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Business and Policy Areas
Business and Policy Areas

FASB Continues to Clarify Grant Revenue Recognition

March 31, 2017

Ten months after the Financial Accounting Standards Board (FASB) added not-for-profit (NFP) grant and contract revenue recognition to its agenda, board discussions are refining what makes a nonreciprocal transaction (i.e., a contribution) conditional. Although FASB’s desired improvements should not change sponsored research revenue recognition, pledge and gift agreements may need to be examined through a new lens.

This important project directly affects independent higher education institutions and NFP foundations affiliated with public institutions. Consequently, NACUBO’s Accounting Principles Council (APC) will meet with FASB staff and several board members on April 11 to discuss this topic.

Tentative Board Decisions:

An NFP must assess reciprocity. FASB identified two key factors that it felt would be useful in determining whether a grant should be characterized as a reciprocal (exchange) or a nonreciprocal (contribution) transaction. These factors are:

  1. Whether the donor/grantor directly receives goods or services of a commensurate value, or
  2. Whether the donor/grantor has a known and explicit obligation to provide goods or services to others.

For example, since the vast majority of higher education’s sponsored research grants advance knowledge for academic or public benefit and because universities often retain the rights to research results in these cases, sponsored research grants are typically nonreciprocal. Nonreciprocal transactions are not exchange transactions and therefore are a type of contribution.

An NFP must subsequently determine if the contribution is conditional or unconditional. FASB has tentatively decided that the definition of a grantor- or donor-imposed condition would include the following:

  1. An explicit right of return, entailing either a return of assets transferred or a release of a promisor from its obligation to transfer assets,
  2. A barrier that must be overcome before the recipient is entitled to the assets transferred or promised. FASB is trying to determine the level of significance that a barrier must carry; barriers would be defined and described through the use of indicators and illustrative examples.

Cost-reimbursement grants. It is commonly believed that a right of return is inherent in all grant agreements. Further, grants awarded through federal agencies are subject to the Office of Management and Budget’s Uniform Administrative Guidance requirements—which stipulate a return of funds or grant withdrawal for noncompliance. Although there may be several barriers, at the very least, a barrier is created when institutions must perform grant work according to the agreement—at a cost to the university—before reimbursement is requested.

Promises-to-give (pledges). Although donor agreements can include clauses that relieve the promised obligation under specified circumstances, a barrier must also exist for the pledge to be considered conditional. NACUBO believes examples of barriers could include matching fund requirements, stipulated zoning use changes for construction projects, and adding new and unplanned or out-of-the-ordinary programs. Barriers are likely assessed within the overall context of the agreement and the NFP entity’s operating environment.


The issuance of FASB Accounting Standards Update (ASU) 2014-09—Revenue from Contracts with Customers (Topic 606) (ASC 606) removes significant portions of the existing revenue recognition guidance for not-for-profit entities. In particular, the term “exchange transaction” has been eliminated, leaving NFPs with only two options for revenue recognition: contribution or contract with a customer. So where do grants—especially those received from the federal government—fit?

FASB’s “grants and contracts” project (added to its agenda in April 2016) attempts to address this issue. The scope of work applies to all grants (and other contributions) received that do not meet the definition of a contract with a customer, regardless of the type of grantor/donor or the type of grant/giving arrangement. Rather than create new accounting guidance specifically for grants, FASB has chosen instead to focus on improving the existing guidance around the distinction between conditional and unconditional contributions. Consequently, although the title of the project is “grants and contracts,” the final guidance will apply to all transactions considered nonreciprocal (non-exchange) and therefore contributions.

Next Steps:

Based on feedback received from the Not-for-Profit Advisory Committee at its March meetings, FASB will continue its deliberations at a future board meeting. At an April 11 meeting with FASB representatives, NACUBO’s APC hopes to provide FASB with relevant information and examples of grant and pledge agreement language that will be useful as they draft a proposed ASU. The proposed ASU is expected to be issued in May 2017 with a three-month comment period. A final standard is expected in the first quarter of 2018.

NACUBO will continue to closely monitor this project and provide input and feedback to FASB as needed.


Sue Menditto
Director, Accounting Policy