All not-for-profit organizations fortunate enough to receive government and private grants must read, interpret and comply with those grant agreements. One of the key issues to address at the inception of a grant is whether the grant represents a contribution or an exchange transaction; the accounting could vary significantly based upon the classification.
Accounting Standards Codification (ASC) 958-605-55 provides guidance to distinguish contributions from exchange transactions. In general, the accounting and reporting of grants is determined by the underlying substance of the transaction. The term "grant" is used broadly and can refer not only to contributions, but to assets transferred in an exchange transaction. Each grant agreement should be carefully reviewed in making this determination, as it may be entirely a contribution, entirely an exchange transaction or a combination of the two.
An example of an exchange transaction that involves a private resource provider would be a corporate entity that sponsors research and development at a research university. The grant agreement includes the corporate entity's right to retain the propriety rights to the exclusive knowledge gained from the research, including patents, copyrights or other privileges. The value retained by the corporate entity is more than incidental and, therefore, would qualify as an exchange transaction.
An example of a transaction considered to be in part a contribution and an exchange would be a transfer of land to an NPO at a price significantly lower than its fair market value with no unstated right or privileges accruing to the donor. The difference between the fair market value and amount paid would be a contribution, and the amount paid would be considered an exchange transaction.
Read the full article to learn the six distinguishing characteristics.