Grant revenue is often one of the largest sources of funding for nonprofit organizations, yet it is also one of the most misunderstood areas of nonprofit accounting. Misclassifying grants can affect financial statements and create audit adjustments.
An unconditional grant is generally recognized when the nonprofit receives notice of the award and has an enforceable right to receive the funding. If there are no future performance requirements or barriers that must be overcome, the organization should record grant revenue and a receivable, if payment has not yet been received.
A conditional grant contains one or more barriers that must be overcome before the organization is entitled to the funding. Common examples include cost reimbursement grants, government grants tied to expenditures, matching grants, and grants requiring specific performance outcomes. Revenue is recognized only when the conditions are substantially met.
If a nonprofit receives cash from a conditional grant before the conditions are satisfied, the funds should generally be recorded as a refundable advance rather than revenue. Revenue is then recognized as the required conditions are fulfilled.
One of the most common errors occurs when a grant award letter is received but the conditions have not been met. In this situation, revenue and receivables generally should not be recorded. The grant may be disclosed in the financial statement footnotes if significant.
Organizations should also avoid recording both a grant receivable and a liability for the same unearned conditional grant, as this can overstate assets and liabilities.
As a practical rule: record revenue when an unconditional grant is awarded; record a refundable advance when cash is received for an unmet conditional grant; and do not record revenue or a receivable for a conditional grant until the conditions are satisfied.
Careful review of grant agreements before year-end can help prevent audit adjustments and ensure compliance with nonprofit reporting standards.
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