal value that is funds are given in exchange for receipt of specific benefits generally this means that the transaction should be recognized as revenue when the nonprofit fulfills its obligation under current practice many nonprofits actually tree government grants and other contracts as exchange transactions but with this update fazzy is encouraging us to actually examine the content of the underlying gra
nt or contract in addition this update makes it clear that the benefit received by general public does not fall under an exchange transaction that is the funder is not receive a direct benefit now let's look at contributions a contribution received by not-for-profit is a voluntary transfer of assets or funds the intent of the donation is not reciprocal meaning the donor does not receive any economic benefit I will need to clarify that last point revenue is typically recognized when the grants re
ceived or notified there are exceptions and we're going to get to them in a bit so let's look at an example we will use a fictitious not-for-profit called help from homeless youth to illustrate the first this first point help for homeless youth just receive notification of a grant from the federal government to do some research on homeless youth the agreement requires them to submit a summary of the research findings to that agency however help the homeless youth will retain the rights to the fi
ndings any unused funds will be forfeited or given back to the agency so if this transaction in exchange or contribution well it's not reciprocal it's not an exchange and therefore it's a contribution so why is that well commensurate or equal value is not being exchanged this is the key help for homeless youth retains the rights to and receives the primary benefit of the findings the funder does not the government agency may receive a benefit as the findings may benefit the general public but it
is not a direct benefit to that agency so this is philanthropic there is no expectation of benefit or value on the part of the agency so what is the government retains the rights to the findings let's say help for homeless youth does the research but give the over the findings to the agency then it would be an exchange of equal value or an exchange transaction not a contribution equal value money in exchange for the research report is exchanged so for instance the government may use the results
of the study to change policy regarding homeless youth another way of looking at it is that the agency is outsourcing the research so that they can make a decision themselves okay now on to step two let's focus on contributions is the contribution considered conditional or unconditional in order to determine whether a contribution is conditional we want to determine whether the agreement includes a barrier to overcome either a right of return of the contribution back to the funder or a right of
release from the funders obligation to provide funds to the nonprofit meaning if the conditions have not been met the funder does not have to transfer the funds to the nonprofit if we have both revenue is recognized only after the nonprofit has overcome the barrier meaning after the conditions have been met if there are no conditions or barriers to overcome or if they already have been met then the revenue is unconditional and revenue cannot can be recognized immediately once the contribution h
as been deemed unconditional either there are no conditions present or the nonprofit has satisfied the condition the nonprofit organization would then consider whether the contribution includes donor imposed restrictions or not let's walk through an example our friends at Health for homeless youth have received a sixty thousand dollar grant from a foundation to provide career training to homeless youth the grant requires help for homeless youth to provide training to at least 30 homeless youth d
uring the next six months with specific minimum targets that must be met each month the funder will only give help for homeless youth $10,000 each month if they meet their minimum target let's say training five homeless youth per month there's a writer right of release from the obligation in the agreement meaning that the funder does not have to give the funds to help from less use if help for homeless youth has not met their obligation of providing training to five youth per month so is this gr
ant conditional or unconditional well it's conditional the agreement requires a specific level of service training 30 homeless views in six months with monthly minimum targets of training five youths per month it also contains a right of release from the obligation of providing the funds if the conditions are not matched in this example both are met what if our friends at health for homeless youth receive a hundred thousand dollar grant from a foundation to be used in a factor school program thi
s grant award specifies how help from homeless youth should use the grant dollars so for instance they could hire five tutors or maybe provide a summer camp for eight weeks however the grant is not specified that it is a condition upon meeting any of the stipulation as long as the funds are used toward the after-school program the grant does retain a right of return but only if the funds are not used for the after-school program so is it unconditional or conditional it's unconditional the grant
does not include a barrier to overcome like stipulating how many youth must be in attendance it does specify how the money should be spent but the agreement does not say entitlement to the funds it depended on meeting any of those stipulations because these conditions were not required to be met the agreement does not include a barrier to overcome and so therefore is unconditional revenue recognition the final frontier let's wrap it up first if you determined that the grantor contract is an exch
ange transaction then the revenue would be recognized when it's earned not too dissimilar to a fee-for-service transaction you provide a service you get paid remember one indicator of an exchange transaction is there is an exchange of equal values next if your grant or contract is not an exchange transaction say there is no exchange of commensurate value then it's a contribution so now we have to decide whether the contribution is conditional or unconditional this will impact the timing of when
you can recognize revenue so a conditional contribution as we have said has barriers or conditions which means that it's not considered revenue until the condition or conditions have been met only after a condition additional contribution becomes unconditional we can recognize revenue if the contribution is unconditional from the start it can be considered recognized as revenue immediately lastly just by virtue of no conditions the unconditional contribution will be recognized as revenue whether
it is restricted or not again if a contribution is unconditional or becomes unconditional and either comes with restrictions or not the condition will be recognized as revenue at that point in time or immediately so what does this mean for you this update will give you clarity in terms of number one how to classify grants and contracts versus exchange or contribution then if it is a contribution whether it's conditional or unconditional number two a little bit more clarity on the timing of reco
gnizing revenue and lastly happy is hoping that this update will give you a little bit more help on how to tell your financial story more effectively if you're interested in learning more check out the learn section on our website at NFS Oh Artie or contact us at consulting at NFS or gee thanks so much for listening goodbye
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