There have also been several questions regarding the implications of ASC Topic 958 and its application to Capital Advance (202/811) projects. As a reminder, in June 2018 FASB issued ASU 2018-08 – Clarifying the Scope and the Accounting Guidance for Contributions Received and Contributions Made (Topic 958). The standard revises the guidance for recognizing revenue from contributions. Under the standard, the project is required to first determine whether a transaction is an exchange or a contribution. Once we know that a contribution has taken place, a determination is then made as to whether the contribution is conditional or unconditional. A contribution is conditional if both of the following exist:
- A right of return/release must exist; and
- The agreement includes a barrier the recipient must overcome to be entitled to resources
Application to Capital Advance Transactions
Traditionally Capital Advances have been accounted for as either debt or restricted net assets. We have also seen some CPAs record Capital Advances as unrestricted net assets. Nevertheless, the primary choices are debt or equity. Prior to Topic 958 there was no stated GAAP preference in how these transactions should be recorded.
Does the issuance of Topic 958 change that accounting? That depends. If the client elected to record the Capital Advance as a mortgage/debt, then no immediate accounting change is required. Revenue will be recognized at the expiration of the 40-year restriction/repayment period. If the client elected to record the amount as either restricted or unrestricted net assets, then the entire amount was recognized in a prior period. Luckily, the standard does not require any previously booked revenue to be unrecorded.
However, if your client is a lucky recipient of one the few newer Capital Advance recipients, your decision process may be significantly different. Based on the standard, you will to determine that the money received is not an exchange, but a contribution. You will further note that the contribution is conditional as the Regulatory Agreement requires an explicit repayment (right of return). Additionally, the Agreement also requires that the project operate the project consistent with the Agreement throughout its life thus establishing a barrier.
Based on the criteria it does not appear that the client will be able to recognize revenue until the barriers are meet and the right of return expires (40 years). This leaves the client with two choices for recording the Capital Advance – debt or deferred income. Given that, we assume few will want to carry a 40-year deferred income, debt may become the requirement. Since there are so few new Capital Advance transactions, we do not anticipate too many changes in accounting.
These accounting issue may also impact other NFP clients who receive loans/grants from state or local governments that do not contain specific repayment terms.