FASB ASU 2018-08 is the sleeper standard that may take you by surprise. This ASU appears to be overlooked with the new revenue recognition standard, and its biggest impact may be on healthcare entities. Make sure you are prepared to implement the new standard and understand the impact it will have on your business.
Leverage a task force
Leverage a task force to help you avoid surprises by taking the following steps:
- Develop a process and procedures.
- Put together a team that includes those dealing directly with funds received.
- Determine what the team will do.
If you have a large entity, the individual at your entity who directly works with the grantor agency or other entity that provides the funds must be there. This process will help to determine who is receiving direct commensurate value, whether the contribution is conditional and how to identify any barriers.
A new way of thinking for grants
For the task force to understand the impact of the standard, requires a new way of thinking for grants and similar transactions:
- Define commensurate value.
- Outline the difference between a contribution and an exchange transaction.
- Expand on what contributions mean under the standard.
We have all heard more grants will be contributions. How? Previously, the thinking was the government agency receives commensurate value through the societal benefit to the public or through the overall mission. The ASU states that societal benefit to the public, or a benefit that the resource provider gains from carrying out its mission, is not commensurate value. This will make the grant a contribution under the ASU rather than an exchange transaction under the new revenue recognition standard. The entity will then need to determine if the contribution is conditional and whether there are any indicators of a barrier to entitlement. Additionally, an entity should expect additional footnote disclosures for conditional contributions.
Indicators to assess for a barrier
The ASU determines the following indicators to assess whether an agreement contains a barrier:
- The inclusion of a measurable performance-related barrier or other measurable barriers
- The extent to which a stipulation limits discretion by the recipient on the conduct of an activity
- Whether a stipulation is related to the purpose of the agreement
Example of the difference between contribution vs. exchange transaction
Here is an example of the difference between contribution vs. exchange transaction under the ASU. The entity has an idea for a clinical trial and reaches out to a pharmaceutical entity for a sponsorship. The entity determined that the pharmaceutical entity was not getting to keep the data or rights from the trial, and no barrier exists to return the funds. This instance is an unconditional contribution, because the pharmaceutical entity did not receive commensurate value.
What could make this an exchange transaction? If the pharmaceutical entity requires reporting and retains the rights to the data of the trial, it’s an exchange transaction because the pharmaceutical entity receives commensurate value.
The rapid adoption of this ASU is here to align with the revenue recognition standard. Determining whether a contribution, grant or similar transaction falls within this ASU or revenue recognition is most important. The best way to do this is to bring everyone to the table and understand the impact of the ASU. Additionally, the AICPA’s expert panel discusses the ASU to provide additional clarified guidance specific to the healthcare industry’s adoption on the matter.
Consult an expert to ensure you know how to implement the new standard and understand how it will affect your business.
For more information on FASB ASU 2018-08, view PDF document.