Contributory Sponsored Agreements - Restricted
On the Exchange Transactions web page the definition of an Exchange Transaction is provided along with details and examples. Further details on how Drexel and the Academy of Natural Sciences are accounting for governmental grants using the Contributory Sponsored Agreement - Unrestricted - Immediately Released categorization can be found on that web page. On this page, we will discuss how to determine if an externally sponsored award is a Contributory Sponsored Agreement - Restricted.
As part of the required transition to Accounting Standards Update (ASU) 2018-08 - Not-For-Profit Entities (Topic 958): Clarifying the Scope and the Accounting for Contributions Received and Contributions Made in fiscal year 2019, determining if an award is conditional or unconditional is the second step in the process once an award is determined to be a contributory sponsored agreement. (See flow chart on Determining Fund Classification web page). The accounting framework makes clear that the conditionality is a threshold consideration for non-exchange revenue recognition. If a grant recipient must meet conditions imposed by the resource provide in order to be entitled to receive or keep the funds, the grant is conditional. This means that Drexel or the Academy will defer recognition of the expense and corresponding revenues until the condition(s) is(are) met.
At the end of every fiscal year, it will be a requirement for Research Accounting Services to reach out to all Principal Investigators and Department Administrators who have awards that are categorized as a Fund Type 24 - Contributory Sponsored Agreement - Restricted and also have been tagged as conditional to determine if the conditions have been met in whole or in part. This information will be gathered in July in order for Financial Reporting to properly defer any revenues and expenses that are associated with awards that have not met their conditions.
The new ASU changes the definition of a donor-imposed condition and in doing so, clarifies the rules around what makes a grant conditional. The guidance states that a grant is conditional if the terms and conditions of the agreement require that:
- the recipient overcome a barrier or hurdle to be entitled to the resources
- the grantor is released from its obligation to transfer resources (or if resources were advanced, had the right to demand their return) if the recipient fails to overcome the barrier.
Both requirements must be present in order for an agreement to be conditional. If either is absent, the grant is unconditional, and revenue and expense are recognized immediately. In cases of ambiguous donor stipulations, an arrangement containing stipulations that are not clearly unconditional is presumed to be conditional.
The new guidance emphasizes that neither the likelihood that a barrier will be met nor the resource provider's intent to enforce a right of return should be considered in evaluating whether an agreement is conditional. This resolves area of significant diversity in practice as compared to the old accounting guidance.
The diagram below is from ASC 958-605-25-5D and provides the following indicators to assist in evaluating whether a stipulation in an agreement constitutes a barrier:
While some indicators may be more significant, no single one is determinative. Research Accounting Services will apply judgment and obtain a clear understanding of specific terms and conditions of each grant to identify barriers in an arrangement.
Some conditions involve a series of barriers (milestones) rather than a single barrier. Such arrangements become unconditional in stages. Such promises are recognized in increments as each of the milestones is met.
If a stipulation does not relate to the purpose for which the grant was awarded, it should not be regarded as a barrier that affects the timing of revenue and expense recognition. Administrative requirements and trivial stipulations typically would not relate to the purpose of the grant. Examples could include a requirement for (a) a homeless shelter to provide a specified number of meals to the homeless (also an example of a measurable performance-related barrier), (b) an animal shelter to expand its facility to accommodate a specified number of additional animals, and (c) a research report that summarizes the findings from a grant on gluten related allergies. A stipulation that is unrelated to the purpose of the agreement (i.e. administrative or trivial stipulations) is not indicative of a barrier. Administrative and trivial stipulations could include routine reporting such as a requirement to provide (a) an annual report or (b) a report that summarizes the recipients performance to demonstrate the underlying actions that were taken to meet the barrier(s) specified in the agreement. For example, a report that indicates the number of meals that a homeless shelter provided to the homeless is typically not a stipulation that would contribute to achieving the purpose of the agreement. Rather, the action of providing the specified number of meals to the homes would meet the stipulation that is required by a recipient to achieve the purpose of the agreement.
Similarly, although not explicitly stated in the new guidance, the inclusion of an audit requirement to confirm that the resources were spent in accordance with the resource provider's requirements would be an administrative requirement not related to the purpose of the grant and therefore not constitute a barrier.
As mentioned on the Contributory Sponsored Agreements - Unrestricted - Immediately Released web page, federal grants typically include a requirement to comply with federal cost principles issued by the Office of Management and Budget (OMB) when conducting the activity. This is referred to in the new accounting guidance as incurring qualifying expenses or costs. This requirement clearly limits an entity's discretion in how it carries out the activity, thus creating a barrier. For example, grants subject to the cost principles: 1) require competitive sealed bids or proposals for certain types of purchases, 2) cannot utilize materials acquired from organizations that are debarred or suspended from Federal assistance programs or use the services of individuals that are debarred or suspended, 3) must use local businesses and contract with small minority and/or women-owned businesses to the maximum extent feasible and, 4) must only use US air carriers for foreign air travel. However, since the incurring of the qualified expenses is overcoming the barrier, these awards will be treated as unconditional and the revenues and expenses recorded as incurred. This will be the classification assuming there are not other barriers outlined in the award agreement. If there are other barriers, then the award will be classified as a Fund Type 24 - Contributory Sponsored Agreement - Restricted in Banner Chart of Accounts fund hierarchy regardless of its funding source.
Drexel and the Academy will handle the deferral of recognition of revenue and expenses in the background using control funds for financial reporting purposes. This will alleviate any confusion for the Principal Investigator and Department Administrators. The awards in this category, regardless of whether conditions have been met or not, will be accounted for just like grants in the Exchange Transactions and Contributory Sponsored Agreements - Unrestricted - Immediately Released categories and revenues will be recognized on the grant as the award is incurring expenses.
The right of return or release from obligation is the second characteristic of a conditional contribution. This requirement indicates that if the recipient does not overcome the barrier, the donor or grantor is released from its obligation to transfer the promised resources (or if the assets were advanced, has a right to demand their return). The ASU emphasizes that the inclusion of right to return language by itself is not sufficient to make a contribution conditional. For a condition to exist it must be linked to a specified barrier to entitlement. For example, a grant agreement that permits a grantor to demand the return of resources advanced if the recipient fails to submit a report indicating how the grantor's resources were spent would be unconditional, because the report requirement is not considered a barrier.
Finally, if a contribution is deemed unconditional, it must be determined if it contains legally binding restrictions on its use. Restrictions stipulate how or when the resources must be used.
Example 1: Conditional or Unconditional?
Scenario: Drexel received and expended $300 million of federal cost-reimbursement grants during the year of adoption of the new guidance.
Conclusion: Prior to adoption, the University classified such grants as exchange transactions. Under the new guidance Drexel determines that it will instead need to classify them as Fund Type 23 - Contributory Sponsored Agreements - Unrestricted - Immediately Released. The reason that Drexel calls them unrestricted is because these awards are immediately being released from restrictions when the funds are expended upon them. The University realizes that they are donor-restricted conditional grants. The grant type field in the Banner ERP captures the fact that that they are conditional in nature. The new fund type has been created in order to segregate these conditional and technically restricted awards and account for the practical expedient that the University has adopted that allow us to recognize these revenues as unrestricted net assets. This alleviates having to distort the financial statements by calling these contributions with donor restrictions and then reclassing them in their entirety to without restrictions on the face of the Statement of Activities.
Example 2: Condition or Restriction?
Scenario: A donor promises the Academy $100,000 towards its Butterfly Exhibit if the Academy can raise a matching amount from other contributors.
Conclusion: The stipulation that the Academy must raise matching funds is a condition until it is achieved. Once the match is raised, the donor's promise to contribute funds becomes binding and the Academy would recognize contribution revenue and a receivable. At that time, the stipulation that contributed resources be spent for the Butterfly Exhibit (a restriction) indicating how the contributed resources must be used becomes operational.
1. PwC In Depth No. US2018-13, August 22, 2018, https://www.pwc.com/us/en/cfodirect/assets/pdf/in-depth/us-2018-13-fasb-grants-contribution-accounting-model.pdf
2. Accounting Standards Update (ASU) 2018-08 - Not-For-Profit Entities (Topic 958): Clarifying the Scope and the Accounting for Contributions Received and Contributions Made, Financial Accounting Standards Update, Financial Accounting Standards Board.