**NO.** 07-2

**DATE:** May 2007

**[PURPOSE]{.underline}.** To revise the \"*Accounting Manual for
Federal Credit Unions*" ("AM-FCU") to address basic accounting for NCUA
grants received by small credit unions. The AM-FCU provides regulatory
accounting policies ("RAP") for credit unions with less than \$10
million in total assets. Credit unions with \$10 million or more in
assets must follow generally accepted accounting principles ("GAAP") in
the reports they file with the NCUA Board.

**[BACKGROUND]{.underline}.** The NCUA Office of Small Credit Union
Initiatives ("OSCUI") receives numerous inquiries from small credit
unions regarding the proper way to account for grants and contributions.
Many of these small credit unions do not have the resources to seek the
advice of independent accountants in the proper application of GAAP to
their facts and circumstances. This bulletin provides consistent
regulatory guidance regarding the proper way small credit unions should
account for grants and contributions.

**[POLICY]{.underline}**. Credit unions should follow the RAP described
in this Bulletin in accounting for grants received. *Care must be taken
in evaluating each grant because the accounting follows the nature of
the arrangement*. The following steps outline how to determine the RAP
accounting for grants.

I.  **Promise to Give**

To determine how to account for a grant, the credit union must first
identify whether or not the grant is clearly a "promise to give." A
promise to give is a written agreement to contribute cash or other
assets. To be recognized in the financial statements, there must be
sufficient, verifiable documentation that a promise to give was made and
received. Occasionally the "promise to give" communication does not
clearly indicate whether it is a promise. In these situations, the offer
can be considered a promise to give if it conveys an unconditional
intention to give that is legally enforceable.[^1]

II. **Conditional versus Unconditional Promise to Give**

Once the grant offer is determined to be a promise to give, the credit
union must then identify it as a conditional or unconditional promise to
give, as these two types of promises have different accounting treament.

> A. **Unconditional Promise to Give**. Unconditional promises to give
> are nonreciprocal, made or received voluntarily, to or from entities
> acting other than as owners, and dependent for performance only on the
> passage of time or demand by the credit union. Grants sometimes come
> with restrictions. A restriction limits how the gift can be used but a
> restriction alone does not necessarily prevent the promise from being
> unconditional. Unconditional promises to give are recognized as income
> on an accrual basis for the fair value of the asset (e.g., cash)
> offered as a grant at the time the promise is received.
>
> B. **Conditional Promise to Give**. Sometimes a grantor imposes a
> condition that limits or directs the use of the assets (e.g., cash)
> being contributed. Conditions are different from restrictions and
> prevent income recognition. A condition must be satisfied before the
> credit union has the right to receive or retain the assets being
> contributed. That is, the grant isn't earned until these conditions
> have been met. A common form of conditional promise to give is one in
> which funds are transferred to the extent the credit union raises
> matching funds. Another common form of conditional promise to give is
> one in which the credit union must incur certain qualifying expenses
> (or costs) post award before the grant is "earned."
>
> Sometimes it is difficult to determine whether or not the promise to
> give contains conditions. For example, the language of the grant
> agreement may indicate certain expectations or requirements, but fail
> to explicitly tie receipt of the funds (assets) to satisfaction of
> these stipulations. If the donor's grant stipulations do not clearly
> state whether the right to receive the assets being contributed
> depends on meeting any such stipulations, or if the stipulations are
> ambiguous, use the following guidance:

-   Review the facts and circumstances surrounding the "right to receive
    payment" and communicate with the donor to clarify the stipulations.

-   If the ambiguity cannot be resolved, presume that the promise is a
    "conditional promise to give."

-   However, if the possibility that the stipulations will not be met is
    remote, the promise to give can be considered unconditional. For
    example, a stipulation that an annual report must be provided by the
    credit union to receive subsequent annual payments on a multi-year
    promise is not a condition [if]{.underline} the possibility of not
    meeting that administrative requirement is remote.

> Conditional promises to give are recorded on the financial statements
> when (see Appendices I through III for examples):
>
> \(1\) The conditions are satisfied even though no actual transfer of
> the gift has yet been made. Upon satisfaction of the conditions, the
> credit union records the grant as income and a corresponding
> receivable is established until receipt of the funds (assets); or
>
> \(2\) The donor transfers assets before the specified conditions and
> requirements are met. The credit union records the receipt of the
> assets as a refundable advance (i.e., a liability). When the
> conditions and requirements are met, the refundable advance is then
> recognized as income.

**[ILLUSTRATION OF ACCOUNTING BY GRANT TYPE]{.underline}.**

1.  NCUA Technical Assistance Grants (TAGs) APPENDIX I

2.  National Federation Of Community Development APPENDIX II

Credit Unions (NFCDCU) Grants

3.  National Credit Union Foundation (NCUF) Grants APPENDIX III

**[EFFECTIVE DATE]{.underline}.** This Bulletin is effective upon
issuance.

**[EXPIRATION DATE]{.underline}.** This Bulletin will expire when
superseded or incorporated into the *Accounting Manual for Federal
Credit Unions*, whichever occurs first.

Director David M. Marquis

Office Examination and Insurance

Attachments

[Distribution]{.underline}:

All FCUs

All FISCUs

All State Supervisory Authorities

NCUA Express

**APPENDIX I**

**NCUA TECHNICAL ASSISTANCE GRANTS (TAGs)**

+--------------------+-------------------------------------------------+
| Evidence of        | Yes, evidence of a promise to give is the       |
| promise made?      | formal grant award letter from OSCUI.           |
+--------------------+-------------------------------------------------+
| Conditions?        | Conditions are stated in the award letter.      |
|                    |                                                 |
|                    | 1.  Credit union must not commit to, contract   |
|                    |     for, procure or purchase the goods or       |
|                    |     services for which they are requesting the  |
|                    |     grant, prior to receiving written approval  |
|                    |     from NCUA for the grant.                    |
|                    |                                                 |
|                    | 2.  Credit union must request reimbursement for |
|                    |     grant fund awards expended within the       |
|                    |     commitment period designated by NCUA, or    |
|                    |     request an extension of the commitment      |
|                    |     period, otherwise the grant award will be   |
|                    |     forfeited.                                  |
|                    |                                                 |
|                    | 3.  The grant funds must be used for the        |
|                    |     purpose stated in OSCUI's grant award       |
|                    |     letter.                                     |
+--------------------+-------------------------------------------------+
| Receipt of         | Receipt of the promised asset (cash             |
| promised asset?    | reimbursement) occurs when conditions are met,  |
|                    | i.e., grant approval, expenditure, submission   |
|                    | of receipts and supporting documentation, etc.  |
+--------------------+-------------------------------------------------+

***Illustrative Entries* \-- NCUA TAGs**

1.  When award letter is received, but before incurring qualifying
    expenses, meeting of additional conditions, or disbursement of
    funds, there is no entry. [Note]{.underline}: Funds are not
    distributed in advance of conditions being met, so no Refundable
    Advance entry.

2.  When the award letter has been received and qualifying expenses have
    been incurred but conditions (such as submitting documentation for
    reimbursement) have not otherwise been met, nor funds disbursed, the
    following entries apply:

  -------- ---------------------------------- -------------- --------------
  Debit    Expense                            \$5,000        

  Credit   Account Payable or Cash                           \$5,000
  -------- ---------------------------------- -------------- --------------

  --------------- ---------------------------------- -------------- --------------
  Debit           Grant Contribution Receivable      \$5,000        

  Credit          Income from TAGs                                  \$5,000

  Assumptions                                                       
  are: (1)                                                          
  pre-approval                                                      
  was correctly                                                     
  obtained, (2)                                                     
  qualifying                                                        
  expenses were                                                     
  incurred, (3)                                                     
  timeframes were                                                   
  properly                                                          
  adhered to, and                                                   
  (4) the                                                           
  possibility of                                                    
  not submitting                                                    
  claim and                                                         
  related                                                           
  documentation                                                     
  within the                                                        
  required                                                          
  timeframe is                                                      
  remote, i.e.,                                                     
  conditions are                                                    
  substantially                                                     
  met.                                                              
  --------------- ---------------------------------- -------------- --------------

[Note]{.underline}: A common form of conditional promise to give is one
in which the promisee must incur certain qualifying expenses (or costs)
before the promise becomes unconditional. The promise should be
recognized to the extent qualifying expenses are incurred. \[C67.809,
Q&A.116/117 #8\]

**APPENDIX I**

(continued)

3.  When conditions are met (documented claim submitted meeting all
    terms and conditions), and OSCUI reimburses the credit union, the
    following entry applies:

  -------- ---------------------------------- -------------- --------------
  Debit    Cash                               \$5,000        

  Credit   Grant Contribution Receivable                     \$5,000
  -------- ---------------------------------- -------------- --------------

4.  If the credit union misapplied this RAP (recognized income
    pre-maturely) or failed to meet the terms and conditions of the TAGs
    in any way such that the TAG grant will not be disbursed, i.e., even
    after expenditures have been made and income recorded, income
    reversal entry:

  -------- ---------------------------------- -------------- --------------
  Debit    Income from TAGs                   \$5,000        

  Credit   Grant Contribution Receivable                     \$5,000
  -------- ---------------------------------- -------------- --------------

**APPENDIX II**

**NATIONAL FEDERATION OF COMMUNITY DEVELOPMENT CREDIT UNIONS (NFCDCU)
GRANTS**

+--------------------+-------------------------------------------------+
| Evidence of        | Yes, formal agreement signed by both parties.   |
| promise made?      |                                                 |
+--------------------+-------------------------------------------------+
| Conditions?        | Specific terms and conditions of NFCDCU grants  |
|                    | vary depending on the credit union's            |
|                    | application request and management's intended   |
|                    | use of the funds. Typically, grant awards are   |
|                    | divided into two portions.                      |
|                    |                                                 |
|                    | 5.  1\. The first portion is provided to the    |
|                    |     credit union at the time the grant          |
|                    |     application is approved by the NFCDCU's     |
|                    |     capitalization committee.                   |
|                    |                                                 |
|                    | 6.  2\. The remainder of the award would be     |
|                    |     provided to the credit union after one or   |
|                    |     two years, depending on whether the credit  |
|                    |     union achieves the performance standards    |
|                    |     documented in the grant application and     |
|                    |     written grant agreement.                    |
|                    |                                                 |
|                    | [Once it is disbursed it cannot be              |
|                    | recalled]{.underline}. Equity grants may only   |
|                    | be used to build capital (net worth) and cannot |
|                    | be used to offset operating losses in the       |
|                    | period (calendar year) disbursed.               |
+--------------------+-------------------------------------------------+
| Receipt of         | Partial disbursement; Other funds held back &   |
| promised asset?    | conditional.                                    |
+--------------------+-------------------------------------------------+

***Illustrative Entries* -- NFCDCU Equity Grants**

1.  When the NFCDCU and the credit union sign the agreement and the
    funds are initially disbursed (e.g., \$10,000 equity award with
    \$4,000 disbursed):

  ---------------- ---------------------------------- -------------- --------------
  Debit            Cash                               \$4,000        

  Credit           Income from Equity Grant                          \$4,000

  Funds disbursed                                                    
  cannot be                                                          
  recalled per                                                       
  agreement                                                          
  (unconditional                                                     
  transfer), so                                                      
  income is                                                          
  recognized.                                                        
  ---------------- ---------------------------------- -------------- --------------

2.  When the NFCDCU's Capitalization Committee reviews the credit
    union's performance in light of the agreement's performance goals
    and agrees to disburse the additional \$6,000 of funds.
    [(Note]{.underline}: Funds are not distributed in advance of
    conditions being met, so no income recognition or Refundable Advance
    entry.)

  ---------------- ---------------------------------- -------------- --------------
  Debit            Grant Contributions Receivable (or \$6,000        
                   Cash)                                             

  Credit           Income from Equity Grant                          \$6,000

  Disbursement of                                                    
  funds after the                                                    
  initial award is                                                   
  at the                                                             
  Capitalization                                                     
  Committee's                                                        
  discretion                                                         
  (conditional),                                                     
  so no income                                                       
  recognition                                                        
  until the                                                          
  Committee's                                                        
  decision is                                                        
  final.                                                             
  ---------------- ---------------------------------- -------------- --------------

**APPENDIX II**

(continued)

3.  When the NFCDCU disburses the funds:

  ----------------- ---------------------------------- -------------- --------------
  Debit             Cash                               \$6,000        

  Credit            Grant Contributions Receivable                    \$6,000

  If the                                                              
  Capitalization                                                      
  Committee                                                           
  notifies the                                                        
  credit union of                                                     
  its decision in                                                     
  #2 and disburses                                                    
  the funds                                                           
  simultaneously,                                                     
  then entry #2 and                                                   
  #3 would be                                                         
  combined without                                                    
  need of the                                                         
  "Grant                                                              
  Contributions                                                       
  Receivable" step.                                                   
  ----------------- ---------------------------------- -------------- --------------

**APPENDIX III**

**NATIONAL CREDIT UNION FOUNDATION (NCUF) GRANTS**

+------------------------+---------------------------------------------+
| Evidence of promise    | Yes, formal agreement signed by both        |
| made?                  | parties.                                    |
+------------------------+---------------------------------------------+
| Conditions?            | The formal Grant Agreement outlines the     |
|                        | grant disbursement terms and the specific   |
|                        | terms and conditions of the grant.          |
|                        |                                             |
|                        | 1.  The Foundation disburses the grant in   |
|                        |     three payments, as stipulated in the    |
|                        |     Grant Agreement. The Foundation will    |
|                        |     issue the first grant payment to the    |
|                        |     grantee upon receipt of the signed      |
|                        |     Grant Agreement. Two additional grant   |
|                        |     payments will be disbursed after        |
|                        |     receipt of satisfactory Progress and    |
|                        |     Final Reports documenting               |
|                        |     accomplishments towards the project     |
|                        |     success measures as outlined in the     |
|                        |     Application and Grant Agreement.        |
|                        |                                             |
|                        | 2.  All grantees are required to submit a   |
|                        |     Progress Report during the grant period |
|                        |     and a Final Report at the conclusion of |
|                        |     the period. The reports must            |
|                        |     specifically address the success        |
|                        |     measures for the project that were      |
|                        |     outlined in the Application and         |
|                        |     codified in the Grant Agreement. Grant  |
|                        |     payments will be based on satisfactory  |
|                        |     progress on the project as described in |
|                        |     the reports.                            |
+------------------------+---------------------------------------------+
| Receipt of promised    | Funds in three disbursements; First         |
| asset?                 | disbursement at award.                      |
+------------------------+---------------------------------------------+

***Illustrative Entries* -- NCUF Equity Grants**

1.  When the NCUF and the credit union sign the agreement and one third
    of the funds are initially disbursed (e.g., \$9,000 equity award
    with \$3,000 disbursed):

  -------- ---------------------------------- -------------- --------------
  Debit    Cash                               \$3,000        

  Credit   Income from NCUF Grant                            \$3,000
  -------- ---------------------------------- -------------- --------------

2.  When the NCUF Grant Reviewer or Review Committee reviews progress
    reports and goal achievements in light of the grant terms and
    conditions and decides to release another payment.

  ---------------- ---------------------------------- -------------- --------------
  Debit            Cash                               \$3,000        

  Credit           Income from NCUF Grant                            \$3,000

  Disbursement of                                                    
  funds is at the                                                    
  NCUF's                                                             
  discretion                                                         
  (conditional),                                                     
  so no income                                                       
  recognition                                                        
  until the final                                                    
  NCUF decision.                                                     
  ---------------- ---------------------------------- -------------- --------------

3.  When the NCUF Grant Reviewer or Review Committee reviews progress
    reports and goal achievements in light of the grant terms and
    conditions and decides to release the final payment.

**APPENDIX III**

(continued)

  ---------------- ---------------------------------- -------------- --------------
  Debit            Cash                               \$3,000        

  Credit           Income from NCUF Grant                            \$3,000

  Disbursement of                                                    
  funds is at the                                                    
  NCUF's                                                             
  discretion                                                         
  (conditional),                                                     
  so no income                                                       
  recognition                                                        
  until the final                                                    
  NCUF decision.                                                     
  ---------------- ---------------------------------- -------------- --------------

[^1]: Legal enforceability refers to the availability of legal remedies,
    not the intent to use them. \[CT.116.108\]