Exchange Transactions

Accounting Standards Update 2018-08 - Not-For-Profit Entities (Topic 958):  Clarifying the Scope and the Accounting Guidance for Contributions Received and Contributions Made serves to clarify and assist entities in (1) evaluating whether transactions should be accounted for as contributions (nonreciprocal transactions) within the scope of Sub-Topic 958-605 - Not-for-Profit Entities-Revenue Recognition, or as exchange (reciprocal) transactions subject to guidance in Topic 606-Revenue from Contracts with Customers, and (2) determining whether a contribution is conditional.

Accounting Standards Codification (ASC) 958-605-15-5A states that "In determining whether a transfer of assets is an exchange transaction in which a resource provided (for example, a government agency, a foundation, a corporation, or other entity) receives commensurate value in return for the resources transferred or a contribution, the type of resource provider shall not factor into the determination and an entity shall evaluate the terms of an agreement and consider the following:

1. The resource provider (including a foundation, a government agency, a corporation, or other entity) is not synonymous with the general public. A benefit received by the public as a result of the assets transferred is not equivalent to commensurate value received by the resource provider. Therefore, if the resource provider receives indirect value in exchange for the assets transferred or if the value received by the resource provider is incidental to the potential public benefit from using the assets transferred, the transaction shall not be considered commensurate value received in return.  
2. Execution of the resource provider's mission or the positive sentiment from acting as a donor shall not constitute commensurate value received by the resource provider for purposes of determining whether the transfer of assets is a contribution or exchange.
3. If the expressed intent asserted by both the recipient and the resource provider is to exchange resources for goods or services that are of commensurate value, the transaction shall be indicative of an exchange transaction. The transaction shall be indicative of a contribution if the recipient solicits assets from the resource provider without the intent of exchanging goods or services of commensurate value.
4. If the resource provider has full discretion in determining the amount of the transferred assets, the transaction shall be indicative of a contribution. If both the recipient and the resource provider agree on the amount of assets transferred in exchange for goods and services that are of commensurate value, the transaction shall be indicative of an exchange transaction.
5. If the penalties assessed on the recipient for failure to comply with the terms of the agreement are limited to the delivery of assets or services already provided and the return of the unspent amount, the transaction is generally indicative of a contribution. The existence of contractual provisions for economic forfeiture beyond the amount of assets transferred by the resource provider to penalize the recipient for nonperformance generally indicates that the transaction is an exchange of commensurate value.

At Drexel University and the Academy of Natural Sciences, Research Accounting Services will review the terms and conditions of every contract and determine whether the agreement meets the proscribed definition of an exchange transaction or a contribution. If the contract meets the definition of an exchange transaction it will be categorized using a fund type of 18 - Exchange Transactions and utilize a fund number appropriate to the funding source (i.e. federal, foundation, industry, etc.).

Prior to ASC 958 - Not-for-Profit Entities, the University and Academy of Natural Sciences classified all awards from federal, state and local governments as exchange transactions. This was consistent with the guidance and the higher education industry as a whole. The reasoning was based on the notion that governments do not provide contributions. In order to adopt ASC 958 - Not-For-Profit Entities, the University and the Academy of Natural Science evaluated its grants and contracts using the definitions provided above and determined the need to create a Fund Type 23 - Contributory Sponsored Agreements - Unrestricted - Immediately Released. This new fund type and series of funds will differentiate federal, state and local governmental grants and cooperative agreements that no longer meet the definition of an exchange transaction. Technically, these type of awards are conditional because these awards have a right of return and a barrier that must be overcome.  However, all of these agreements have barriers that are overcome as soon as qualified expenses are made and as such, they meet their conditions. The categorization of these funds as contributory sponsored agreements is necessary for financial reporting purposes, however, funds assigned to this fund type will have accounting treatment similar to exchange transactions and will also have an unrestricted fund balance indicator. For more information about Fund Type 23 - Contributory Sponsored Agreements - Unconditional see the associated web page. 

For information about transactions that are Contributory Sponsored Agreements - Restricted (Fund Type 24) in nature please refer to the associated web page for more details.

Exchange Transaction Indicators

• The expressed intent by both parties is to exchange resources for goods and services that are of commensurate value.
• Both parties agree on the amount of the assets transferred in exchange for goods and services that are of commensurate value.
• Contractual provisions provide for the assessment of penalties beyond the amount of assets transferred if the recipient fails to perform.

Example 1:  Exchange Transaction or Non-Exchange Transaction?

Scenario:  Drexel University is awarded a grant from the Department of Health and Human Services (DHHS) to find a cure for cancer. The agreement requires the University to 1) follow the rules and regulations established by the Office of Management and Budget (OMB) (aka Uniform Guidance), 2) incur certain expenses in compliance with Uniform Guidance and DHHS, 3) obtain an annual audit in accordance with Uniform Guidance, 4) submit a report of research findings to the Federal government at the end of the award.  Any unused assets (i.e. budget dollars) are forfeited at the end of the award and if any unallowed costs that have been drawn by the University they are required to be refunded. Drexel University will retain the rights to the findings.

Conclusion: This is a non-exchange transaction for the following reasons: 1) commensurate value is not being exchanged between Drexel and DHHS, 2) Drexel retains the rights to the research and receives the primary benefit of the findings, 3) the federal government is considered an indirect beneficiary since the research benefits the general public.

Classification: This award would be set-up as a Fund Type 23 - Contributory Sponsored Agreements - Unrestricted - Immediately Released in Drexel's Chart of accounts using a fund number that begins with 900XXX.  This type of fund is technically considered conditional because a barrier exist as well as a right of return of funds. However, since the barrier which in this case is the adherence to the Uniform Guidance and agency regulations is met at the time funds are expended, the University is immediately meeting the conditions. As such, the funds become immediately released from their restrictions and we can recognize the corresponding revenues as unrestricted.

Example 2: Exchange Transaction or Non-Exchange Transaction?

Scenario:  Drexel is awarded a sub-contract to assist on a research project in which the University of Pennsylvania holds the prime award with DHHS.  Drexel will complete certain specific tasks outlined in the contract and must meet specific performance targets with respect to measurable output and reporting.  Drexel will not retain and rights to intellectual property or data findings.

Conclusion:  This sub-contract is considered a Contributory Sponsored Agreement - Unconditional (Fund Type 23) because this award is subject to Uniform Guidance and as such there is a barrier but that barrier is immediately overcome when spending funds in accordance with the Uniform Guidance. 

Classification:  This award would be set up as a Fund Type 23 - Contributory Sponsored Agreements - Unrestricted - Immediately Released in Drexel's chart of accounts using a fund number that begins with 960XXX.  This fund is considered unrestricted and revenues will be recognized as the award is expended.

Example 3: Exchange Transaction or Non-Exchange Transaction?

Scenario:  Drexel has been awarded a clinical trial contract with a large pharmaceutical company to test the efficacy of a new drug. As part of the clinical trial Drexel must recruit a population of patients to properly test the new medication on and develop results.  The award has specific time frames in which to recruit patients for the study, test the medication and report outcomes. The pharmaceutical company will retain any intellectual property and data findings with the intent on profiting from the drug, if approved by the Food and Drug Administration.

Conclusion: This clinical trial is considered an exchange transaction because commensurate value is being exchange for services. The pharmaceutical company retains all intellectual property, so it can not be considered a contribution. 

Classification: This clinical trial would be set up as a Fund Type 18 - Exchange Transactions in Drexel's chart of accounts using a fund number that begins with 480XXX. The fund would be considered unrestricted and revenues would be recognized over time as the award is expended.

Sources:

1. PwC In Depth No. US2018-13, August 22, 2018 

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.