Yes, and that’s because revenue recognition isn’t always straightforward for nonprofits. Grant agreements often come with strings attached, and organizations have to determine how those terms affect when, or how much, revenue gets recognized.
Even though the guidance around revenue recognition isn’t new, it’s worthwhile to revisit what it says so that we are appropriately classifying conditional grants. Ultimately, there are two questions we need to ask: First, is the grant conditional? And if it is, have the conditions been met so that we can recognize the revenue?
A quick scope note: For purposes of this discussion, we are focusing on grants that have first been determined to be contributions rather than exchange transactions.
Contributions, grants, or awards sometimes come with stipulations that the nonprofit must satisfy before it is entitled to the funds. Here are three examples:
For revenue recognition purposes, these are all considered conditional contributions because they meet both of the following requirements: (1) the grant’s conditions create a barrier that the nonprofit must overcome before it is entitled to the money, and (2) if those requirements aren’t met, the donor is not obligated to transfer the money, or has the right to reclaim funds that were already transferred.
Conditional contributions are not the same as contributions with donor-imposed restrictions. Donor-imposed restrictions simply dictate how or when the contribution can be used.
Let’s go back to the food bank example. The food bank is not entitled to the funds until it incurs $200,000 of eligible expenses. This is a conditional contribution because (1) there is a barrier the nonprofit must overcome, incurring $200,000 of eligible expenses, and (2) if the nonprofit does not meet that condition, the agency is released from its obligation to transfer the funds.
Now let’s change the example slightly. Assume the $100,000 grant was awarded to the food bank to use on eligible food program expenses. The food bank received the contribution and is entitled to use it. It simply must use the funds for a particular purpose. There is no barrier to overcome before the nonprofit is entitled to the money.
The difference is subtle, so let’s look again:
Conditional contribution: The food bank is entitled to $100,000 only after it incurs $200,000 of eligible expenses.
TRANSLATION: The nonprofit is not yet entitled to the money.
Contribution with donor-imposed restrictions: The food bank is given $100,000 to use on eligible food program expenses.
TRANSLATION: The nonprofit is already entitled to the money.
Not necessarily. Routine reports that explain how funds were used or summarize activities already completed are generally administrative requirements, not barriers to entitlement. They often provide the funder with evidence that the organization used the contribution as intended or completed the activity required by the agreement.
Return to the animal shelter example. The requirement to find homes for at least 100 animals is the substantive performance barrier because the shelter must achieve that outcome before it is entitled to the $25,000. If the shelter also must submit a report listing the number of animals placed, the report generally would not be a separate barrier. It simply documents whether the shelter completed the underlying activity.
Keep in mind: A routine administrative report is different from a substantive report or other deliverable that is central to the purpose of the grant. Organizations should evaluate each reporting requirement in the context of the entire agreement rather than assuming that every required report creates a barrier.
Unconditional contributions are generally recognized when received or promised, even when the donor restricts how or when the funds may be used. A donor-imposed restriction does not, by itself, delay revenue recognition because there is no barrier the organization must overcome before it is entitled to the contribution.
The story is very different for conditional contributions.
Recognizing revenue for conditional contributions has everything to do with overcoming the barrier, or meeting the conditions of the agreement. Revenue can be recognized only after those barriers have been overcome. Until then, nothing is recorded on the statement of activities. If the nonprofit receives cash from the donor before overcoming the barrier, it should record a refundable advance, which is a liability, because the organization is not yet entitled to those funds.
Here is a brief summary of the recognition rules for contribution revenue:
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Type of Contribution |
Revenue Recognition Treatment |
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Unrestricted and Unconditional Contributions |
When an unconditional contribution is made or an unconditional promise to give is received:
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Contributions with Donor-Imposed Restrictions |
When an unconditional contribution is made or an unconditional promise to give is received:
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Conditional Contributions |
Before the barrier has been overcome: |
A contribution is conditional when both are true: (1) the nonprofit must overcome a barrier before it is entitled to the funds, and (2) the donor has either a right of return of assets already transferred or a right of release from its obligation to transfer the assets.
Once the nonprofit has met the conditions, or overcome the barriers, of the grant.
No. Once the barrier has been overcome, the nonprofit can recognize the contribution as revenue even if the funds have not yet been transferred.
Yes. A grant can contain multiple barriers. For example, a foundation agrees to provide a social services nonprofit with funding as it completes certain tasks. The agreement provides $10,000 once the organization hires its program director, $20,000 once it provides services to 50 individuals, and $20,000 once it provides services to 100 additional individuals. Revenue could be recognized over time as each barrier is overcome.
The nonprofit can accept the funds, but it must record them as a liability on the statement of financial position, typically as a refundable advance. Once the conditions are met, the liability is reversed and contribution revenue is recognized.
If the nonprofit never meets the conditions, it is not entitled to the money and cannot record contribution revenue. If it already received the funds, it must return them to the donor.
No. A requirement included in a grant agreement is not automatically a condition for revenue recognition purposes. A donor-imposed restriction may require a nonprofit to use funds for a particular purpose without creating a barrier to entitlement. Likewise, a routine administrative report generally is not a barrier by itself. The organization should evaluate the substance of each requirement and the entire agreement to determine whether a barrier exists.
Read the full agreement, identify what the nonprofit must actually accomplish to become entitled to the funds, and distinguish substantive performance requirements from restrictions and routine administrative reporting. That analysis determines when contribution revenue should be recognized. When in doubt, do not hesitate to reach out to your external accounting firm for help clarifying the terms of the agreement and the appropriate accounting treatment. Contact us today for more information.