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Does Your Nonprofit Receive Grant Funding? Here’s How You Should Account for It

April 25, 2019

When it comes to how nonprofit organizations handle their financial reporting, it’s safe to say 2018 was rife with change. This year, nonprofits are facing more of the same. With the Financial Accounting Standards Board’s new revenue recognition standard (ASC 606) and clarification on the accounting for contributions received (ASU 2018-08) going into effect for calendar year 2019, many nonprofits must now also revise how and when they recognize revenue.

One of the more significant changes brought about by the clarification is a shift in the definition of a “contribution.” This is particularly important for nonprofits that receive grant funding.

In previous years, some nonprofits would record a grant as an exchange transaction, while others would record it as a contribution. To promote uniformity among nonprofits across the board, the clarification on the accounting for contributions received dictates that, in the majority of cases, grants should be recorded as contributions.

To help you understand how ASU 2018-08 could impact your nonprofit, here are a few things you should know, starting with the difference between an exchange transaction and a contribution.

What is an exchange transaction? 

An exchange transaction is a reciprocal transfer in which each party gives and receives commensurate (i.e., equal) value. Per the new revenue recognition standard, examples of an exchange transaction include:

• Memberships

• Subscriptions

• Products and services

• Royalty agreements

• Conferences and seminars

• Tuition

• Advertising

• Licensing

What is a contribution? 

A contribution, however, is an unconditional transfer of cash or other assets to an entity. It could also be a reduction, settlement, or cancellation of liabilities in a voluntary, nonreciprocal transfer by another entity acting other than as an owner, such as when a nonprofit receives pro-bono services from an attorney.  In any case, a contribution is when the amount of cash or other assets transferred is solely at the resource provider’s discretion. Per the clarification on the accounting for contributions received, examples of a contribution include:

• Government grants

• Foundation grants

• Individual or corporate gifts

• Sponsorships

Why are grants now considered a contribution? 

It all comes down to how the nonprofit determines commensurate value within the agreement. Here’s a brief summary of the ASU 2018-08 clarification for what can—and cannot—be considered commensurate value.

• A benefit received by the general public does not constitute commensurate value for the resource provider. For example, let’s say a government agency gave a nonprofit grant funds to educate children on the dangers of tobacco use. One might argue that the agency is receiving a benefit because the government is “by the people, for the people,” and that the grant should be recorded as an exchange transaction. Nevertheless, per ASU 2018-08 this situation would not constitute commensurate value for the government agency.


• A transfer of assets made in order to further the resource provider’s mission does not result in commensurate value. Here’s an example: A foundation’s mission is to help homeless children. The foundation gives a nonprofit a grant to provide shelter for homeless children. The foundation in this case is not receiving value, even though the nonprofit is helping to further its mission.

Understand the differences in accounting for exchange transactions and contributions.

This is where it can get a little complicated. Accounting for an exchange transaction involves a five-step process:

1. Identify the contract

2. Identify performance obligations

3. Determine the transaction price

4. Allocate the transaction price

5. Recognize revenue when or as performance obligations are satisfied

Contributions, on the other hand, must be recognized as revenue or gains during the period in which the nonprofit receives notification of an unconditional promise to give.

Act now to avoid end-of-year stress.

As soon as possible, review your nonprofit’s agreements to determine if they should be recorded as exchange transactions or contributions. Then, make sure each agreement is correctly presented on your organization’s financial statements.

Keep in mind that both ASC 606 and ASU 2018-08 apply to existing agreements and may require you to restate net assets in the year of adoption and provide additional financial statement disclosures for exchange transactions. Taking care of these details now—instead of at the end of the year—could keep you from experiencing undue stress and finding yourself with inaccurate financial statements.

Remember, you’re not alone.

We’re here to help you with everything from reviewing agreements to properly recording them on your financial statements. To make sure your nonprofit is in compliance with the latest revenue recognition changes, give your AEM advisor a call today.

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