Revenue Recognition for Nonprofit Grants

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Many nonprofit organizations struggle to keep their financial reporting compliant with generally accepted accounting principles (GAAP). Nonprofits often run a skeleton crew in an attempt to keep overhead costs down and direct more funds towards their mission. As a result of these efforts, some nonprofits may entrust their books to a less-than-qualified individual who may not fully understand financial reporting for nonprofits. All too often, these organizations fail to recognize grant revenue in the proper fiscal period. If these revenues are significant, the financial statements of your nonprofit can be seriously impacted.

What is a grant?

The IRS identifies a grant as “any expenditure of scholarships, fellowships, internships, prizes, awards, charitable loans, program-related investments or payments to any exempt organization to further its exempt purpose.” For the purpose of this discussion, the grantor does not receive anything of commensurate value from the grantee. (If that was the case, the revenue would be considered an exchange transaction instead.)

The Financial Accounting Standards Board Codification is an authoritative source of GAAP. Periodically, the FASB will issue an Accounting Standards Update (ASU) to clarify changes to the FASB Codification. In June 2018, FASB released ASU 2018-08, Not-For-Profit Entities (Topic 958): Clarifying the Scope and the Accounting Guidance for Contributions Received and Contributions Made. Among other things, this document provides detailed guidance on what defines grant revenue versus an exchange transaction, and when to recognize it. ASU 2018-08 is essentially an effort to standardize how grants are classified in the nonprofit sector.

When is a grant recognized?

So, your organization has been awarded a grant – congratulations! But when do you recognize that revenue? What fiscal period do those funds “belong” to? This depends on a number of things, including the timing of the contribution and the language of the grant letter.

In general, once a funder has informed you that you will receive a grant, the revenue is immediately recognized in the same fiscal year – whether or not you’ve actually received the money yet. This complies with an accounting principle referred to as the “matching principle.” This principle states that revenue is recognized in the period that reasonable assurance exists that it will be received. In other words, as soon as you’re sure that you will receive a grant, you should go ahead and recognize it.

For nonprofits, this means revenue may be recognized in a different period than when the check arrives. For example, you may be notified of an award in December, but the check doesn’t come until January. If the money does not change hands within the same fiscal year, to conform with GAAP you must book a receivable (meaning that you haven’t received the cash yet). That will ensure the funds are recognized in the proper fiscal year.

A caveat to this statement is the fact that the grant may be given with specific conditions attached. If these conditions create barriers or stipulations requiring action of the grantee, it can be considered a conditional grant. If this is the case, these donor-imposed conditions must be met before the organization recognizes the revenue.

The following examples illustrate two common scenarios in recognizing grant revenue:

Example 1: A foundation decides to grant a local community organization $20,000 for three years in a row. The foundation sends a letter of intent in November, informing the organization of their decision to provide a grant and the dollar amount of the contribution. The foundation does not impose any conditions. The fiscal year of the community organization ends on December 31st, but the check does not arrive until January. In this case, since the letter provides reasonable assurance that the money will be granted and no conditions are imposed on the grantee, all the revenue is recognized and booked as a receivable within the fiscal year in which the organization was notified of the award.

Example 2: A foundation informs a local community organization they will be granted $20,000 for three years in a row, but includes specific conditions that must be met each year before the funds are distributed. The organization does not have reasonable assurance that they will meet those conditions. In this case, the community organization would recognize the grant revenue in the period in which it is received – not the period in which they were notified of the award.

Revenue recognition can be tricky, particularly for nonprofits. If your organization has additional questions relating to grant revenue recognition, refer to ASU 2018-08 or consult an accounting professional.