Accounting For Grants and Contributions (Nonprofits)
Contributor: Abby Lamothe, CPA, Senior Accountant
Receiving funding from a grant or contributor can be incredibly exciting for nonprofits. Knowing how to account for the resulting revenue stream, however, can be a completely different story. Organizations must determine if the funds they receive are classified as a contribution or an exchange transaction. This article will provide a high-level overview of factors for organizations to keep in mind when receiving funds.
Does The Funding Count as a Contribution or an Exchange?
When determining whether a grant or other funds received are a contribution or an exchange, the organization must first determine if the two parties involved receive and provide something of comparable value. For example, if a grant is received for $1,000, but in turn, the recipient must deliver specific scientific data to the grantor, this would be considered an exchange. If something of comparable value is not received, the recipient should account for the transaction as a contribution.
Due to the new guidance surrounding nonprofit revenue recognition, many grantors and contributors have been careful with the language used in their agreements being sent to organizations. As such, grant agreements will often include a detailed layout of the timing of funds to be disbursed and any requirements to fulfill before such monies are distributed.
Steps to Take to Confirm Type of Funding
Organizations must read all documentation carefully, looking for any language that may signal a contribution or that an exchange is taking place. If you’re questioning whether revenue related to a grant or contribution falls into one of the two categories, follow the steps below:
- Read over the signed agreement carefully
- Make a note of any payment schedule and any requirements for receiving funds
- Review wire, ACH, or check stubs, noting when payments were received
- If still uncertain, consult with your accountant, who will be able to provide additional guidance.
During the first year under this new guidance, organizations may experience more adjustments being needed to their revenue accounts. In the periods going forward, however, a careful analysis of documents received, in conjunction with continuing conversations with the organization’s accounting team, can help to ensure that revenues collected from grants and contributors are appropriately recorded for purposes of revenue recognition.
Contact Leone, McDonnell & Roberts today to hear more about identifying contributions versus exchange transactions.