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The proposed update also provides
some examples of exchange and non-
exchange transactions:
Exchange transaction A univer-
sity that conducts cancer research
is engaged by a pharmaceutical
company to test an experimental
cancer drug. The pharmaceutical
company specifies the protocol
of the testing and requires a re-
port from the university within two
months after the tests are com-
pleted. This is an exchange trans-
action because the pharmaceuti-
cal company is receiving commen-
surate value.
Non-exchange transaction (con-
tribution) A university receives
a government grant to conduct
research and must incur qualify-
ing expenses. Any unspent money
must be repaid to the govern-
ment. The university retains rights
to the findings and can publish
them. This is not considered an
exchange transaction because the
government doesn't receive com-
mensurate value other than the
benefit received by the general
public as a result of the findings.
Other examples of exchange transac-
tions occur when an entity receives
assets from a third-party payer for
an existing reciprocal transaction
between the recipient entity and an
identified customer and are not sub-
ject to the reporting requirements of
Topic 958. Examples include Medi-
care, Medicaid, Pell Grants, and provi-
sions of healthcare or tuition for gov-
ernmental employees.
Conditional vs. Unconditional
The new guidance proposes criteria
to determine when contributions are
considered conditional and when they
are considered unconditional. This dis-
tinction is important because it affects
when the revenue from contributions is
Revenue is recognized immediately
for unconditional contributions. For
conditional contributions, revenue is
deferred as a liability on the balance
sheet. Revenue recognition occurs
only when the terms of the condition
giving the not-for-profit the right to re-
ceive the contribution are met.
Conditional contributions and donor
restrictions are two distinct issues and
must be evaluated separately. Keep
in mind that the new (separate) not-
for-profit financial statement reporting
model will eliminate the distinction of
temporarily and permanently restricted
net assets, rolling both into one net as-
set with donor restrictions designation.
Under the new guidance, a contribution
would be conditional if the agreement
or contract includes a donor-imposed
barrier and the donor has either a re-
quirement to return assets previously
transferred or a right of release of ad-
ditional transfers of assets. The barrier
must be satisfied in order for the recipi-
ent to be entitled to the contribution.
The proposed standard provides ex-
amples of indicators that would consti-
tute the existence of a barrier. However,
the examples provided in the proposal
are not an exhaustive list of indicators.
Once a barrier is met, the contribution
becomes unconditional and revenue
is recognized at that point, either as
unrestricted or restricted revenue de-
pending on the resource provider's
specifications. The proposal makes
it clear that determining whether the
contribution revenue is unrestricted
or restricted is the second step in
the process after the barrier is over-
come and the contribution is consid-
ered unconditional.
Indicators of Barriers
The proposed amendment discusses
measurable performance-related bar-
riers and other measurable barriers.
An example of a measurable barrier
is when the recipient is entitled to the
contribution upon the occurrence of a
specified event (for example, a match-
ing requirement).
Think of the public radio station where
an individual promises to make a
contribution once the station raises a
specified amount from other donors.
Once the donations are raised, the
condition is met and the contribution is
considered unconditional.
In a measurable performance-related
barrier, the uses for the contributions
could include:
Achieving a specified level of service;
Achieving a specific output or out-
Occurrence of some outside event.
The stipulation must be related to the
purpose of the agreement. Stipulations
that are trivial would not be considered
For a barrier to exist, the recipient must
have limited discretion about how the
contribution funds will be spent. If the
recipient has broad discretion and
there are no additional factors that
would be considered barriers, the con-
tribution would be considered uncon-
A barrier could require the recipient to
undertake additional identified actions
that it normally would not have taken.
Examples include an expansion in level
of services provided or a requirement
to provide new types of services.
Determining whether a contribution is
conditional or not can be difficult if do-
nor stipulations do not clearly specify
whether a barrier exists or whether the
right to the contribution depends on
meeting barriers. If the terms are un-
clear, the proposed update indicates
that the contribution should be ac-
counted for as a conditional.
The amendments could result
in more grants and contracts
being accounted for as con-
tributions (often conditional
contributions) than under
current GAAP.