Determining which type of transaction a grant is categorized as can be difficult. However, it is important for nonprofits to get it right as grant classification impacts revenue recognition and financial reporting.

What is a “grant” in nonprofit accounting?

Grants are a core funding source for many nonprofits, but nonprofit grant classification is often complex. Funders often use the term ‘grant,’ but it has no formal accounting definition. In nonprofit financial reporting, grants must be classified as either an exchange transaction or a contribution.

Nonprofit grants fall into three categories:

1. Exchange transaction
2. Conditional contribution
3. Unconditional contribution

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When are grants considered exchange contributions?

Exchange transactions occur when a resource provider (grantor) receives commensurate value (reciprocal benefits of roughly equal value) in return for the resources transferred.  The reciprocal value received must be received directly by the grantor. Upon the exchange of resources, revenue can be recognized.

Common characteristics of exchange transactions include:

• Expressed intent by the organization and the grantor to exchange resources for goods or services that are of equal value
• Grantor retains the rights to the results of the intellectual property
• Grantor requires the organization to deliver specific goods or services to specified individuals or entities closely connected to the provider (vs the general public)

The factors indicating an exchange tend to describe transactions where the potential public benefits are secondary to the potential proprietary benefits to the grantor. If the grantor receives indirect value in exchange for the asset transferred or if the value received by the grantor is minor compared to the potential public benefit, the transaction should not be considered as having equal value received in return. This is often the case with government grants where the governmental entity is receiving incidental value compared to the public benefit. For more details on nonprofit grant classification, refer to FASB’s nonprofit accounting standards.

When are grants considered contributions?

Contribution transactions occur when there is a voluntary transfer of goods or services from one entity to another for which equal value is not given in return. A contribution can be conditional or unconditional.

What makes a contribution conditional vs. unconditional?

For a contribution to be conditional there must be one or more barriers that must be overcome before the organization is entitled to the asset transferred or promised and there must also be a right of return (ex. if the organization does not spend all the money as intended, the remainder must be returned to the grantor).  If either a barrier or a right to return is missing, the contribution is unconditional, and revenue can be recognized at the time the contribution is received or promised. If the contribution is conditional, the barrier must be overcome as well as a right of release from the obligation to be able to recognize the revenue.

Conditional Contributions: Identifying Barriers

A further consideration for contribution transactions when recording the revenue is determining whether the donor has restricted the contribution for a specific time or purpose. This will determine if the revenue is reported as an increase in net assets with donor restrictions or net assets without donor restrictions.

Often grants will come with stipulations that require the organization to turn in a report either during the grant period or at the end. This however is considered insignificant and not a barrier to recognize revenue.  Barriers are objective and binary.  An organization will either satisfy the barrier or it won’t.  The barrier needs to be specific enough that both parties can identify the condition(s) to be satisfied.  Often barriers are noted by specific and measurable achievement levels rather than goals.

Barrier Example

An example of a barrier in a grant might be to install two handicapped parking spots in the organization’s parking lot.  The barrier is the number of handicapped parking spots to be installed whereas a goal would look more like developing the means for those with a handicap to access the organization.

Examples of Nonprofit Grant Recognition

Let’s look at an example of a grant agreement and three different potential outcomes of how it can be recognized:

1. Exchange transaction – the agreement states the grantor, who is in the business of serving meals, wishes to purchase/hire the organization to serve 100 meals at $5/meal to be served in the month of January to those who qualify.  Revenue will be recognized when the performance obligation of serving the meals occurs. The revenue is recognized as an exchange transaction because the grantor is receiving equal value in return – the grantor does not have to serve the meals themselves. Due to the grantor outsourcing their normal business activity, this is an exchange transaction.
2. Unconditional contribution transaction – the agreement states that the grantor is giving the organization $500 to serve meals. Revenue will be recognized when the notice of the award is given. The organization does not need to wait to recognize the revenue because the grantor does not receive anything in return, other than knowing that they’re helping the community.  The general public is receiving the value of the meal, and therefore, the transaction is recorded as an unconditional contribution that is restricted for serving meals.
3. Conditional contribution – the agreement states that IF the organization serves 100 meals during the month of January, the grantor will give the organization $500.  Revenue will only be recognized if the organization actually serves 100 meals in the month of January.

Classifying nonprofit grants correctly as exchange transactions or contributions ensures compliance with accounting standards and strengthens financial transparency. Given the complexities involved, nonprofits should carefully review grant agreements, document their classification process, and seek expert advice when needed. By taking these steps, organizations can better manage their funding and confidently report their financials.

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