When Should You Report Grant and Contribution Revenues?

The Financial Accounting Standards Board’s (“FASB”) new revenue recognition standard caused quite a stir across industries upon its release in 2014. However, the standard only applies to revenue from “exchange transactions,” also known as reciprocal transactions. Since contributions to nonprofits are nonreciprocal — and your grants may be too — different rules apply.

Recognizing Contributions

In Accounting Standards Update (“ASU”) No. 2014-09, Revenue from Contracts with Customers, the FASB contribution is defined as an unconditional transfer of cash or other assets to an entity in a voluntary nonreciprocal transfer. It specifically distinguishes contributions from exchange transactions, which are described as reciprocal transactions where each party receives and sacrifices approximately equal value.

This means that contributions don’t fall within the rules in ASU 2014-09, exempting them from its voluminous disclosure requirements. Rather, contributions should generally be reported in the period you receive the pledge or commitment to donate. Restrictions imposed — based on directions given by the donor — as to how or when the funds may be used do not alter the timing of revenue recognition.

The timing of recognition may be different when the donor’s gift is available only after certain requirements are met by your organization. Specifically, conditional promises to give should not be recognized as revenue until the conditions are substantially satisfied. For example, a promise to give that requires a minimum matching contribution can’t be recognized until the match is received. Transfers of assets with donor-imposed conditions should be reported as refundable advances until the conditions are substantially met or if the donor explicitly waives the condition.

You can recognize a conditional promise to give upon receipt of the promise, if the possibility is “remote” that the condition won’t be met. An example is a grant that requires submission of an annual report in order to receive subsequent annual payments on a multiyear promise.

Recognizing Grants

A more complicated situation is determining whether a grant is an exchange transaction, where the grantor expects goods and services in return for their money, or a type of restricted or conditional contribution, where the grantor intends to make a gift to support the organization. For instance, a grant based on the number of meals or beds provided by a nonprofit to its client population could be considered an exchange transaction, because it’s similar to a contract to provide goods or services. Similarly, a research and development grant could be considered an exchange transaction, if the grantor retains intellectual property rights in the outcomes.

A grant that’s an exchange transaction is subject to ASU 2014-09’s five-step framework:

  1. Identify the contract (or contracts) with a customer.
  2. Identify the performance obligations in the contract.
  3. Determine the transaction price.
  4. Allocate the transaction price to the performance obligations in the contract.
  5. Recognize revenue when (or as) you satisfy a performance obligation.

In a case where your organization receives a fixed-fee grant to perform specific research for a governmental agency and the agency will own the outcome, the grant is a contract since the parties each receive something of equal value (grant funds and research) (step 1). The provision and delivery of the research is the performance obligation under the contract (step 2). The fixed fee is the transaction price (step 3). With there being only one performance obligation, the entire transaction price is allocated to it (step 4), and the grant revenue is recognized when you deliver the research to the agency (step 5).

The preceding was a simplified example. It could be quite challenging merely to determine whether a grant is an exchange transaction or a contribution — or a combination of the two, requiring “bifurcation” for proper accounting treatment. Additionally, when a grant is an exchange transaction, it can be difficult to identify the performance obligations, determine when precisely they’re satisfied and allocating properly the transaction price to those obligations.

Be Prepared

ASU 2014-09 will take effect for some nonprofits as early as 2018. Now is the time to start analyzing all of your organization’s revenues to determine when and how they should be reported.

Sidebar: FASB Works on More Guidance

The determination of how and when to recognize grant and contribution revenue can be very tricky for many nonprofits, particularly for those that receive government funds. The good news is that the FASB is at work on an Accounting Standards Update that will provide additional guidance. As part of its “Revenue Recognition of Grants and Contracts by Not-for-Profit Entities” project, the FASB is considering two main issues:

  • How to differentiate between grants and similar contracts that are exchange transactions (that are subject to the FASB’s five-step revenue recognition framework) and those that are contributions (which aren’t subject to the framework), and
  • How to distinguish between conditions and restrictions for contributions.

Although still in the early stages of the project, the FASB has already tentatively decided that a donor-imposed condition will require: (1) a right of return (either a return of the assets transferred or a release of the donor from their obligation to transfer the assets), and (2) a barrier that must be overcome prior to the recipient being entitled to the assets transferred or promised. (For example, the recipient is required to raise a threshold amount of contributions from other donors.) A final ASU is expected to be issued in the first quarter of 2018.

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