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Is That Grant a Contribution or an Exchange Transaction?


By Jennifer Coleman, CPA, CFE

Grants are undoubtedly a boon for many nonprofits, helping organizations fulfill their mission and expand their reach. But when it comes to how to report revenue from a grant, things can be less clear cut. Grant is not an accounting term and grants are considered either a contribution or an exchange transaction for the purposes of a nonprofit’s financial reporting. There has been disagreement in the nonprofit accounting world about when to classify a grant as one versus the other. This prompted an update from the Financial Accounting Standards Board (FASB) in 2018 to help organizations consistently report grant funding.

A contribution is an unconditional transfer of cash or assets that is voluntary and non-reciprocal, meaning the organization making the contribution gets nothing in return.  The contribution is recognized as revenue when the grant is awarded. A grant with no strings or post-award obligations is straightforward from a reporting standpoint.

Exchange transactions are a reciprocal transaction in which the two parties exchange something of commensurate value.  Exchange transactions must be accounted for using the same revenue recognition accounting standards used to report revenue from contracts with customers. Government grants are often considered exchange transfers because the government is using the grant to pay for specific goods or services for a service population, often in place of a government agency providing those goods or services. For example, a local government agency providing a grant to a nonprofit service provider for shelter and meals to eligible clients.

However, the FASB has clarified that just because the general public benefits from the use of a grant, it doesn’t equate to the grantor—a local government agency in our example—receiving commensurate value.  In some cases, the nonprofit can classify the grant as a “conditional contribution” instead of an exchange transfer. Some nonprofits that have classified their government grants as exchange transactions, will now be classifying them as conditional contributions.

It can be considered a conditional contribution when the grant agreement includes a barrier or requirement which, if not overcome, results in a return of assets or a release of a grantor‘s obligation to transfer assets. For example, if a certain threshold of expenses is met or a required matching amount must first be raised before the money is dispersed. For financial reporting, a conditional contribution is not accrued as a receivable when the grant is made but when the conditions are met.

Tips for Identifying How to Report Your Grant

The following characteristics of the grant are indicators that it should be classified as an exchange transaction:

  • The grant states it is funding to pay for a specific good or service. 
  • The grant money is paid out after a reimbursement request is submitted to the grantor to reimburse certain expenses as they are incurred.  
  • The government agency can claim ownership over any intellectual property that is created as the result of the nonprofit’s work.   
  • The good or services provided by the nonprofit is used by the grantor or a party specified by the grantor. 

The grant is considered a contribution if: 

  • When requesting the grant, your organization states it is seeking a contribution. 
  • The grantor decides the grant amount is not contingent on documented expenses. 
  • Your organization is not penalized for not achieving specified performance indicators beyond returning any unspent funds. 
  • The nonprofit makes all the decision about how the money will be allocated and what kind of technology and testing may take place. 
  • The nonprofit retains any commercial rights for any intellectual property that’s developed. 

Tax exemptions, tax incentives or tax abatements are NOT considered contributions. Government agencies that receive grants are not affected because they are not covered by the FASB and must meet alternative accounting standards.  

For more information, see the Financial Accounting Standards Board (FASB)’s Accounting Standards Update (ASU) 2018-08,Clarifying the Scope of the Accounting Guidance for Contributions Received and Contributions Made

Jennifer Coleman, CPA, CFE is the assurance and quality control partner ofMyers, Brettholtz & Company, PA. She is a member of the American Institute of Certified Public Accountants and the Florida Institute of Certified Public Accountants and has received Certification in Fraud Examinations.

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