Government Grants: Exchange or Contribution? It Depends.

When nonprofit organizations report certain government grants, revenue recognition standards can still be tricky. Although FASB has provided clarification, new accounting standards regarding revenue recognition from contracts (FASB ASC 605) have created more questions about how to categorize grants. Are they an exchange or a contribution?

But first, let’s define the difference between an exchange and a contribution.

Exchange transactions are:

  1. a reciprocal transaction in which two parties exchange something of commensurate value;
  2. within the scope and need to be accounted for following the new revenue recognition requirements (FASB ASC 605)

Contributions are:

  1. an unconditional transfer of cash or assets in a voluntary non-reciprocal transfer;
  2. scoped out of revenue recognition (FASB ASC 958-605)

The tricky parts come when determining when to recognize the revenue and where.

Your auditor is going to ask if you have properly recorded contracts and/or contributions according to these new revenue recognition standards. Doing it properly the first time supports a more accurate financial story as well as less work in creating adjusting entries later.

Reporting Contribution Revenue

As a contribution, revenue is recognized as soon as the intent to contribute funds is unconditionally communicated, but what about multi-year grants in which the grantee does not have access to the funds immediately? It will be necessary to determine whether the contribution is conditional or unconditional. If there is a barrier that must be overcome and the donor has the right to receive unspent contributions, the contribution is conditional and isn’t recognized until the barrier is overcome. If the contribution is unconditional, then the funds may be recorded as restricted or unrestricted, but they are still listed somewhere on the balance sheet.

Reporting Exchange Revenue

In an exchange transaction, both the grantor and the grantee receive equal value from the arrangement and the revenue is recognized when (or as) the terms are completed. Depending on who benefits from government grants, a government grant could be classified as 100 percent contribution (benefiting the general public), 100 percent exchange (benefiting the government itself) or a combination of both.

In light of these nuances, if you are uncertain about the proper recording of revenue recognition in your current financial statements, LvHJ’s team is happy to help. We can advise on the new accounting standards taking effect in 2019 regarding revenue recognition from contributions and exchange transactions to support preparation of accurate financial statements.

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