In 2018, the Financial Accounting Standards Board (FASB) issued ASU 2018-08 which provided clarifications on how non-governmental organizations should recognize contributions in accordance with ASC topic 958. This guidance also applies to various grants that non-profit organizations often receive. Now, that this guidance has been published for a few years, we’d like to take a deeper dive into the appropriate accounting treatment and timing for recognition of grant revenue, more specifically grant revenue that qualifies as a contribution per the clarifications in ASU 2018-08 and ASC topic 958.
When determining recognition of grant revenue, the first step is to determine if the transaction is an exchange transaction or a contribution. The key difference between an exchange transaction and a contribution is commensurate value which refers to reciprocal benefits of equal value flowing between two parties to an agreement. It should be noted that a benefit provided to the general public does not constitute commensurate value to the resource provider. One of the most common forms of grants we see where commensurate value exists are when payments are being made on behalf of third parties, for example, a payment from Medicare, Medicaid, or another state agency where the agency is covering the cost of care to a specified individual.
Grants that Are Exchange Transactions
If it is determined that commensurate value exists in the transaction the grant qualifies as an exchange transaction and should be recognized in accordance with ASC 606. There is no specific guidelines on how these transactions should be labeled on an organization’s statement of activities. However, it is important that grants that qualify as exchange transactions be separately stated from grants that qualify as contributions. There are also additional disclosures required for these types of transactions in accordance with ASC 606. For more detail on recognition of this type of revenue, please refer to the following document:
Grants That Are Contributions
If it is determined that the grant qualifies as a contribution the next step is to determine if the contribution is conditional or unconditional. Two things need to exist in order for the grant to be considered conditional:
- There is a barrier the nonprofit must overcome to be entitled to the resources, and
- The contributor retains a right of return for the resources provided or more simply put, the funding needs to be returned or is not received if certain conditions are not met. The grant agreement must make it sufficiently clear that there is a right of return for this component to be met.
The existence of a barrier is subject to judgment, possible indicators of a barrier are:
- A measurable barrier: This might be performance-related. One example would be a grant to assist a food shelter where they are required to provide 1,000 meals per month. Another example would be a requirement that a matching amount of contributions would need to be obtained by an organization.
- Limited discretion in the conduct of an activity: The agreement might place a limit to the discretion in how the activity may be conducted. An example would be a grant that can only be spent on costs incurred to prevent and respond to the coronavirus pandemic.
- Requirements related to the purpose of the agreement: Examples might be an agreement that requires a homeless shelter to construct a building addition with a specific amount of sleeping capacity.
Stipulations that are administrative or trivial would not constitute a barrier. Reporting on the project would not be a stipulation creating a barrier.
If a grant is determined to be conditional based on the criteria discussed above there would be no financial statement recognition of the grant until the conditions are met. One exception to this is if cash or other assets were received in advance. In this circumstance the assets received would need to be recorded as a refundable advance (liability) on the statement of financial position until all of the conditions have been met where it would then be recognized as revenue. Conditional grants that are material will require disclosure in your financial statements. Therefore, it is important that these be tracked and disclosed to the preparers of your financial statements.
If a grant is determined to be unconditional, revenue is recognized when the grant is received. The final step in the evaluation process is to determine whether or not donor-restrictions exist. Donor-restrictions should not be confused with conditions as mentioned above and instead are grants where a restriction exists that limits the use of the assets received. These restrictions may permanently limit the use of the asset received, stipulate the assets be used at a particular point in time, or be specific for a particular purpose or program. Any amounts not used in the year they are received are recognized as with donor restrictions at yearend and disclosed in your financial statements.
Determining what is a condition versus what is a donor restriction can be complex and not always immediately clear, but, if the above steps and criteria are utilized, you can ensure that your grant revenue transactions are being recorded properly. If you have any questions on when or how to recognize your grant revenue, please contact your Hawkins Ash CPAs representative.