Are Government Grants Contributions or Exchange Transactions?

Why do the accounting standards keep changing words around on us? And what is a government grant now? Under the new revenue recognition standards for not-for-profit entities in FASB (the Financial Accounting Standards Board), there are two main classes of revenue: Contributions and Exchange Transactions.

• A contribution is defined as an unconditional transfer of assets, settlement or cancellation of liabilities in a voluntary nonreciprocal transfer. The transferred assets may be cash, securities or property, as well as the use of facilities or utilities, materials and supplies. They can also be services, or unconditional promises to give those items in the future. (Basically, a contribution is a promise to give something of value for nothing in return.)
• An exchange transaction is defined as a reciprocal transfer whereby each party receives and sacrifices something of approximately equal value.

FASB tried to simplify revenue by using these two very broad definitions of revenue. The only problem is that government grants, depending on the elements present in a contract, could be considered a contribution, exchange transaction or some combination of both!

Government Grants – Contribution

When a grant is given with nothing received in exchange, or when there is a value to the grantor received–but it is secondary when compared to the possible public benefit–the grant would be considered a contribution. The grant is considered a contribution because the grantor is giving the money away without expecting and getting anything in return and they no longer have direct control of the funds.

Government Grants – Exchange transaction

When a grant has return benefit to the grantor, similar to the amount paid, then a grant would be considered an exchange transaction.

Determination between the two

The determination on whether government grants should be contributions or exchange transactions is very subjective, however there are a couple of factors that can help point to an answer.

If a government grant is more of a reciprocal transaction (both parties get something) the deciding points would be related to:

• The government needs to perform a service and instead of doing it themselves they contract with someone else to do the work. Some factors that support this determination would be:
  • There is a service delivery requirement
  • There were multiple proposals sent in and the government picked the one that was the most cost-effective and provided the necessary services
  • The payment is based on hours-of-service deliverables, not expense reimbursement
  • There is a penalty for failure to perform the services a certain way

On the other hand, if a government grant has more of a contribution feel to it, some deciding characteristics would be:

• The government grant was made to benefit the general public or people who are not the government. Some factors showing that it is a nonexchange transaction would be:
  • The grantee gets to decide how, when and where to provide services to the general public
  • The grant received is to subsidize goods and services already delivered
  • The grant pays to fund an existing program at the not-for-profit
    
    

In Conclusion

In an attempt to simplify revenue into two categories, accounting for a government grant became a little more complicated. Typically, most government grants are going to be considered contributions. However, there are a couple of elements in a government grant contract that would point to the grant being more of a contribution or exchange transaction, and sometimes there are both types of elements in a contract. The best way to evaluate a government grant is to, after reading through a contract, highlight the parts that made you lean one way or the other. Because judgement is used to evaluate government grants, this can cause different people to come to different conclusions on the same contract! Just make sure you have a documented reason for whatever decision you come to.

For additional considerations, please reach out to Caroline Russell, CPA, Manager, or contact the Not-For-Profit Solutions team at Mahoney to be of help to you in any way.