Accounting and Reporting for Contribution Revenue

By Kristin Clayton, CPA

Believe it or not, not all not-for-profit entities (NFPs) account for contribution revenue the same. Historically, there have been differences in when NFPs recognize revenue received from grantors, the government and individual donors. These differences are not due to the difference in how they should be recorded, but instead the result of different interpretations of the accounting standards.

To provide some clarification, the Financial Accounting Standards Board (FASB) issued Accounting Standards Update (ASU) 2018-08 Contributions Received and Contributions Made.

According to ASU 2018-08, contributions are a voluntary, non-reciprocal transfer of cash or assets. To translate, if someone gives you money and does not expect anything in return, or what they receive in return is not of comparable value to what they gave, then it is accounted for as a contribution. Most grants would fall into this definition because the grantor is typically not the one receiving the benefit of the service to be provided. Government grants will typically be classified as contributions because providing a societal benefit does not equal commensurate value being provided directly to the government. There is no requirement to title these as contributions on the financial statements. The financial statements may still list these funds as grant revenue. Ultimately, the determination of whether to use contribution accounting is not based on the source of the funds or the title on the financial statements, but rather is based on the terms of the grant or donor agreement.

When a contribution gets recognized as revenue depends on whether it is conditional or unconditional. Unconditional contributions are recognized as revenue when there is an unconditional promise to give. That promise may be the gift of cash up front or it may be a pledge to give over a certain amount of years. Conditional contributions are recognized when the condition has been met. Conditional contributions must include both a right of return and a barrier to be overcome. To qualify as a barrier there must be a measurable performance result (ex. number of veterans served) or a stipulation that limits discretion by the recipient to conduct the activity (ex. qualifying expenditures). If the grant or donor agreement states that the funds will not be provided or must be returned if the barriers are not met, then the contribution is conditional and will be recorded as the condition stated is met.

Once the contribution is determined to be unconditional, it will be recorded as either net assets with or without donor restrictions. A promise to give may not have a measurable barrier or right of return but could restrict the funds to be spent on a certain program. These would be recorded as net assets with donor restrictions. Once spent on the specified program they would be released to net assets without donor restrictions.

As you can see, the clarified guidance still includes a rather complicated decision tree based on factors of each individual grant and donor agreement. We are always available to help review grants, help with other agreements, and assist you in making these determinations. Please let us know how we can best serve you.

Kristin Clayton, CPA | Director
KClayton@MHCScpa.com