nonprofit-accounting-for-grants

The Fundamentals of Nonprofit Grant Accounting

Corinne

Grants are prime commodities in the nonprofit world for good reason. They can provide increased funds to achieve your organization’s social mission and overall growth. 

However, before you look to acquire grants, it is important to understand how to account for them so you can keep your financial statements in good order. Good financial habits and clear guidelines on accounting for donations are key to getting additional grants in the future as full financial transparency is required by most grant organizations.

We will explain how to classify grants and the best methods for recording them to ensure keeping your books as accurate as possible is not a barrier in this process. 

Here’s what we’ll cover in this article:

nonprofit-accounting-for-grants-what-is

What Is a Grant And Why Do You Need to Record Them?

While you may already have an understanding of what a grant is, it’s important to know the IRS definition of what constitutes and does not constitute a grant.

A grant includes:

  • Scholarships

  • Fellowships

  • Internships

  • Prizes

  • Awards

  • Loans for charitable purposes

  • Investments relation to programs

A grant does not include: 

  • Salaries to employees

  • Compensations to employees

  • Payments to people for personal services, which includes assisting in a foundation plan, evaluating or developing projects or areas of program activity, or consulting, advising, or participating in conferences organized by the foundation

If you are looking for information on donations, we cover accounting for donations to nonprofit organizations and, more specifically, nonprofit accounting for stock donations and in-kind donation accounting, separately.

Understanding which items constitute a grant is integral for determining which is the proper method of recording them to remain compliant. 

The Three Major Types of Grants

The three major types of grants that most nonprofits would encounter are:

  • Unconditional Grants - these are funds provided with no conditions attached to their usage

  • Conditional Grants - funds provided that have designated usage requirements or other special implementation rules to constitute how they may be allocated. An example of a common conditional grant is a matching grant. A donor approves a grant to the donee organization with an agreement that funds will be issued once the organization has raised a specific amount of money from other sources.

  • Reimbursable Grants - normally given for a dedicated purpose or project, these grants are often only received by your organization upon the completion of said project. In short, that means that you provide all upfront costs to fund the project using your organizational resources, and afterward, the grant will reimburse you for your expenses. Perhaps an energy efficiency grant is available. Once awarded, but before the transfer of assets is approved to pay for the installation of the relevant energy conservation measures e.g., new windows, foam insulation and a new boiler, your organization must purchase and successfully install the items. The grantor will likely require an itemized invoice and proof from an independent auditor that there is no measurable performance-related barrier.

nonprofit-grant-accounting-typesOliver is thinking carefully about the three different types of grants.

In addition, it is important to note that if a large proportion of your nonprofit revenue is grant revenue, incorrect accounting can have a profound impact on your financial statements.

Pro Tip: As standards and accounting requirements are constantly evolving, make sure that you research and stay up-to-date with current procedures and best practices at a given time. This will keep you compliant and ensure that your records are accurate based on current stipulations. A little time spent researching can save you a lot of time making the update after the fact. 

Now that you know the different grants types, we will provide some guidance around how to record them when you receive them.

nonprofit-accounting-for-grants-exchange-vs-contribution

Exchange Transaction Vs. Contribution 

The category, an exchange transaction or a contribution, that forms the umbrella for a grant determines when and how that revenue is recorded. That is important because if you designate it under the wrong heading, you will follow incorrect instructions. When you file your paperwork, this will be detected as improper accounting. 

An exchange transaction is one where both parties receive something of approximately equal value, resulting in a reciprocal exchange. 

On the other hand, a contribution is a non-reciprocal transaction in which there is no obligation criteria to provide anything at all in return. 

It has been a matter of debate historically as to whether grants make up contributions or exchange transactions, but the Financial Accounting Standards Board (FASB) has recently provided a clarification, stating that government and foundation grants that benefit the general public are now considered only as contributions. 

As a result, it is more common for grants to fall under this category rather than exchange transactions. That does not mean that all grants will be considered contributions; you will still need to look at the conditions involved and make sure before committing any final documentation actions. 

This distinction could equally provide cancellation of liabilities and make sure that you are compliant. 

Sponsorships and corporate gifts are other examples of items that are considered contributions. 

nonprofit-accounting-for-grants-accounting-contributions

Accounting For Grants As Contributions

Now that you have the information to make a determination where a grant falls categorically, it’s time to learn to properly document them. 

When Do You Recognize the Grant?

You need to recognize and record your revenue the moment that it is received or the pledge is made because the moment you receive it is the moment that it becomes usable income. For example, perhaps a professor at ASU (Arizona State University) applied for government grants to further ongoing research on desert animals. If they are awarded one, that grant would be recorded as revenue as soon as the donor provided the cash.

nonprofit-grant-accounting-recognizeRyan is becoming an expert at looking closely and recognizing grants as soon as they come in!

This ideology corresponds with an accounting principle termed the "matching principle" which recommends that the moment you have "reasonable assurance" that you will receive that grant, you should go ahead and proceed with the proper documentation of it. 

What If You Recognize the Grant In a Different Fiscal Year Than When You Received It? 

In a situation such as this one, you will need to book a receivable in order to meet the requirements of the Generally Accepted Accounting Principles (GAAP) and ensure that the funds are accounted for in the proper fiscal year for accurate record keeping. 

What If Your Grant Has Conditions?

In the event that you receive a conditional grant, there may be a stipulation or a number of obligations before you can receive that grant. 

When this happens, you should not recognize those funds until you have met those conditions, reviewers or auditors have verified that the grant money is assured, which once more corresponds to the matching principle. 

nonprofit-accounting-for-grants-accounting-transactions

Accounting for Grants as Exchange Transactions

In the rarer instance that the grant does fall under an exchange transaction, the important difference for accounting is that the revenue will not be recorded until after the expenditure has been incurred. 

That means that once whatever goods provided through this grant have been sold or otherwise liquidated, that is the time for the revenue to enter the books officially. 

nonprofit-accounting-for-grants-bottom-line

The Bottom Line

The IRS requires a nonprofit organization to complete very specific paperwork documenting all accounting procedures and expenditures for public consumption. This means that these organizations are carefully monitored to ensure that they are following the proper accounting practices and reporting all donations and how they are being used. 

Failure to record these properly can cause serious implications, such as fines or even a loss of the tax-exempt status that nonprofits enjoy.

For organizations that rely heavily on grants, mistakes in accounting can provide misleading and inaccurate information as to the valuation of the organization and the results of their efforts in pursuit of their mission. 

It is paramount for these nonprofits to take care to ensure the best possible results with bookkeeping and an all-in-one software program (like Springly!). This can make all the difference when trying to keep accurate and streamlined accounts. 

nonprofit-accounting-for-grants-end

Springly is trusted by over 15,000 nonprofits to help them run their organizations on a daily basis. Try it, test it, love it with a 14-day free trial!

 

Finance
Corinne
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