TLDR
FASB ASU 2018-08 (issued June 2018, effective for fiscal years beginning after December 15, 2018 for most nonprofits) clarified grant revenue recognition under ASC 958-605. Two tests apply. First, is the transaction a contribution (nonreciprocal) or an exchange (reciprocal value to the resource provider)? If it is a contribution, the second test asks whether it is conditional (contains both a measurable performance-related barrier and a right of return or release) or unconditional. Cost-reimbursement grants are typically conditional: revenue is recognized as allowable costs are incurred.
BLUF
ASU 2018-08 clarified grant revenue recognition under ASC 958-605. First, determine whether the transaction is a contribution or an exchange. For contributions, determine whether the contribution is conditional by looking for a measurable barrier combined with a right of return or release. Cost-reimbursement grants almost always meet the conditional test and are recognized as allowable costs are incurred.
TL;DR
- ASU 2018-08: effective for resource recipients in fiscal years beginning after December 15, 2018.
- Step 1: contribution (nonreciprocal) or exchange (reciprocal)?
- Step 2 (if contribution): conditional (barrier + right of return) or unconditional?
- Cost-reimbursement grants: conditional, recognized as qualifying costs are incurred.
- Unconditional promises: recognized when the promise is made; discount to present value if due beyond one year.
The pre-ASU 2018-08 confusion
Before ASU 2018-08, preparers and auditors disagreed about whether to treat government grants and some foundation grants as contributions or exchange transactions. The difference matters: contributions follow ASC 958-605 and can be restricted or conditional; exchanges follow ASC 606 and run through performance obligations and transaction price allocation.
ASU 2018-08 clarified the two tests and pushed most government program grants and most foundation program grants into the contribution bucket, with conditional treatment driven by the presence of barriers.
Test 1: contribution vs exchange
A contribution is a nonreciprocal transfer of assets. An exchange is a reciprocal transfer, where each party receives commensurate value. The key questions:
- Does the resource provider receive commensurate value in return?
- Is the public benefit from the program the only value the resource provider receives?
Public benefit is not commensurate value. If the only thing the grantor receives is the public benefit of the program, the transaction is a contribution. If the grantor is purchasing services it would otherwise have to provide (a fee-for-service contract), the transaction is an exchange and follows ASC 606.
Test 2: conditional vs unconditional
For contributions, two criteria must both be present to make the contribution conditional:
- A measurable performance-related barrier or other measurable barrier.
- A right of return of transferred assets, or a right of release from the obligation to transfer assets.
Examples of measurable barriers:
- Incur specific allowable costs (the barrier in most cost-reimbursement grants)
- Achieve a defined output (serve 200 participants, deliver 50 training sessions)
- Match funds from other sources
- Complete a specific deliverable
A vague use stipulation with no measurable performance target is generally not a barrier.
Cost-reimbursement grants
Cost-reimbursement grants are the textbook conditional contribution. The barrier is incurring allowable costs under the grant agreement; the right of return attaches if costs are not incurred as required. Revenue recognition works like this:
- Award at $500,000 for a two-year period, cost-reimbursement basis.
- At award date: no revenue recognized; no receivable booked.
- Month 1: organization incurs $20,000 in allowable costs. Recognize $20,000 of grant revenue; book $20,000 as grants receivable if not yet drawn down.
- Draw down: reduce receivable, increase cash.
- If the organization does not incur costs, no revenue is recognized and no assets are returned because none were transferred.
Unconditional promises to give
An unconditional promise is recognized at the date the promise is made, at fair value. Promises to be received beyond one year are discounted to present value at an appropriate discount rate. An allowance for uncollectible pledges is also recorded based on historical experience. If the gift has a purpose or time restriction, it is recorded in net assets with donor restrictions and reclassified when restrictions are met.
Exchange transactions follow ASC 606
Fee-for-service contracts, special event ticket sales (the exchange portion), and membership dues that confer benefits are exchange transactions. They follow ASC 606: identify the contract, identify performance obligations, determine transaction price, allocate, and recognize as performance obligations are satisfied.
Common errors
- Recognizing cost-reimbursement grant revenue at award rather than as costs are incurred
- Missing a restriction on an unconditional contribution and recording it in the wrong net asset class
- Treating a fee-for-service government contract as a contribution and under-reporting ASC 606 performance obligations
- Failing to discount multi-year unconditional pledges
What GrantPipe Does Here
GrantPipe records every grant with its contribution vs exchange classification, its barriers, and its remaining conditional balance, then posts revenue as allowable costs hit the books, so the operating record matches ASC 958-605 without parallel spreadsheets. Start a trial.
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Source: Financial Accounting Standards Board, ASU 2018-08
Source: OMB 2 CFR Part 200
- ASC 958-605
- The FASB Accounting Standards Codification subtopic for not-for-profit revenue recognition, covering contributions received by nonprofit entities.
DEFINITION
- ASU 2018-08
- Accounting Standards Update Clarifying the Scope and the Accounting Guidance for Contributions Received and Contributions Made, issued June 2018, which clarified the contribution vs exchange and conditional vs unconditional distinctions.
DEFINITION
- Barrier
- A measurable performance-related or other measurable requirement that, combined with a right of return or release, makes a contribution conditional under ASU 2018-08.
DEFINITION
- Right of return
- A right of the resource provider to demand return of assets already transferred (or release from the obligation to transfer) if the barrier is not met. Combined with a barrier, it creates a condition.
DEFINITION
- Exchange transaction
- A reciprocal transfer in which each party receives commensurate value. Recognized under ASC 606, not ASC 958-605.
DEFINITION
Q&A
Is a government grant always a contribution?
Not automatically. The test is whether the government is receiving commensurate value. A program grant intended to benefit the public is a contribution. A fee-for-service contract, where the government purchases services it would otherwise perform, is an exchange and follows ASC 606.
Q&A
What are examples of measurable barriers?
A requirement to incur specific allowable costs, a requirement to match funds from other sources, a requirement to serve a defined number of participants, or a requirement to complete specific deliverables. A stipulation on how to use funds that does not include a measurable performance target is generally not a barrier.
Q&A
When does revenue recognition start for a cost-reimbursement grant?
Revenue is recognized as allowable costs are incurred, since incurring those costs is the barrier. A grant awarded but not yet spent produces no revenue at award; it produces revenue as qualifying expenses are booked. Unbilled eligible costs sit as grants receivable until drawn down.
Frequently asked