Revenue Recognition: Grants and Contracts
Your organization has successfully raised funds to support their important and ongoing work. When do record this revenue? The devil is in the details, of course. Read on to learn how to handle unconditional gifts, temporarily restricted grants, grant contingencies, reimbursable grants, and contracts.
When a foundation or donor notifies you that they have decided to make a grant or donation with no contingencies, you can record an asset called an unconditional promise to give. Also known as a grant or contribution receivable, and you can record it as of the date of their decision. When they send you a check making good on their promise, you essentially convert that receivable into cash: debit cash, credit receivable.
If the funder defines a particular purpose for the award, the revenue as temporarily restricted. Grants stipulated by the donor to be spent in a particular fiscal year are also temporarily restricted, in this case to that time. You still record revenue on the date the award was made, and you have a grant receivable on the books until the cash comes in.
Foundations often award multi-year grants where they give the first year’s gift without condition but require the organization to meet certain benchmarks in order to qualify for the rest of the money. When organizations are conducting campaigns where the intent is to obtain gifts from multiple donors, the first foundation to make a major contribution may set up their award like this, so that the second and third years’ installments depend on successful fundraising in accordance with the plan. In these cases, you only recognize the first year’s revenue. Once the organization has met the contingency, it can recognize the rest of the gift.
Most grants from governments, and some from other entities, are reimbursable: an organization is only entitled to receive the award when it has incurred costs in doing the program work (or sometimes administrative work) the grant is funding. In this case, think of the award as conditional – and accomplishing the work fulfills the condition. Practically speaking, you record revenue at each month-end after you know your total costs: you have closed accounts payable, allocated personnel expense, and determined what portion of shared costs applies to the work.
Does your organization sell services to organizations, companies, or individuals? Among the organizations I’ve worked with, some examples are medical services, energy efficiency evaluations on homes, GIS services, conferences that require registration fees, classes that charge tuition, and rent under leases. Recognize this earned income, or program service revenue in the language of the 990, as you earn it. At least monthly, you should calculate it and invoice your customers.
Note: In all of these types of transactions, you should record a receivable and revenue in one step, and when you receive cash in payment, credit the receivable.
Next time: IRS updates for the new year.