Although grants are one of the most common revenue sources for non-profit organizations, the term “grant” has no accounting definition and is used interchangeably with both of the accounting terms “exchange transaction” and “contribution”.
It is important for organizations to determine whether their grant is an exchange transaction or a contribution, as the classification will determine the accounting treatment of the grant.
Exchange transactions are defined as, “purchases of goods and services from another entity.”
Government grants are generally treated as exchange transactions due to the common practice of governments purchasing goods or services for a particular population or the general public (although, private funders can provide exchange transactions as well).
Some common characteristics of exchange transactions include:
- When requesting the grant, the organization states that it is seeking resources in exchange for a particular good or service.
- The grantor states that it is providing funding in exchange for a particular good or service.
- The grantor pays the organization for the organization’s costs to provide the particular good or service; this is often in the form of a cost reimbursement contract.
- The organization is penalized for breaching the contract with penalties beyond the amount of the payment received by the organization.
- The good or service provided by the organization is used by either the grantor or a party specified by the grantor.
Contributions are defined as, “a transfer of assets that is unconditional, voluntary, and nonreciprocal.”
While contributions are most frequently provided by private funders, government grants can also be treated as contributions.
Some common characteristics of contributions include:
- When requesting the grant, the organization states that it is seeking a contribution.
- The grantor states that it is making a contribution to support the organization’s programs.
- The grantor decides upon the amount of the funding.
- The organization is not penalized for nonperformance of any restrictions on the funding beyond returning any unspent funds.
- The good or service provided by the organization is used by individuals or organizations that are not specified by the grantor.
The accounting implications of whether a grant is treated as an exchange transaction or a contribution include the timing of when the revenue is recognized, the asset account used for funds to be received in future periods, and the treatment of any restrictions on the funds.
For exchange transactions, revenue is recognized only after the revenue is earned, and any funds to be received in periods subsequent to the revenue being earned are recorded as an asset in accounts receivable. Any restrictions on the funds from exchange transactions are met before the revenue is recorded, so no restrictions on net assets are needed.
Contribution revenue is recognized when an unconditional promise is made and any funds to be received in future periods are recorded as an asset in promises to give. If there are any time or purpose restrictions on the funds, these contributions are recorded as temporarily or permanently restricted net assets.
It is usually not black and white whether a grant should be treated as an exchange transaction or a contribution, so while working through the gray area it is important to consider each of the factors listed above and document the reasons for recording a particular transaction as either an exchange transaction or a contribution.