Accounting and Bookkeeping

FASB 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.