Learn the Basics of Revenue Recognition for Contributions and Grants

Revenue recognition is a cornerstone of nonprofit accounting. But correctly determining whether your nonprofit organization’s revenues are contributions or exchange transactions, and which conditions may apply, can be complex.

Here to walk you through the process are James Moore CPAs Jane Lastinger and Meghan Rizzi. Both are valued members of James Moore’s Public Broadcasting Team, which Jane leads.

Jane and Meghan help clarify the difference between contributions and exchange transactions based on standards from the Financial Accounting Standards Board, or FASB. (We’ll cover accounting for similar transactions under the Governmental Accounting Standards Board, or GASB, in another article.)

Is revenue a contribution or exchange transaction?

Revenue transactions fall into two categories: contributions and exchange transactions.

Contributions are non-reciprocal transactions, meaning no direct commensurate value is involved. Donations of money, time, supplies, and other items given without the expectation of something in return are considered contributions. These transactions are recognized as revenue during the time period in which the contribution is made. For contributions, follow FASB ASC 958-605.

Exchange transactions involve a reciprocal exchange of value between a nonprofit and a resource provider. This is generally the purchase of goods or services from the organization for a fair market price (called direct commensurate value). Examples include a membership at the local YMCA or tickets to a play at a nonprofit theater. For exchange transactions, follow FASB ASC Topic 606 on revenue from contracts with customers.

Determining what constitutes direct commensurate value can be tricky in some cases. The following transactions are considered contributions because they do not involve direct commensurate value:

• Transactions that result in societal benefit. In the past, some nonprofits mistakenly categorized a government grant that provided assistance to a community as an exchange transaction. They reasoned that the societal benefit derived from the grant-funded work amounted to direct commensurate value. FASB ASU 2018-08 clarifies that benefit to the general public does not equal direct commensurate value. If the grant identifies specific beneficiaries, however, it is an exchange transaction.
• Transactions that help execute the resource provider’s mission. Similarly, positive sentiment from making a donation is not direct commensurate value.
• Transactions in which one party determines the amount of the transferred assets. For example, if a nonprofit receives a set amount of funds from a foundation to restore parks, this revenue would be a contribution. “There’s no direct commensurate value. There’s nothing that’s being sold here. Only one party has the sole discretion to determine those amounts,” Jane said.

Conditional or unconditional contributions?

Recognition is deferred for conditional contributions until the condition is met. However, revenue is recognized immediately for unconditional contributions.

In determining if a contribution is conditional, it’s important to differentiate between conditions and restrictions. A condition is a barrier that must be overcome before the assets are transferred. Failure to overcome the barrier gives the contributor a right of return or right of release from its obligation. A restriction is a donor stipulation that specifies a particular use for the contribution. A contribution can be unconditional (and therefore recognized immediately) while having a restriction placed upon it.

Understanding barriers in conditional contributions

Barriers should be outlined in the funding agreement or another document referenced in the agreement. If the agreement is unclear about the existence of a barrier, or the existence of a right of return or release from obligation, the contribution should be deemed as not having donor-imposed conditions. It should be recognized as revenue immediately in the appropriate net asset class.

Previously, if the possibility that a condition would not be met was remote, a conditional promise to give funds was considered unconditional. That guidance unintentionally led to the use of probability assessments about the likelihood of failing to meet a condition and in evaluating whether and how remote provisions affect the timing of when a contribution is recognized.

“ASU 2018-08 removed this notion of remote and actually gave clear examples of barriers,” Meghan said. “It clearly establishes this requirement for a barrier to be present for the contribution to be conditional.”

Still, determining whether a barrier is present sometimes requires the exercise of professional judgment.

There are three kinds of barriers:

• Measurable performance-related barriers: A recipient’s entitlement to resources is contingent upon a specified level of service, an identified number of units of output, a specific outcome or a matching requirement. In the case of a matching requirement, a recipient is entitled to the resource if a particular event occurs.
• Stipulations: Stipulations are related to the purpose of the agreement. Examples include a homeless shelter providing a specific number of meals, an animal shelter expanding to accommodate a specific number of additional animals, or a research report summarizing findings on a grant on a dairy allergy.
• Limited discretion by the recipient on the conduct of an activity: This can be the most difficult barrier to recognize. Limited discretion is more specific than a donor-imposed restriction. Restrictions limit the use of a contribution to a specific activity or time, but they don’t necessarily place limitations on how the activity is performed. In contrast, limited discretion could mandate adhering to specific guidelines or protocols or hiring specific individuals.

Note that administrative or trivial stipulations are not considered barriers.

To help ground these concepts, let’s look at a few examples.

Example A: Grant for Veterans’ Career Training

 A foundation gives a nonprofit a grant for $400,000. The grant agreement specifies the following requirements:

• These funds are for providing disabled veterans with career training.
• The nonprofit must train at least 8,000 disabled veterans during the fiscal year.
• Each quarter, the nonprofit must train 2,000 veterans.
• The right of release says if the nonprofit does not meet the quarterly quota, the foundation is not obligated to provide that quarter’s $100,000.

This is an example of a conditional contribution. The agreement includes a right of release. It also has a measurable performance-related barrier: The nonprofit must hit the milestone of training 2,000 disabled veterans per quarter.

Example B: Contribution to a University Capital Campaign

 A university is launching a capital campaign to build a new building and receives a grant of $10,000 from a foundation. The agreement has a right of return that requires the assets to be reimbursed to the foundation if they are not used for the purpose outlined in the capital campaign. However, the foundation does not specify how the building should be constructed or how other improvements should be made.

This is an example of an unconditional contribution. While the agreement limits the use of the funds to a specific activity, the foundation did not have any specifications about the building’s construction. The university would recognize this revenue immediately because it is unconditional. It would be recognized as revenue with donor restrictions.

Example C: Grant With Qualifying Expenses to a Hospital

A hospital receives a grant of $300,000 from a federal awarding agency to fund thyroid cancer research. The grant specifies that the hospital has to incur certain qualifying expenses or costs. These costs must be in line with the Office of Management and Budget requirements and the federal awarding agency. The grant is paid on a cost-reimbursement basis by the nonprofit initiating drawdowns on the grant assets, indicating that it has incurred the qualifying expenses. Any unused assets are forfeited.

This is an example of a conditional contribution. There is limited discretion on how the funds can be spent – the hospital must incur certain qualifying expenses. The grant also includes a release from the provider’s obligation for unused assets.

“This is where we get into that professional judgment,” Jane said. “There is limited discretion because everything has to be spent in accordance with the OMB rules and regulations. If they had only said, ‘You have to spend this money on thyroid research,’ that’s not specific enough to necessarily have limited discretion. That wouldn’t necessarily be a conditional grant.”

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