The Financial Accounting Standards Board released an accounting standards update Thursday to clarify and improve the scope and accounting guidance for contributions of cash and other assets received and made by nonprofit organizations and businesses.

The standards update clarifies the current guidance about whether a transfer of assets—or the reduction, settlement, or cancellation of liabilities—is a contribution or an exchange transaction. It offers some criteria for determining whether the resource provider is receiving commensurate value in return for the resources transferred which, depending on the outcome, determines whether the organization follows contribution guidance or exchange transaction guidance in the revenue recognition and other applicable standards.

The new guidance also provides a stronger framework for deciding whether a contribution is conditional or unconditional, and for distinguishing a donor-imposed condition from a donor-imposed restriction. That’s significant because those classifications affect the timing of contribution revenue and expense recognition.

“The new ASU clarifies whether certain transactions should be characterized as contributions or exchanges,” said FASB Chairman Russell G. Golden in a statement. “It will improve financial reporting by reducing diversity in practice among not-for-profits and other businesses and organizations that make or receive contributions of cash or other assets—most notably in accounting for grants and similar contracts received by not-for-profits from governments.”

The new ASU doesn’t apply to transfers of assets from governments to businesses. The guidance aims to standardize how grants are classified across various not-for-profit sectors, such as nonprofit colleges and universities. For some organizations, the new guidance could alleviate the administrative burden of implementing FASB’s revenue recognition standard, one of the biggest accounting changes in recent years. College, universities, research institutions, social services organizations, and other nonprofits that heavily rely on grants and contracts could see the biggest relief.

“Accounting changes are like a relay race,” said Lee Klumpp, national assurance partner in BDO’s Nonprofit Education practice, a former FASB fellow, and author of a book on the recent changes to nonprofit financial reporting, How to Read Nonprofit Financial Statements: A Practical Guide, 3rd Edition. “Today, the FASB handed off new clarified guidance on accounting for contributions and answered a longstanding question for the sector. Now, it’s up to nonprofits to apply it to their own books, run the rest of the race to implement revenue recognition guidance, and finish strong.”

BDO USA’s recent benchmarking survey on nonprofit standards found that more than half of nonprofit CFOs say new regulations, and the time and effort required to deal with them, are a challenge. The long-awaited clarification on grants and contributions could offer nonprofits some relief on applying the rev rec standard.

“Revenue recognition introduced a lot of questions,” said Klumpp. “Nonprofits have been waiting for clarified guidance from the FASB about the classification of grants since summer 2017, when the FASB first published an exposure draft on the topic. Today marks an important step forward for a sector that is grappling with substantial accounting changes in how it recognizes revenue.”

Klumpp recently predicted the nonprofit accounting guidance would be coming out before the end of the month (see FASB expected to issue nonprofit accounting guidance on grants).

“The revenue recognition deadline has nonprofit CFOs and controllers working tirelessly to prepare their organization to comply with the new guidance,” he said. “Determining whether a grant is classified as contribution or exchange transaction is the first step in implementing revenue recognition. The new and improved clarifying guidance for accounting for contributions should improve that process.”

FASB plans to host a CPE webinar on the new standards update on Friday, Sept. 14, 2018, at 1:00 p.m. EDT. Registration information for the webinar will be announced.

Complete information about effective dates is available in the accounting standards update. The standards update, along with a FASB in Focus overview summary and an educational video, are available on FASB’s website.