Revenue Recognition for Non-Profit Entities, Part 2: Government Grants

In this article, we’ll focus on government grants – and whether they should be considered a contribution or an exchange transaction 

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In this article, we’ll focus on government grants – and whether they should be considered a contribution or an exchange transaction 

As we covered in a previous article, the Financial Accounting Standards Board (FASB) felt the need to release an update (ASU 2018-08) to its revenue recognition guidelines (ASC 606) specifically written to provide clarified guidance to non-profit entities. Our last article focused on how the FASB’s update defines contributions and exchange transactions, explaining that exchange transactions fall under the scope of ASC 606 while contributions, both conditional and unconditional, do not. 

In this article, we’ll focus on government grants – and whether they should be considered a contribution or an exchange transaction 


Grants from governmental agencies, whether at a federal, state or city level, are some of the most common and most important sources of funding for any non-profit entity. They’re also some of the most complicated aspects of an entity’s financial reporting, because it’s quite difficult for entities to confidently determine whether they should be recorded as contributions or exchange transactions. 

Prior to the release of ASU 2018-08, many non-profit entities considered the majority of their government grants to be exchange transactions, or “reciprocal transfers in which each party receives and sacrifices approximately commensurate value.” Their reasoning was that, in the case of most of their government grants, the grantor (the government and the public it serves) was receiving commensurate value in exchange for its funding in the form of the non-profit entity’s services. Therefore, entities believed, they were party to a mutually beneficial contract with the general public, which would be recognized as an exchange transaction to be reported under the guidance of ASC 606.  

However, ASU 2018-08 included an important clarification that specifically stated that government agencies – and, for that matter, other resource providers like charitable foundations – “are not synonymous with the general public.” This one seemingly simple sentence will likely change the way countless grants are recognized on non-profit entities’ financial records. 

Since government agencies are no longer considered synonymous with the people they serve, the government agencies themselves must directly receive commensurate value from the entities they’re supporting in order for grants to be considered exchange transactions. If the commensurate value is received by the general public, the grant will likely be considered a contribution and reported under the guidance of ASC 988-605, rather than ASC 606. 

Let’s look at a few examples. 

Example #1: Exchange Transaction

Let’s say the city of Providence provides public funding to a local non-profit think tank in order to support a year-long research study on economic development. The think tank agrees that, at the end of the study, the results – all of the data, the takeaways and the intellectual property – will belong to the City of Providence for the government’s use in perpetuity.  

This, more than likely, would be considered an exchange transaction, because the grantor (the City of Providence) disbursed funding to the entity (the think tank), and – in return – received commensurate value (the intellectual property created by the study). 

Example #2: Contribution

Let’s say that in addition to funding the non-profit think tank’s research project, the city of Providence also awards a grant to a local youth group to help them build a new basketball court. The basketball court, once completed, will be open to the public and free for all residents to enjoy.  

In this example, we can agree that the entity (the youth group) is using its funding to provide value (the basketball court). The basketball court will certainly benefit the general public, and it may provide indirect value to the grantor (the city of Providence as a whole) by beautifying its local neighborhood and perhaps increasing the property value of neighboring homes. But, because city governments are societal constructs that cannot shoot basketballs, the grantor in this example is not directly receiving commensurate value in exchange for the funding it is providing.  

That’s why this example – and many like it – will likely be considered a conditional, restricted contribution under the clarified guidelines put forward in ASU 2018-08. The grantor (the city) is making a nonreciprocal transfer of assets (the grant dollars) to a non-profit entity (the local youth group) on the condition (or barrier) that those funds be used to build a basketball court. Since this is a contribution, it should be recognized under the guidance of ASC 988-605 once barriers are overcome.  


Since the majority of government-funded grants are awarded in the best interest of the general public and not the government itself, most financial experts agree that the clarifications made in ASU 2018-08 will result in an immediate increase in grants being recognized as conditional or unconditional contributions rather than exchange transactions. That said, though, there are always exceptions.  

Our best advice for non-profit entities looking to stay on top of the rapidly changing revenue recognition landscape is to contact their financial professionals for support as soon as possible. 

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