Grant income recognition is the process of reporting grant funds as income in an organisation’s financial statements. This process is governed by accounting rules such as Generally Accepted Accounting Principles (GAAP) or International Financial Reporting Standards (IFRS). Accurate revenue recognition helps organisations manage cash flow and plan budgets. It also creates transparency for donors, grantors, and regulatory bodies, and it's key for maintaining trust and avoiding potential penalties or funding issues.

For non-profits, research institutions, and government-funded projects, the stakes around grant income recognition are high. These organisations often handle grants that come with specific conditions or restrictions and must show that funds have been used as intended. Non-profits must carefully track whether they’ve met the conditions tied to restricted grants before recognising the income, and research institutions must provide clear and accurate reporting to satisfy funders and auditors. For government grants – of which there were more than 143,000 issued in the US in 2023 – recipients must demonstrate proper use of public funds. In all cases, processing grant income recognition correctly ensures accountability and allows these funding systems to operate effectively.

Below, we’ll explain the different types of grants and their revenue recognition implications, how to recognise grant income, and common challenges non-profits face around grant income recognition.

What’s in this article?

• Types of grants and revenue recognition implications
  
• How to recognise grant income
  
• Common challenges in grant income recognition
  

Types of grants and revenue recognition implications

Grants can be a complex area of revenue recognition. Here’s a breakdown of the different types of grants and the revenue recognition implications of each.

Conditional vs. unconditional grants

Conditional grants

Conditional grants come with specific conditions or requirements that the recipient organisation must meet before recognising the grant as revenue. Conditions could include achieving certain performance milestones, spending the funds in specific ways, or using the grant within a set time frame.

For accounting purposes, conditional grants are typically recognised as a liability (deferred income) until the conditions are substantially met. This means that revenue is recognised only when the grant’s conditions are fulfilled. However, the conditions must be substantive, not merely administrative or routine, to defer revenue recognition. If conditions are not met, the organisation might need to return the grant to the grantor.

Unconditional grants

Unconditional grants do not have strict conditions attached. The recipient organisation can use the grant funds in any manner, without specific requirements.

For accounting purposes, unconditional grants are recognised as revenue as soon as the organisation is notified that the grant has been awarded and there is a reasonable assurance that the grant will be received. These grants might still come with usage restrictions (e.g. for specific projects), but these restrictions do not affect the timing of revenue recognition under most accounting standards.

Capital vs. revenue grants

Capital grants

Capital grants are for acquiring, constructing, or improving long-term assets such as property, plant, or equipment.

For accounting purposes, these grants are not recognised as revenue immediately. Instead, they are deferred and recognised over the useful life of the related asset. This process aligns the recognition of grant income with the depreciation expense of the asset, and it provides a more accurate picture of an organisation’s financial performance over time. The specific timing and method of recognition might vary depending on the grant’s terms and the relevant accounting framework (e.g. GAAP, IFRS).

Revenue grants

Revenue grants are meant to cover operating expenses or general activities rather than capital expenditures. These grants might cover areas such as salaries, programme expenses, or general operations.

For accounting purposes, these grants are generally recognised over the period they can be matched with the related costs, provided that there are no conditions attached that have yet to be met. If there are conditions, recognition is delayed until those conditions are satisfied.

How to recognise grant income

ASC 958 is the section of the Accounting Standards Codification (ASC) that specifically addresses accounting for not-for-profit entities, including the recognition of grant income. These rules can differ substantially from revenue recognition rules of for-profit entities under ASC 606.

Under ASC 958, the primary determining factor in how to account for grant income is whether it’s considered a contribution or an exchange transaction – and, if it’s a contribution, whether it’s conditional or unconditional.

A grant is considered a contribution if the donor (grantor) does not expect anything of equal value in return. If the grantor expects a direct benefit in exchange, it’s considered an exchange transaction. This type of transaction is governed by ASC 606, not ASC 958. If a transaction is partially a contribution and partially an exchange, only the exchange portion falls under ASC 606.

Here’s a closer look at how to identify which type of transaction a grant represents and how to recognize revenue for each type.

Conditional contributions

Conditional contributions have specific barriers or requirements that the recipient must meet to be entitled to the funds. These conditions could include performance milestones, specific deliverables, measurable outcomes, or expenditure guidelines. Conditions are considered substantive if they require a significant level of effort or activity from the recipient. For instance, a grant that requires an organisation to launch a new programme or reach a particular impact measure would have conditions attached.

It is important to differentiate between restrictions and conditions. Restrictions specify how the grant money should be used (e.g. restricted to education programmes), while conditions specify what must be achieved or done to earn the grant money (e.g. hire 10 new teachers within a year). Restrictions alone do not delay revenue recognition, but conditions do.

Revenue for conditional grants is recognised only when the conditions are met. This means the organisation must first complete the required tasks – such as delivering a report, launching a programme, or achieving specific milestones – before recording the grant as income. Until the conditions are fulfilled, any funds received are recorded as a liability (often referred to as deferred revenue). This treatment reflects the fact that the organisation does not yet have an unconditional right to the grant funds.

• Example: If a non-profit receives a $100,000 grant with the condition that it must train 500 volunteers within a year, the revenue is not recognised until the training of those volunteers is substantially completed.
  

Unconditional contributions

Unconditional contributions do not come with conditions – or they come with conditions that are only administrative. Revenue for unconditional grants can be recognised as soon as the grant is awarded and there is a reasonable assurance that the organisation will receive the funds. This applies even if the cash payment is received later. Multi-year grants might be partially recognised in the year they are received, and then additional amounts may be recognised as revenue in future periods.

If a grant is unconditional but restricted in use (e.g. must be used for a specific programme), the organisation can recognise the revenue immediately and categorise it as restricted in the financial statements.

• Example: If a non-profit is awarded an unconditional $50,000 grant to support general operations, and the grantor commits to sending the payment in three months, the non-profit can recognise the $50,000 as revenue when it receives the award notice, not when the cash is received.
  

Exchange transactions

Exchange transactions are defined as an exchange of value where goods or services are provided to a customer in return for payment. Revenue from exchange transactions is recorded using the ASC 606 five-step model for recognising revenue from customer contracts. This is the standard used by for-profit entities. Revenue recognition under ASC 606 differs from the process for ASC 958 in two key ways.

Recognition criteria

• ASC 958 uses the criteria of conditions and restrictions. Revenue is recognised when conditions are met for conditional grants or when the organization is entitled to the contribution for unconditional grants.
  
• ASC 606 uses the criteria of performance obligations. Revenue is recognised when these obligations are satisfied, defined as the delivery and transfer of control of promised goods or services to the customer.
  

Disclosures

• ASC 958 requires disclosures about the nature of contributions and conditions attached.
  
• ASC 606 requires disclosures about contract balances, performance obligations, and transaction price allocation.
  

Recognizing grant income: A step-by-step look

• Read the grant agreement carefully to understand the terms
  Identify any conditions, restrictions, and specific performance obligations.

• Determine if the grant is an exchange transaction or a contribution
  If it’s a contribution, determine whether it’s conditional or unconditional. If conditional, identify the specific conditions that must be met to earn the funds.

• For conditional grants, record as a liability until conditions are substantially met
  Once the conditions are met, reclassify the amount as income. For unconditional grants, recognise the revenue immediately, taking into account any restrictions on use. For exchange transactions, record revenue in accordance with ASC 606.

• For conditional grants, maintain detailed records of progress
  Document any progress toward meeting conditions for auditors and internal stakeholders. These records will verify that revenue recognition aligns with grant terms.

Common challenges in grant income recognition

Grant income recognition can become complicated due to varying terms, conditions, and accounting standards that govern how and when revenue is recognised. Here are some of the common challenges organisations face in recognising grant income and how to navigate them effectively.

Conditions vs. restrictions

One of the most common challenges is understanding the difference between donor-imposed conditions and restrictions. Conditions create a barrier that must be overcome for the grant to be considered revenue; they can include measurable goals, specific deliverables, or the need to achieve certain milestones. Restrictions dictate how the grant funds must be used (e.g. “funds must be used for research purposes”). Conditions delay revenue recognition, while restrictions do not. Restrictions require the recognised revenue to be classified as restricted net assets until the restriction is fulfilled.

Grant agreements are sometimes ambiguous about whether a requirement is a condition or a restriction. For example, a grant that says “Funds should be used to build a new facility” could be seen as a restriction (dictating what the funds will be used for) or a condition (requiring the building to be completed before funds can be recognised as revenue).

To avoid this confusion, organisations need to pay careful attention to the wording in any grant documents and clarify with grantors if necessary. They should work closely with grantors to ensure documentation reflects the correct interpretation.

Mismatch of revenue recognition and cash flow

Organisations can also face a mismatch between cash inflow and revenue recognition. They might receive the entire amount of a multi-year grant upfront, but if conditions are attached, they cannot recognise the income all at once. This scenario can create a situation where cash is available, but it appears as a liability on the balance sheet until the conditions are met.

Organisations must maintain consistent tracking of both cash flow and revenue recognition schedules, and they’ll need to communicate with stakeholders to set expectations.

Timing of revenue recognition

It can be unclear when a condition is considered “substantially met”, which is the threshold for when revenue can be recognised. For example, if a condition involves launching a new programme, does that mean setting up the programme, serving the first participants, or completing the first year of operations?

When organisations face this dilemma, they’ll need to adopt a conservative approach by recognising revenue only when there is little to no doubt that the condition is met. Comprehensive internal policies and communication with grantors can help define these milestones.

Monitoring and documentation

Organisations must keep detailed records to support when and how conditions are met. This can be challenging, especially for organisations managing multiple grants, and failure to document properly can lead to compliance issues or audit challenges. Organisations must develop strong internal systems for tracking grant conditions and fulfilment, and they’ll need to regularly update their records to align with revenue recognition policies.

Grant term amendments and changes

Grant terms can change to add new conditions or remove existing ones. This can complicate the revenue recognition process, especially if changes occur during the period or after partial recognition. Organisations must document any changes to grants and adjust their revenue recognition policies accordingly. They’ll also need to closely communicate with grantors to manage expectations if changes occur.

Auditor scrutiny and compliance

Grants, especially conditional ones, are often subject to high levels of scrutiny from auditors. Auditors might require extensive evidence to prove that conditions were met before revenue was recognised, which can lead to delays in finalising financial statements and – in some cases – adjustments to previously recognised revenue.

Organisations need to prepare thorough documentation for auditors, including agreements, progress reports, and communications with grantors. This preparation can help with compliance efforts and facilitate smoother audit processes.