GAAP Accounting for Third Party Reimbursements: Contributions vs. Exchange Transactions
October 14, 2021
U.S. GAAP accounting for Federal government grants might seem straightforward after the adoption of ASU 2018-08–Clarifying The Scope And Accounting Guidance For Contributions Received And Contributions Made. The FASB explained that the resource provider, for example, the Federal government, is not synonymous with the general public and to be an exchange transaction the resource provider must receive commensurate value for the payments provided. Simply put, to be classified as an exchange transaction (which requires ASC 606 application), the transaction must be fee for service to the resource provider directly and not a third party or the general public: The resource provider pays an organization, the organization provides goods or services to the resource provider, and the resource provider consumes them.
BUT WAIT… there are situations where the federal, state or local government (or another unrelated third party) makes payment on another’s behalf and the payor does not receive commensurate value.
This doesn’t sound like it meets the definition of an exchange transaction…
What is the resource provider receiving? Should this transaction be accounted for as a contribution under ASC 958?
No. It should not.
According to FASB 958-605-15-6-E, contribution accounting doesn’t apply to transfers of assets that are part of an existing exchange transaction between a recipient and a customer. If your not-for-profit is providing services to individuals eligible for Medicare benefits, the individual eligible is the customer, not the federal government or third-party payor. The third-party payor is just paying your fees on the customer’s behalf. It is a single transaction and is subject to ASC 606 (part of the transaction price).
A similar situation can arise with tuition revenue.
Example: The customer is a student and the tuition fee is most likely fixed. It doesn’t matter who pays the tuition fee: the student, their parents, Aunt Susan, or Uncle Sam; the tuition price still remains the same and the third party payment(s) are not a separate transaction under these circumstances. The transaction is subject to ASC 606.
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