Most nonprofit organizations are excited, and rightfully so, whenever a new funding source is identified and funding is awarded. Accounting for this funding is rarely a thought in the mind of the development staff, but can present a significant dilemma to a bookkeeper or finance director.
Grants and contributions share many of the same characteristics, but accounting for the transactions is very different. A large grant received near an organization’s year-end more than likely would not have a significant impact on the statement of activities. Conversely, a large contribution received at the same time could make the difference between a poor year and a great year.
Here are some ways to tell the difference so there are no surprises during your annual audit. The following characteristics suggest that the award is a grant:
1. Is the grantor receiving something in return? For example, research, budget reports, progress reports, or specific details on the outcome of the work.
2. Does the grantor require reporting at specific intervals or dates such as monthly, quarterly, annually, or at expenditure intervals (ie 25 percent of funds utilized, 50 percent utilized, etc.)?
3. Is there a set period during which the funds must be utilized, generally a start and end date?
4. Is the organization required to return any unused funding?
5. Are there penalties for failure to use the funds in the appropriate manner?
6. Are any overhead or administrative costs reimbursed by the award?
7. Is there a set budget detailing how the funding should be used? Is approval required if changes to the budget categories are necessary?
8. Were funds awarded following a competitive application or bid process?
9. Does the awarding agency require any type of audits of the organization?
10. Are there any restrictions on the publication or dissemination of the results of the project? Does the awarding agency need to approve articles prior to publishing?
Generally, if the majority of your answers above are no, then the award is more than likely a contribution. Some additional characteristics unique to contributions are as follows:
1. Donor does not expect anything in return for their donation.
2. The donor may provide guidance on how they would like their donation spent, for example, “on a new stadium,” or “for the biology department,” but they do not have the authority to approve purchasing decisions. In this example, organization staff would be responsible for seeing that the funds were used by the biology department rather than the donor.
3. Unused funds do not have to be returned to the donor.
4. Progress reports or reports on use of funds are more general in nature and serve to provide donors with evidence of the organization’s good stewardship rather than explicit details on results of the work.
5. Frequently contributions are received from individuals, family foundations, or donor advised funds.
Although the above should provide guidance on identifying a grant or contribution, no one factor should outweigh any other. When an award is particularly difficult to determine, the organization should consider how many of the above factors are present. The more “grant” factors, then the award is likely a grant. The more “contribution” factors, it is more likely a contribution.
Once the proper classification has been determined, the accounting treatment is relatively easy. Grants are recorded as deferred revenue by the organization until the funds are expended for the intended purpose in accordance with the grant agreement. At that time, the grant is recognized as revenue.
On the other hand, contributions are recognized as revenue at the time a pledge is made or donation is received. If a donation was received with a restriction imposed by the donor, this is classified as temporarily restricted revenue unless the restriction cannot be removed, in which case the donation is recorded as permanently restricted revenue.
For example, if a grant of $1 million was awarded near year-end, more than likely most of the grant would not be expended by year end, resulting in a simple gross-up of the balance sheet of both cash and deferred revenue. Alternatively, if a contribution of $1 million was received near year end, this would be recognized as revenue at that time, causing the organization’s change in net assets to increase by the same $1 million.
Knowing the difference between the two transactions will help development personnel understand how new funding will impact their organization.
Jackie Lee, CPA, is a senior manager with Mengel, Metzger, Barr & Co. LLP. She may be reached at Jlee@mmb-co.com.