Implementing the new revenue recognition standard in higher education: Grants and contracts

This is the second in a series of articles in which we will explore the revenue recognition standard requirements and the impact on higher education institutions, including the types of contracts with customers that your institution may have, while highlighting some of the decisions that you will need to make as you evaluate your contracts under the revenue recognition standard.

An overview of the standard

In June 2018, the Financial Accounting Standards Board (FASB) issued Accounting Standards Update (ASU) No. 2018-08, Not-for-Profit Entities (Topic 958), Clarifying the Scope and the Accounting Guidance for Contributions Received and Contributions Made. This update is intended to clarify and improve accounting guidance for contributions received and contributions made and applies to the recipient of the contributions (resource recipient) as well as the resource provider.

The amendments in this ASU should assist entities in: (1) evaluating whether transactions should be accounted for as contributions (nonreciprocal transactions) or as exchanges (reciprocal transactions), and are subject to other guidance, such as ASU No. 2014-09, Revenue from Contracts with Customers (Topic 606); and (2) determining whether a contribution is conditional.

When will the amendments be effective?

The amendments in ASU No. 2018-08, Topic 958 should be applied on a modified prospective basis – although retrospective application is also permitted. Under a modified prospective basis, the entity should apply this ASU to agreements that are either: (1) not completed as of the effective date; or (2) entered into after the effective date.

For entities that are either a public business entity or a not-for-profit entity that have issued conduit debt and serve as the “resource recipient,” the effective date is annual periods beginning after June 15, 2018. All other entities should apply the amendments to annual periods beginning after Dec. 15, 2018. For entities that are either a public business entity or a not-for-profit entity that have issued conduit debt and serve as the “resource provider,” these amendments should be applied to annual periods beginning after Dec. 15, 2018, with a one-year deferral for all other entities for annual periods beginning after Dec. 15, 2019. Early adoption of the amendments is permitted.

Analyzing grants and contracts

When analyzing grants and contracts, many institutions have difficulty determining if revenue should be recognized as either an exchange transaction or a contribution. Further, institutions may struggle in determining whether a contribution is conditional when applying the previous guidance. The issuance of ASU No. 2014-09, Topic 606 generated a second look at the contribution guidance.