This past year has been a whirlwind of changes and innovative problem solving for nonprofits everywhere, and the last thing anyone needs is year-end adjustments to properly recording grants received. Hopefully, we can give you some comfort by providing a quick refresher!

The process for deciding how to record a grant received can be simplified by using the following decision tree:

1. Decision: Contribution or Exchange
Question: Does the granting agency receive any commensurate value in return for the grant given?

Reasoning: If the answer is no, then the grant is deemed to be a contribution, and you proceed to step two of the decision tree. If the answer is yes, then the grant is deemed to be an exchange transaction and is to be recognized as unrestricted revenue as the goods or services are received. It is important to note if the only benefit received by the granting agency is a social benefit, commensurate value is not exchanged, and the grant is deemed to be a contribution.

2. Decision: Intended or Promised
Question: What language did the granting agency use? Do they intend to give a grant in the future, or did they promise it?

Reasoning: If the granting agency used language similar to “We will grant $XXX”, then the grant is promised, and you proceed to step three of the decision tree.   If they used language similar to “We plan to grant $XXX”, then the grant would be intended as the language leaves room for the granting agency to change their mind in the future. As such, the grant will not be recorded or disclosed on the financial statements until the grant becomes promised.

3. Decision: Conditional or Unconditional
Question: Were there any conditions or barriers laid out in the grant agreement that are required to be met before the Organization will receive the funds?

Reasoning: If there were no conditions or barriers laid out in the grant agreement, then the grant is deemed to be unconditional, and you proceed to step four of the decision tree. If the answer is yes, then the grant is deemed to be conditional. Examples of condition or barrier indicators are:

  • Inclusion of measurable performance-related or another measurable barrier (e.g. achieve certain level of service or number of units of output, or occurrence of identified event like matching).
  • Extent to which stipulation limits discretion by recipient on conduct of activity (e.g. specific guidelines to qualify allowable expenses, hire specific individuals, or adhere to specific protocols).
  • Whether stipulation is related to purpose of agreement (e.g. administrative tasks and trivial stipulations excluded).

At this point the grant will not be recorded or recognized as income until the conditions are met and the funds are received. However, it will be disclosed in the financial statements. If it is not clear that the grant is conditional, default to unconditional.

It is important to note that deciphering if a grant is conditional or unconditional is not the same as deciphering if a grant is given with or without donor restriction (see step 4). The determination of whether a grant is conditional or unconditional considers if there have been limits set on how the activity of the Organization is performed, where determining if it is a grant with or without donor restriction is related to the use of the grant.

4. Decision: With or Without Donor Restriction
Question: Were there specific time or purpose restrictions laid out in the grant agreement by the granting agency?

Reasoning: If the grant agreement includes restrictions on the use of the funds given, then the grant is deemed to be restricted. Depending on the type of restrictions, the funds could be recognized as a grant with donor restrictions for time or purpose (temporary) or a grant with donor restriction for perpetuity (permanent). If there are no restrictions outlined in the grant agreement, then the grant is deemed to be unrestricted. This gives the Organization’s governing body freedom to decided if they would like the funds to be recognized as designated for a particular purpose or undesignated.

Now that we have laid out the steps for our decision tree, we can apply it to the following example:

A school receives a multi-year $20M pledge to build a LEED certified, green, sustainable, zero emission, zero-carbon-footprint building on campus.  The pledge is payable over 3 years. $7M is payable up front with no conditions. $6M is payable upon evidence that the land has been cleared, the architectural design has been received, and the proper building permits have been obtained. The remaining $7M is payable upon receipt of LEED certification and the certificate of occupancy.

1. Decision: Contribution
There is no commensurate value given in return of the funds as the funds are being used to build the facility for
the benefit of the school and the environment (social benefit only).

2. Decision: Promised
The grant agreement has been received and put into effect.

3. Decision: Both Conditional and Unconditional
The initial $7M received upfront was specified that it had no conditions, therefore it is unconditional. The
remaining $13M will be granted once specific conditions are met, therefore it is conditional.

4. Decision: Restricted
The purpose of the funds is to help construct a building, which is a purpose that is narrower than a typical
school’s overall mission. Therefore, these funds are temporarily restricted.

Considering the decisions above, the school would record $7M now as a grant with donor restrictions (temporary). The remaining $13M will be recorded when the conditions are met, also as a grant with donor restrictions (temporary).

Proper recognition of grants received can be complex and require a significant amount of analysis and judgment. There is no one size fits all solution for every situation; however, the decision tree above is a great place to start. As always, the experts at Ketel Thorstenson, LLP  are here to assist you with your grant accounting needs!