In August, the FASB proposed rules to amend the new revenue standard to clarify how all entities should account for making and receiving grants. PwC's Christopher Chung discusses how the proposed guidance will impact both for-profit and not-for-profit entities.
Hi, I’m Christopher Chung, a director in PwC's National Office.
In August, the FASB proposed rules to amend the new revenue standard to clarify how all entities should account for making and receiving grants. The amendment would clarify whether grants received are accounted for as "contracts with customers" under the new revenue standard. This guidance impacts all entities that make or receive grants, including for profit business entities that make charitable grants directly, or through a corporate foundation. However, the proposed rules do not address the accounting for government grants received by business entities. This means that similar grants received by a business entity from a third party and from the government could be accounted for differently.
The proposed rules focus on the direct flow of benefits that occurs between the parties, and whether an "exchange of commensurate value" occurs. If the donor obtains proprietary knowledge, intellectual property, or other exclusive benefits, it's an exchange transaction, and the recipient applies the new revenue standard. However, if the research benefits the general public, such as finding a cure for cancer, there's no exchange, and the new revenue standard wouldn't apply. In that case, the entity receiving the grant would account for the transaction as a contribution.
For example, if a private foundation offers a pharmaceutical company a grant to conduct cancer research for the public, the pharmaceutical company would recognize contribution income.
This could be a change for business entities, as today, classification as an exchange transaction or contribution depends on the interpretation of existing guidance which has led to diversity in practice.
The proposal also clarifies what would be defined as a "conditional" gift or grant. A conditional gift or grant is one that specifies a condition that must be met to be entitled to the funds, along with a requirement that the funds be returned if the condition is not met.
When a gift or grant is conditional, neither the giver nor the receiver can recognize expense or revenue until the condition is met.
Depending on how a company makes gifts or grants, the new definition of "conditional" could delay expense recognition for some companies, while for others it might accelerate expense recognition.
If the gift or grant is unconditional, contribution income and expense would be recognized upfront by the recipient and the donor, at the time that the gift or grant is received or made.
The proposed amendments would have the same effective date as the new revenue standard, which is January 1, 2018 for PBEs with a calendar year end. Given the potential for changes to the timing of revenue and expense recognition so close to the effective date of the new revenue standard, entities that make or receive grants are encouraged to keep an eye on the FASB's deliberations on this topic.
For more information please see our In brief, FASB proposes clarifications to accounting for grants and contributions on CFOdirect.com.
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