Accounting for Grants Under US GAAP: Business vs. NFP

An entity receiving a grant must account for the resources to ensure financial statements accurately reflect the nature of the funds and any related obligations. This accounting provides transparency to stakeholders. The process requires analyzing the grant’s terms and conditions to determine its substance and the appropriate timing for recognition.

Distinguishing Contributions from Exchange Transactions

The first step in grant accounting is determining if it is a contribution or an exchange transaction. This classification depends on whether the provider of the resources receives something of approximately equal value in return. In an exchange, value flows both ways, while in a contribution, it primarily flows one way from the grantor to the recipient.

An exchange transaction involves both parties receiving and sacrificing equal value. For instance, if a government pays a company to construct a building to its specifications, it is an exchange. Such arrangements with a government acting as a customer are accounted for under the revenue recognition guidance in Accounting Standards Codification (ASC) 606.

A contribution is a nonreciprocal transfer where the grantor does not receive direct value in return. The grantor’s benefit is indirect, such as furthering a public purpose. Most government grants fall into this category of nonexchange transactions.

Grant Accounting for Not-for-Profit Entities

For not-for-profit (NFP) organizations, accounting for contributions is governed by Accounting Standards Codification 958-605. This framework requires NFPs to distinguish between conditional and unconditional contributions, which impacts the timing of revenue recognition.

A contribution is conditional if it includes both a barrier to entitlement and a right of return. A barrier is a stipulation the NFP must overcome, such as achieving a measurable outcome, incurring qualifying expenses, or meeting a matching requirement.

For a grant to be conditional, the agreement must also state that if the NFP fails to overcome the barrier, the grantor can withhold payment or demand a return of funds. Revenue from a conditional grant is recognized only as the NFP meets the conditions.

If a contribution has no such barriers, it is unconditional, and the NFP recognizes the full amount as revenue immediately. The funds may still be restricted by the donor for a specific purpose or time, which affects their classification on the balance sheet but does not delay revenue recognition.

Grant Accounting for Business Entities

U.S. GAAP lacks specific guidance for government grants received by business entities. This requires a for-profit company to develop a reasonable accounting policy by looking to other standards by analogy and apply it consistently.

A common approach is to use International Accounting Standard 20. For grants related to assets, a business can either record the grant as deferred income and recognize it over the asset’s useful life, or deduct the grant from the asset’s carrying value. For grants related to income, the deferred income approach is used, with the grant recognized in the same periods as the related expenses.

Alternatively, a business could apply the NFP guidance on contributions by analogy. In this case, the company would follow the conditional versus unconditional framework to determine when to recognize grant income.

To address this gap, the Financial Accounting Standards Board (FASB) has been working to establish a unified standard. A proposed update issued in late 2024, based largely on the international model, would create specific U.S. GAAP guidance for business entities, ending the practice of accounting by analogy.

Financial Statement Presentation and Disclosures

The presentation of grant revenue depends on the entity type and accounting policy. For an NFP, contribution revenue is presented as a distinct line item on its statement of activities. The revenue is categorized based on whether the funds have donor-imposed restrictions.

For a business, presentation varies. Using the deferred income approach, the grant is a liability on the balance sheet, and recognized income appears as “other income” or a reduction of a related expense. If netted against an asset, it reduces the asset’s book value and future depreciation.

U.S. GAAP mandates specific disclosures for businesses under Accounting Standards Codification 832. This requires disclosing the accounting policies for grants, the nature and amounts of assistance recognized, and the terms of the agreements. All entities must also communicate any unfulfilled conditions and information about grants not yet recognized as income.