Program Letter 20-4
In June 2018, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update 2018-08 (“ASU 2018-08”) pertaining to Not-for-Profit Entities. ASU 2018-08 clarified what is considered an exchange transaction versus a contribution. Further, the update provided guidance on how to determine whether contributions are conditional or non-conditional. In this Program Letter, the Legal Services Corporation (“LSC”) confirms that LSC Basic Field Grants are considered non-exchange transactions/contributions with conditions. LSC is aware that the 2010 Accounting Guide for LSC Recipients (“2010 LSC Accounting Guide”) contradicts ASU 2018-08 and directs Recipients to treat funds consistent with ASU 2018-08. LSC is currently in the process of developing a Financial Guide that will supersede the 2010 LSC Accounting Guide. The new Guide will address ASU 2018-08 and its implications for the presentation of LSC funds in Recipients’ financial statements and the Office of Compliance and Enforcement’s (“OCE”) oversight of Recipients’ fund balances under 45 C.F.R. Part 1628.
As many LSC Recipients are undergoing financial statement audits, LSC has received several inquiries requesting guidance on ASU 2018-08.
ASU 2018-08 states that in a contribution transaction, the resource provider often receives value indirectly by providing a societal benefit, although that benefit is not considered to be of commensurate value. For exchange transactions, the potential public benefits are secondary to the potential direct benefits to the resource provider. LSC Basic Field Grant awards do not involve an exchange with Recipients of commensurate value and the benefit to LSC is considered indirect because the grant serves the general public. As such, LSC concludes that its Basic Field Grant awards are considered non-exchange transactions/contributions.
According to ASU 2018-08, a grant is considered conditional if there is either a right of release of a promisor’s obligation to transfer assets or a right of return on assets transferred AND barrier(s) that must be overcome. Right of return/release is reflected in several areas of the LSC Basic Field Grant terms and conditions (e.g., compliance with federal laws on proper use of federal funds, cost standards and procedures). Barriers are stated in the grant agreement, “Acceptance of Grant Award,” per the references to the grant terms and conditions, LSC rules, regulations, guidelines, and instructions. Further, the requirement to spend an amount equal to 12.5% of the Basic Field Grant on private attorney involvement activities under 45 C.F.R. Part 1614 constitutes a performance-related barrier for the General Basic Field Grant award.
LSC’s Basic Field Grants are non-exchange/contributions with conditions. LSC awards Basic Field Grant funds on a calendar year basis and typically sends notification of funding to Recipients in December of the year before the grant award period. As such, it would be improper to recognize revenue related to LSC Basic Field Grant award at the time of notification. Unexpended grant amounts should be reflected in the Recipients’ liability account (e.g., deferred revenue).
For purposes of conducting oversight in relation to 45 C.F.R. Part 1628, LSC directs Recipients to report in their financial statements the unexpended LSC Basic Field Grant award amount(s) per Basic Field Grant award type (i.e., General, Agricultural Worker, Native American) and grant year. This may be done in the Supplemental Statement of LSC Grant Activity or a note to the financial statements. Recipients must disclose the balance(s) of deferred revenue, even if the balance of the fund is zero.
Note that ASU 2018-08 does not change the treatment of LSC special-purpose/one-time grants (e.g., TIG, PBIF), as unexpended balances should continue to be reflected on Recipients’ balance sheets as deferred revenue (now the same treatment as LSC Basic Field Grant awards).