In this edition
February 2022

Grant Revenue and Income Recognition

The New Lease Standard is Here

Audit Report Changes Are Coming

Client Profile: FOCUS
Grant Revenue and Income Recognition
In 2018, the Financial Accounting Standards Board (FASB) issued ASU 2018-08 which provided clarifications on how non-governmental organizations should recognize contributions in accordance with ASC topic 958. This guidance also applies to various grants that non-profit organizations often receive. Now, that this guidance has been published for a few years, we’d like to take a deeper dive into the appropriate accounting treatment and timing for recognition of grant revenue, more specifically grant revenue that qualifies as a contribution per the clarifications in ASU 2018-08 and ASC topic 958.

When determining recognition of grant revenue, the first step is to determine if the transaction is an exchange transaction or a contribution. The key difference between an exchange transaction and a contribution is commensurate value which refers to reciprocal benefits of equal value flowing between two parties to an agreement. It should be noted that a benefit provided to the general public does not constitute commensurate value to the resource provider. One of the most common forms of grants we see where commensurate value exists are when payments are being made on behalf of third parties, for example, a payment from Medicare, Medicaid, or another state agency where the agency is covering the cost of care to a specified individual. 

Grants that Are Exchange Transactions

If it is determined that commensurate value exists in the transaction the grant qualifies as an exchange transaction and should be recognized in accordance with ASC 606. There is no specific guidelines on how these transactions should be labeled on an organization’s statement of activities. However, it is important that grants that qualify as exchange transactions be separately stated from grants that qualify as contributions. There are also additional disclosures required for these types of transactions in accordance with ASC 606. For more detail on recognition of this type of revenue, please refer to the following document:
Grants That Are Contributions

If it is determined that the grant qualifies as a contribution the next step is to determine if the contribution is conditional or unconditional. Two things need to exist in order for the grant to be considered conditional:

  1. There is a barrier the nonprofit must overcome to be entitled to the resources, and 
  2. The contributor retains a right of return for the resources provided or more simply put, the funding needs to be returned or is not received if certain conditions are not met. The grant agreement must make it sufficiently clear that there is a right of return for this component to be met.

The existence of a barrier is subject to judgment, possible indicators of a barrier are:

  • A measurable barrier: This might be performance-related. One example would be a grant to assist a food shelter where they are required to provide 1,000 meals per month. Another example would be a requirement that a matching amount of contributions would need to be obtained by an organization. 
  • Limited discretion in the conduct of an activity: The agreement might place a limit to the discretion in how the activity may be conducted. An example would be a grant that can only be spent on costs incurred to prevent and respond to the coronavirus pandemic. 
  • Requirements related to the purpose of the agreement: Examples might be an agreement that requires a homeless shelter to construct a building addition with a specific amount of sleeping capacity. 

Stipulations that are administrative or trivial would not constitute a barrier. Reporting on the project would not be a stipulation creating a barrier.

If a grant is determined to be conditional based on the criteria discussed above there would be no financial statement recognition of the grant until the conditions are met. One exception to this is if cash or other assets were received in advance. In this circumstance the assets received would need to be recorded as a refundable advance (liability) on the statement of financial position until all of the conditions have been met where it would then be recognized as revenue. Conditional grants that are material will require disclosure in your financial statements. Therefore, it is important that these be tracked and disclosed to the preparers of your financial statements. 

If a grant is determined to be unconditional, revenue is recognized when the grant is received. The final step in the evaluation process is to determine whether or not donor-restrictions exist. Donor-restrictions should not be confused with conditions as mentioned above and instead are grants where a restriction exists that limits the use of the assets received. These restrictions may permanently limit the use of the asset received, stipulate the assets be used at a particular point in time, or be specific for a particular purpose or program. Any amounts not used in the year they are received are recognized as with donor restrictions at yearend and disclosed in your financial statements.

Determining what is a condition versus what is a donor restriction can be complex and not always immediately clear, but, if the above steps and criteria are utilized, you can ensure that your grant revenue transactions are being recorded properly. If you have any questions on when or how to recognize your grant revenue, please contact your Hawkins Ash CPAs representative.

Brittany Leonard, CPA
D 608.793.3123
The New Lease Standard is Here
The new accounting standard for Leases (Topic 842) that was issued back in 2016 is now effective for not-for-profit (NFP) organizations beginning on or after December 15, 2021. There will be no last minute reprieve; now is the time to begin to think about this standard.

Why Did This Standard Come About? 

The Financial Accounting Standards Board (FASB) was concerned that while the old standard required operating leases to record their activity on the income statement and disclose any future commitments in the footnotes, the impact of the off- balance sheet debt, which could be substantial, was not being reflected on the financial statements or considered by most organizations. The new standard’s purpose is to improve the quality of financial reporting by providing more transparency about the assets an organization uses and the risks associated with leasing transactions. The lease standard applies to all public and private companies, including nonprofit organizations.

Impact on NFP Organizations

The new standard requires the NFP to read each contract and make a determination about whether the contract is a lease. The definition of a lease is as follows: a lease is a contract or a part of a contract that conveys the right to control the use of an identified asset for a period of time in exchange for consideration. The right to control the use of an asset means that the organization has the right to substantially all the economic benefits of the asset and the right to direct the use of the asset. Many service contracts may fail to be considered a lease under this new definition, as they typically do not convey the right to control the asset.

Once it is determined that the contract meets the requirements of a lease, a “right to use” asset and a liability to make lease payments will be recorded on the financial statements for all leases that are greater than 12 months. Accounting for an operating lease and a finance lease are different.

A lease is classified as an operating lease unless it meets one of the following criteria:

  • The lease transfers ownership at the end of the lease  
  • The lease grants an option to purchase the asset that the organization is reasonably certain to exercise 
  • The lease term cover substantially all (greater than 75%) of the expected economic life of the asset 
  • The present value of the sum of the lease payments plus any residual value is equal to or exceeds substantially all of the fair value of the asset
  • The asset is so specialized that it is expected to have no other use to the lessor at the end of the lease term 

As with all new standards, additional disclosures are required. The new disclosures will give the reader of the financials more information and aid them in making decisions about the organization. The standard does list some leases which are excluded, but the fact that the lease is immaterial is not a reason for exclusion. An organization can adopt a reasonable capitalization threshold as a way to assess whether recognition of lease assets and liabilities of smaller dollar leases is required. This policy should be consistent with other policies that the organization has such as capitalization of assets.

So What Can an Organization Do to Get Ready for Implementation?

First, gather all current contracts and list them on a spreadsheet. Read each contract and document the answers to the following questions on the spreadsheet:

  • Does the contract grant the organization the right to control the use of the asset? If so, does the organization have rights to substantially all the economic benefits and the right to direct the use of the asset? 
  • Is the lease for a period of time that is greater than one year? Is there an option to extend or terminate the lease? If there is an option to extend the lease, is the organization reasonably certain they will exercise the option to renew? If there is a termination clause, who can terminate the lease? This will help to determine the measurement period of the lease. 
  • Schedule out the payments and identify if there is an in-kind component to the contract. This will need to be excluded from the measurement of the lease liability. 

Creating this spreadsheet now will save you time in the future and allow you to ask questions to properly assess the impact this standard will have on your organization and make the implementation process easier. If you have any questions on how to apply the lease standard, please contact your Hawkins Ash CPAs representative.

Sandy Jensen, CPA
D 608.793.3126
Audit Report Changes Are Coming
The Auditing Standards Board recently issued Statements on Auditing Standards (SAS) 134. The update comes as part of an effort by the Auditing Standards Board (ASB) to converge Auditing Standards with International Auditing and Assurance Standards. The standard update is also meant to increase the informational value and relevance of the auditors’ report for users and the public interest. The SAS will significantly change the look of the independent auditors’ report included in the financial statements. 
Previous Layout

  • Report on the Financial Statements
  • Management’s Responsibility for the Financial Statements
  • Auditors’ Responsibility
  • Opinion
  • Report on Supplementary Information
New Layout

  • Opinion
  • Basis for Opinion
  • Responsibilities of Management for the Financial Statements
  • Auditors’ Responsibilities for the Audit of the Financial Statements
  • Supplementary Information
The Opinion and Basis for Opinion paragraphs have been moved to the beginning of the report to first state the conclusion, and then explain how the auditor reached that conclusion. 

The Management Responsibilities paragraph has added a statement about management’s responsibility to evaluate the entity’s ability to continue as a going concern. 

The Auditors’ Responsibility paragraph will be quite a bit longer than in the previous auditors’ report. The updated paragraph walks the financial statement user through the process of performing an audit from beginning to end. It will include a definition of reasonable assurance and material misstatement and also discuss that auditors use professional judgment and professional skepticism throughout the audit. The paragraph will explain that fraud is harder to detect than material misstatement and that the purpose of an audit is not to detect fraud. Other items covered include the role of internal controls, responsibilities for estimates made by management, and new language regarding going concern. 

The Supplementary Information will still be included at the end of the auditors’ report, if supplementary information is included in the financial statements. 

Since this is an audit standard, there is nothing your not-for-profit organization needs to do to prepare; just be aware of changes to expect in your upcoming report.

Emily Donohue, CPA
D 920.337.4542
Client Feature: FOCUS
Uniting to Fight Food Insecurity

Feeding Our Communities with United Services (FOCUS) was founded in 2020 when three food organizations merged in Wisconsin’s South Wood County. FOCUS combines the individual strengths of each organization; food pantry services, free community meal service, and weekend meal backpacks.

“Prior to joining forces, the local food organizations were basically competing for resources to achieve the same goal,” said Dale Davis, FOCUS Operations Manager.
“As one organization, we’re able to have a greater impact with those same resources, and our communities benefit from the joint efficiencies.”

South Wood Emerging Food Pantry Shelf (SWEPS) food pantry began in 1975 to provide food to area residents only in emergency situations. SWEPS expanded dramatically over the last 45 years and now provides food on a regular basis to those in need in South Wood County. In 2020 SWEPS provided food, hygiene products and educational services to over 6,300 households and nearly 18,500 people.

The Neighborhood Table (TNT) is a free community meal service that began with a meal served to approximately 50 people New Year’s Eve of 2003. TNT has grown substantially since 2003 and now offers meals every Thursday and the last two Tuesdays of the month (pre-COVID). Approximately 150 meals are served on Tuesdays and about 280 meals each Thursday.
Rapids Family Backpacks (RFB) was established in 2011 to assist children with food insecurity needs over the weekend while away from school. Students take home a nondescript backpack filled with food items and a retail voucher for perishable food items. The program currently runs from October to May and assists about 85 families.

In spring 2022, the programs will relocate under one roof to make the best use of resources, better serve guests and create a better working environment for volunteers. The new facility more than triples the organization’s current square footage. Situated on one level, it will provide better access to guests and volunteers with mobility issues. Volunteers that cook for TNT will enjoy the new, expanded kitchen.

Guests will have access to all the FOCUS services with one stop: weekly meal, pantry items, fresh greens grown in the organization’s hydroponic garden, and much more.
Donations will be shared among the services as would best fit. The new facility includes a food processing center to safely repackage and salvage produce and other foods before spoiling.

 “At the current facility, cold foods need to be loaded in the refrigerator and freezer piece by piece, “said Dale Bikowski, FOCUS Treasurer. “The new process will make it easier for volunteers and preserve the foods better.” The large, walk-in freezer and refrigerator can accommodate entire pallets of food, reducing the physical handling required.

“The new facility brings the excitement of being able to expand services and programs and develop more ways to support healthy living through food and eliminate food insecurity in our local communities,” said Bikowski.

The community has embraced FOCUS efforts. In addition to a sizeable grant, the capital costs to the new facility required FOCUS to acquire about $250,000 in community support. Through generous corporate and personal donors, FOCUS surpassed that amount.
Executive Director Q&A

Dale Davis
FOCUS Operations Manager

For Operations Manager Dale Davis, whether in service in Haiti or at home working in engineering, he has always loved helping people. Prior to joining FOCUS as an employee, he volunteered at the food pantry for more than a decade. As he, along with the entire team, worked to grow the impact they have in the community, he focused on a few basics. It started with providing classes to educate the community about healthy living through food. “We have done garden tables and garden buckets. We started small with hydroponics, said Davis. “We now have four units planted so we can harvest one a week, impacting 80 households with every harvest.”

In his opinion, his strongest effort has been to continually work on strengthening collaborative works. Whether it's being a drop site for Feeding America, sharing product back and forth or talking about failures and success together, building a bond between many different programs and strengthening work collectively produces a greater impact in our communities. Dale noted, “As we work with the utmost kindness and respect for our clients, I see great things in store for FOCUS.”
More Resources from CPA-HQ
2022 Key Tax Fact Sheet

Download our 2022 Key Tax Fact Sheet to ensure you're up to date.
Hawkins Ash CPAs Names New Partners

We are proud to announce Holly Pett, CPA, EA, and Brittany Leonard, CPA, as Partners!
Key Consideration of Grant Management

In this article, we discuss some guidelines for properly managing your grant funds.