Ronald S. Flagg, President

May 12, 2023

• Program Letter 23-2
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Summary

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 when a transaction, including a grant, is considered an exchange transaction to be accounted for under Accounting Standards Codification (ASC) 606: Revenue from Contracts with Customers versus a contribution (or non-exchange transaction) to be accounted for under ASC 605: Not-for-Profit Entities, Revenue Recognition. Further, the update provided guidance on how to determine whether contributions are conditional or unconditional. In this Program Letter, the Legal Services Corporation ("LSC") confirms that LSC Basic Field Grants are considered non-exchange transactions/contributions with conditions. The new LSC Financial Guide addresses 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. This Program Letter supersedes Program Letter 20-4.

Background

While undergoing their annual financial statement audits, several LSC Recipients requested clarity from LSC relating to ASU 2018-08.

ASU 2018-08 states that in a contribution or non-exchange transaction, the resource provider often receives value indirectly from the transaction by providing a societal benefit. Thus, the resource provider is not receiving commensurate value (approximately equal value) for the asset they have contributed. Conversely, an exchange transaction involves a contract whereby the transfer of assets between the resource provider and another party has approximate equal value. Exchange transactions are accounted for under ASC 606: Revenue from Contracts with Customers rather than ASC 605: Not-for-Profit Entities, Revenue Recognition. LSC Basic Field Grant awards involved LSC contributing funds to its recipients in exchange for a societal benefit serving the general public; thus, it receives an indirect benefit from cash awarded. As such, LSC concludes that its Basic Field Grant awards are considered contributions or non-exchange transactions and fall under the guidance of ASC 605: Not-for-Profit Entities, Revenue Recognition.

According to ASC 605: Not-for-Profit Entities, Revenue Recognition, a contribution or non-exchange transaction is considered conditional when certain performance obligations attached to the funding must be met by the recipient (i.e., barriers to overcome) AND the funder has 1) the right of return of funds transferred or 2) the right to stop payment of funds if the recipient has not met the performance obligations. LSC Regulations 45 C.F.R. Part 1628 - Recipient Fund Balances and 45 C.F.R. Part 1630 - Cost Standards and Procedures, include a right of return and barriers to overcome, outlined as follows.

LSC permits its recipients to retain fund balances on Basic Field funds up to 10% of LSC support from one fiscal year to the next, without obtaining approval from LSC. Fund balances of Basic Field funds exceeding 10% require formal request to retain the portion of the fund balance that exceeds 10%. However, in both circumstances, the fund balance is subject to the regulatory requirements outlined in 45 C.F.R. Part 1630 - Cost Standards and Procedures (barrier) and to the grant and contract termination and recovery of funds provisions outlined in 45 C.F.R. Part 1606 - Termination, Limited Reduction of Funding, and Debarment Procedures (right of return of funds transferred). 

The presence of a barrier and the right of return of funds transferred results in the classification of the fund balance on Basic Field grants as conditional contributions (refundable advance) regardless of whether the fund balance is above or below 10% of LSC support. When the recipient expends funds in accordance with 45 C.F.R. Part 1630 - Cost Standards and Procedures, there is no longer a barrier and the funds can be recognized as revenue under ASC 605: Not-for-Profit Entities, Revenue Recognition. 

Application

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 awards at the time of notification. All unexpended LSC Basic Field grant amounts must be reflected in the Recipients' liability account (e.g., refundable advances) whether LSC approved the amounts to carry over, or the amounts do not meet the threshold for approval. 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 refundable advances (now the same treatment as LSC Basic Field Grant awards).

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 refundable advances, even if the balance of the fund is zero.