Nonprofit Accounting Basics

FAS 116

What is FASB 116?

Statement of Financial Account Standards 116 (FASB116) is the primary guidance relating to the recording of contribution revenue by not-for-profit organizations (NFPs). The Financial Accounting Standards Board issued it in 1993. FASB116 created new standards relating to the recording and presentation of contribution revenue and introduced the terms restricted revenue and net assets. The main effect of FASB116 was to require that NFPs record all unconditional contributions as revenue when notification of the contribution is received.

What is covered by FASB116?

FASB116 is applicable only to contribution revenue, not exchange transactions (such as certain grants, program service revenue or other non-contribution revenue). Often it is difficult to distinguish between a contribution and an exchange transaction, the following factors are indicative of an exchange transaction:

  • There economic penalties if the terms of the agreement are not met
  • The payor specify the time and place of delivery of any goods or services
  • The payment is calculated in a manner that provides a "profit margin" for the recipient
  • The payor receives a direct benefit from the payee (excluding any intrinsic benefit from helping the NFP)
  • The grant requires that the recipient provide the grantor with a specific service, facility or product rather than providing the benefit to the general public

There is often no clear indicator as to whether something is a contribution or an exchange transaction. In this case the primary objective should be to treat all transactions consistently. For example, if you receive awards that contain indicators of both contributions and exchange transactions you should treat all of them in the same manner.

Importance of FASB116

One key component of FASB116 is the requirement that all unconditional promises to give (pledges) to be recognized in the year the notification of the pledge is received. This can cause significant fluctuations in the change in net assets of an NFP. For example, if you receive a $1,000,000 award to be paid over the next 5 years you would have to record the entire $1,000,000 in Year 1. This would likely cause a large increase in net assets in Year 1, however; as the funds are spent in Years 2-5 you would likely show a decrease in net assets. These fluctuations can make it difficult to properly budget and are often confusing to the readers of your financial statements and Form 990.

It is important to keep this in mind when submitting award applications or requests. Oftentimes, structuring an award as an exchange transaction (this is explained in detail below) will aid in budgeting and financial reporting.

What are “donor-imposed” restrictions?

FASB116 focuses on the concept of restricted revenue.  Under FASB116 all contribution revenue must be classified as either: unrestricted, temporarily restricted or permanently restricted.  The existence of restrictions is determined by “donor-imposed” restrictions, internal restrictions (such as Board designated funds) are considered unrestricted. 

  • Permanently restricted support includes all contributions, which are not expendable by the NFP. 

    • The most prevalent example of this is an endowment fund.  Typically the organization is not able to use the principal but is able to use the investment earnings. 

    • The earnings on permanently restricted funds may be further restricted for use for a given purpose, thus resulting in temporarily restricted revenue.

  • Temporarily restricted consists of contributions with donor-imposed restrictions that limit the use of the funds as follows:

    • Purpose-restricted: These are funds that are donor-restricted for use on a particular project.

    • Time-restricted:  These are funds that are donor-restricted for use in a certain time period.  An example of this is a unconditional pledge that stipulates the funds will be donated to the NFP over a 5-year period.  The amount to be received in future years is considered time-restricted.

    • Unrestricted support consists of all other revenue

What is an unconditional promise to give (pledge)?

FASB116 stipulates that “unconditional promises to give” are to be recorded at the time the NFP receives notification of the promise.  This notification must be in written form, oral promises should not be recorded.  FASB defines a condition as a “future and uncertain event” that must occur for the promise to give to become binding. 

In many cases, the only notification an NFP receives is when they receive the contribution.  In this case it is clear that the entire contribution must be recorded at that time. 

However, in other cases the NFP will receive notification of a contribution prior to the actual receipt of the funds.  In this case the NFP must determine if they have received an “unconditional promise to give”, if so the revenue must be recorded. 

Some factors that indicate an unconditional promise to give has been received are:

  • The donor has made payments under the promise

  • The promise contains a fixed payment schedule

  • The award uses words such as – promise, binding, agree…

  • The amount of the promise is determinable

  • The donor has the financial ability to fulfill the promise

  • A condition that is not truly uncertain – such as the NFP continuing operations

  • Examples of true conditions are:

    • Raising matching funds or receipt of other awards

    • Receipt of funds is based on a certain outcome

    • Amount of award is based on the amount expended

What are “split-interest” (“planned giving”) agreements?

Split-interest agreements, also known as planned giving, are contributions that assign the legal rights to certain assets to an NFP and other beneficiaries.  Typically, the terms of these contributions do not allow the donor to revoke the gift and therefore they are considered unconditional pledges.  The most common type of spilt-interest agreement stipulates that the donor will receive a fixed payment (often expressed as a percentage of the initial contribution) every year for a period of time, either a fixed number of years or the remaining life of the donor. 

For example, I give $100,000 to the NFP-A but stipulate that they must pay me 7.5% interest each year for the remainder of my life.  NFP-A will have full use of the $100,000 but will have to pay me $7,500 each year.  When I die the stipulation expires and the organization no longer has to make any interest payments.  

What are agency transactions?

Agency transactions occur when one NFP (the agent) raises contributions for another NFP (the recipient).  Contributions received through agency transactions are accounted for under FASB136 and are not recorded as revenue or support on the books of the agent.  The primary factor in determining if a transaction should be considered an agency transaction is “variance power”.  If a donor stipulates the final recipient of the contribution then the agent does not have variance power and typically would not recognize the contribution as revenue.