This article explains how nonprofits should recognize revenue from government grants under FASB ASC 958, focusing on nonexchange transactions and donor-imposed conditions or restrictions.

Step 1: Is the Grant an Exchange Transaction or a Contribution?

Exchange Transaction → Apply ASC 606 (not covered in this article).

Contributions → Apply ASC 958 (focus of this article).

Key Definitions

  • Exchange Transaction: A reciprocal transfer in which each party receives direct commensurate value. The value given or received could be an asset or a reduction of a liability.
  • Contribution: An unconditional, voluntary, nonreciprocal transfer of assets or settlement of liabilities.

Determine whether the transaction provides commensurate value by assessing its intent. Exchange transactions provide mutual benefit, while contributions benefit society. Indirect public benefits or goodwill are not commensurate value.

Examples

Indicators and examples for exchange transaction vs. contribution determinations include:

  • Exchange Transaction: A government grant awarded to a nonprofit for a research study is considered an exchange transaction if the government agency retains the study’s rights. In this case, the agency receives a direct benefit. If the nonprofit retains the rights, the grant is a contribution, as the agency receives no direct benefit.
  • Contribution: A government grant for a low-income housing project is considered a contribution because it benefits the public without providing a direct benefit to the government agency.

 

Step 2: Does the Contribution Have Donor-Imposed Conditions?

A contribution is conditional if both of the following are true:

  1. The nonprofit must overcome an objective, measurable performance barrier before becoming entitled to the funds received or promised, and
  2. The donor retains a right of return or release of the funds if the barrier is not met.

Identify barriers from the grant agreement or donor discussions. Likelihood of meeting them does not affect their existence.

If a performance isn’t measurable, it is not a barrier. Administrative tasks (such as submitting a report or budget) are not barriers.

Examples of barriers

Indicators and examples of barriers include:

  • Measurable performance requirements, such as raising an additional 10% in matching funds or serving 50 participants during the grant period.
  • Limited spending discretion, such as grant expenditures that must comply with federal, state, and local regulations on allowable costs, along with any additional requirements from specific agencies or awards.
  • Activity limitations, such as requirements to use specific research personnel or follow designated procurement procedures (e.g., approved vendor lists or bidding processes), which are common in cost-reimbursement grants.
  • Purpose-related stipulations, such as requiring a shelter to expand its facility for additional beneficiaries or produce a research report summarizing grant-funded findings.

Document your revenue recognition assessment. Government grants often include barriers and requirements to return unspent or misused funds and are generally conditional. Consult with your auditors if a material government award appears to be unconditional or merely restricted.

Revenue Restriction

Recognize unconditional contributions immediately.

Recognize conditional contributions after barriers are met. Record advance payments as “refundable advances” (liabilities) until conditions are fulfilled or waived.

The recipient must identify performance barriers from the grant agreement and track when they’re met. Revenue cannot be recognized based on the likelihood of meeting a barrier, only after the barrier is overcome.

If a grant includes distinct performance obligations with clearly defined sub-amounts, recognize each portion as its related obligation is met. Progress toward a single milestone is not prorated.

 

Step 3: Is the Grant Conditional?

Conditions require both a performance barrier and a right of return or release. Ambiguity in either may vary and can often be clarified through further discussion with the funder.

When conditions are ambiguous, document the assessment of the conditions and the reasons why they are ambiguous.

If ambiguity about a barrier or return rights remains, ASC 958-605 requires treating the contribution as conditional. Define the conditions for revenue recognition and track progress.

Example

A funder awards a grant with multiple deliverables, the nonprofit identifies barriers, such as serving clients in specific regions, but the agreement is unclear about returning unspent funds. Upon receipt, the nonprofit documents the ambiguity and records the funds as a refundable advance.

After clarification that repayment isn’t required for properly spent funds, the ambiguity around the right of return is resolved, and the nonprofit recognizes the funds as contribution revenue with donor restrictions (see Step 4).

When grant milestones are unclear on revenue amounts, performance obligations, but there is no right of return, treat them as donor-imposed restrictions. In such cases, recognize revenue when the grant is awarded.

Recognizing revenue at milestones without a return right is a common error. Grants without return rights are unconditional and should be recognized in full upon award.

 

Step 4: Does the Contribution Have Donor-Imposed Restrictions?

Restrictions from donors specify a limited purpose or time frame and may be temporary, permanent, explicit, or implied.

Examples

  • Capital campaign grants for a building or facility
  • Research grants for a specific study
  • Multi-year grants with scheduled annual disbursements
  • Endowment grants that preserve principal but allow using investment earnings for scholarships

Revenue Reporting

Donor restrictions affect revenue reporting, not timing of recognition.

Revenue is classified as with or without donor restrictions. When restrictions are met or expire, report that change as “Net Assets Released from Restriction.”

Nonprofits may elect a “simultaneous release” policy to report donor-restricted contributions as unrestricted if the restrictions are met in the same period revenue is recognized. This policy must be disclosed and applied consistently.

Government Grants

Most government grants are cost-reimbursement grants. Revenue is recognized when qualifying expenses are incurred (barrier), and the government is not liable for non-qualifying costs (right of release).

Even when grant funds are received in advance, agreements typically include a clause stating the government is not liable for non-qualifying expenditures. The recipient must repay any unspent or misspent funds (right of return).

Example

A mental health center receives a grant requiring three therapy groups to be held over three months.

Half the funds are received at signing; the rest is paid after completion and final reporting. The initial payment is recorded as a refundable advance.

After the third therapy group, the nonprofit recognizes the entire grant as contribution revenue, reclassifies the advance to revenue, and records the balance as a receivable. The donor restriction is met upon completion.

If electing ‘simultaneous release,’ the grant is reported as unrestricted. Otherwise, the organization records the grant as restricted and reports both addition and release from donor restrictions.

Revenue recognition may not align with report submission to the grantor or payment timing. Administrative tasks, like filing reports, don’t delay recognition because they aren’t barriers.

Conclusion

Careful evaluation of government grants and proper application of accounting guidance ensures accurate revenue recognition, financial accountability, and compliance.

Additional Resources

For additional help with government grants, check out our other government funding resources and services.

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