Determining if a gift is truly an outright gift or whether the resource received be should recorded in the organization's books as some other type of income is not always a simple question. In the past the Financial Accounting Standards Board (FASB) has not provided definitive guidance on how government grants should be recognized. Accounting for the grant money has historically been a matter of interpretation.
The FASB finally addressed this issue in ASU 2018-08, Clarifying the Scope and the Accounting Guidance for Contributions Received and Contributions Made (Topic 958).
Under ASU 2018-08, the first step in determining how a resource should be recorded is to determine if you have a contribution or an exchange transaction.
Contribution vs. Exchange Transaction
In determining whether a transfer of assets is an exchange transaction or a contribution, a nonprofit must identify whether the resource provider (such as a government agency, private foundation, individual donor or other nonprofit) receives something of commensurate value in return for the resources transferred. That is, does the resource provider receive something of equal measure or amount for the compensation received.
When making this determination the nonprofit should evaluate:
- The express intent of the institution and the resource provider
- The resource provider’s mission and purpose for the transfer
- Which party has discretion in determining the amount of the grant
- The penalties to the recipient for nonperformance
- Whether the recipient has discretion over how the funds are used
ASU 2018-08 offers nonprofits some much needed clarity on the distinction between “direct” and “indirect” benefit. A government agency that bestows a grant often receives an indirect benefit in the form of services provided to the constituents of that government. Under the new rules, such indirect benefit does not constitute commensurate value.
Most government grants would be accounted for as contributions under the new guidance. However, there will be some exceptions. For example, a research grant might be classified as an exchange transaction if the funding agency retains all rights to the research results. Like other exchange transactions, this type of grant would be accounted for under the revenue recognition standard ASU 2014-09 (Revenue from Contracts with Customers).
Conditional vs. Unconditional Contributions
Once a transaction has been deemed a contribution, the next determination is whether that gift is conditional (comes with strings) or is unconditional (no strings).
Although grants and similar contracts always have terms that could be interpreted as conditions, these terms only create a “conditional” contribution if they introduce barriers that must be overcome by the recipient. Also, to be called a "conditional" contribution the donor must have the right of return of assets, or a right of release from its obligation to transfer assets. The table below gives some examples of types of barriers a donor could impose.
Type of Barrier
Specific outcome, certain level of service, identified number of units
A nonprofit receives a certain amount of money contingent upon the nonprofit raising matching funds
Stipulation related to the purpose of the agreement
Additional activity or event (generally excludes administrative tasks and trivial situations)
Funding to address cybersecurity risks is contingent on the institution engaging an external consultant to perform a cybersecurity risk assessment
Limited discretion by recipient
Specific guidance on how assets should be spent
A grant that is designated for a specific program or activity
Requires additional action
Additional action(s) taken for a new or existing activity
The recipient is required to expand its facility
A grant from a state agency to a social services nonprofit to house and feed a certain number of homeless people each year would be an example of a conditional contribution. Under the new standard, the grant is a contribution because the agency does not receive a direct benefit from the recipient’s services. Because the grant makes the award conditional upon achieving certain performance-related benchmarks, the revenue should be accounted for as the conditions are met.
An example of an unconditional contribution would be a grant for capital improvements without stipulations about how the improvements should be made. Because the nonprofit has discretion over how the grant is used, it would be classified as unconditional donor-restricted revenue when awarded.
For most nonprofits, the effective date for the organizations receiving contributions is fiscal years ending after December 15, 2018. If you are an organization that is making grants you have an additional year for implementation and that is not required until years beginning after December 15, 2019. However, early implementation is allowed.
If you need assistance with revenue recognition please contact us. We are here to help!