Accounting for Grants Under US GAAP: ASC 958, 606, and ASU 2025-10

Accounting for grants under US GAAP runs on a single upfront decision: is the grant a contribution or an exchange transaction? Contributions follow ASC Topic 958, exchange transactions follow ASC Topic 606, and the classification drives everything downstream — when you recognize revenue, how you measure it, and how it appears on your statements. For-profit entities receiving government grants now have a third track: ASU 2025-10, issued in December 2025, which finally provides authoritative recognition and measurement guidance under Topic 832 where none previously existed.¹

Contribution or Exchange Transaction: The Threshold Call

Every grant agreement needs this question answered before any journal entry is made. The two frameworks recognize revenue differently, present it differently, and disclose it differently.

A contribution is a one-way transfer. The funder hands over resources and gets nothing of comparable value back. A foundation giving $300,000 to a food bank to expand operations is a textbook contribution: the foundation receives no product, no service, no intellectual property.

An exchange transaction is a two-way deal. The funder transfers resources and receives goods or services of approximately equal value. A federal agency paying a university $2 million to develop a prototype the agency will own and commercialize is an exchange transaction. The agency is buying deliverables.

ASU 2018-08 tells you to evaluate whether the funder receives commensurate value in return for the resources transferred.² The fact that a grant requires you to spend money on specific activities does not, by itself, make it an exchange. The test is whether the funder gets something back it could sell, use, or consume. Public benefit flowing to the general population does not count as commensurate value to the funder — that is what makes most social-program, public-health, and community-development grants contributions even when the check comes from a federal agency.

Do this analysis grant by grant. A single organization routinely holds contributions from one funder and exchange awards from another, each following different recognition rules at the same time.

Contributions Under ASC 958

Once a grant lands in the contribution framework, the next question controls timing: is it conditional or unconditional?

An unconditional contribution is recognized as revenue the moment you receive the promise or the assets, at fair value. A $100,000 pledge with no strings beyond a general purpose hits the Statement of Activities when the pledge is made.

Conditional Contributions

A conditional contribution has two elements together: a barrier you must overcome, and either a right of return (the funder can demand money back) or a right of release (the funder walks away from its pledge if you fail).² Both elements. A barrier with no clawback mechanism is not a condition; it is an unconditional grant.

Typical barriers include matching requirements (you must raise $500,000 from other sources first), measurable performance targets (serve 1,000 unique clients), and milestone approvals (finish Phase I before Phase II releases). Until you substantially meet the barrier, any cash already received sits on the balance sheet as a refundable advance — a liability, not revenue.²

When you substantially overcome the barrier, the refundable advance reclassifies to contribution revenue in that period. “Substantially met” is a judgment call, and auditors will want documentation showing why you concluded it was cleared.

Federal grants almost always include a right of return for unspent funds or noncompliance, which makes them conditional in practice. Expect to run the barrier-clearing analysis on each federal award and recognize revenue as those barriers are met, not when the cash arrives.

Restrictions Are Not Conditions

This is where organizations most often go wrong. A restriction limits how or when you spend the money. It does not delay revenue recognition. A condition delays recognition entirely until the barrier is cleared. The bookkeeping consequences are completely different.

A restriction channels funds to a specific purpose (build a new wing) or a specific time period (use during fiscal year 2027). You recognize the revenue immediately, but you classify it as Net Assets With Donor Restrictions on the Statement of Financial Position.² The money is revenue from day one. You just track it separately.

When you spend the restricted funds for the specified purpose, or when the time period expires, you reclassify that amount from Net Assets With Donor Restrictions to Net Assets Without Donor Restrictions. This net asset release shows on the Statement of Activities in the period the restriction is satisfied. Receive a $500,000 grant restricted for construction, spend $200,000 on foundation work this year: $200,000 moves out of restricted net assets in this year’s financials.²

Practical test: if the funder can demand money back because you failed to do something, you likely have a condition. If the funder wants the money spent on a particular program but has no clawback right, you have a restriction. A grant can be both restricted and conditional; you apply the condition analysis first (for timing) and the restriction analysis second (for net asset classification once revenue is recognized).

Exchange Transactions Under ASC 606

When a grant qualifies as an exchange transaction, the grant agreement is your contract and the funding entity is your customer. Run the same five-step model that applies to ordinary commercial contracts.

Step 1 — Identify the contract. Confirm both parties have approved it, rights and payment terms are identifiable, the agreement has commercial substance, and collection is probable.

Step 2 — Identify performance obligations. Break the agreement into its distinct promises. A single grant might contain several: delivering a final research report, providing quarterly progress briefings, performing community outreach. Each distinct promise is a separate performance obligation.

Step 3 — Determine the transaction price. Generally the total grant amount, adjusted for variable consideration such as performance bonuses or clawback provisions.

Step 4 — Allocate the transaction price. Spread the total across each performance obligation based on relative standalone selling prices. If you would charge $80,000 for the report and $20,000 for the outreach if sold separately, you allocate 80 percent and 20 percent.

Step 5 — Recognize revenue upon satisfaction. Revenue is recognized when you transfer control of the promised good or service to the funder, either at a point in time or over time.

The point-in-time versus over-time distinction matters enormously for grants. Research grants requiring continuous effort, where the funder simultaneously receives the benefit of the work as it progresses, are typically recognized over time. You measure progress with an input method such as costs incurred relative to total expected costs, and recognize revenue proportionally.

A grant requiring delivery of a single final product — a prototype, a comprehensive dataset, a finished software tool — is usually satisfied at a point in time. Revenue stays on hold until delivery and funder acceptance. Any cash received in the meantime sits on the balance sheet as a contract liability (deferred revenue) that reduces as you satisfy obligations.

Government Grants to Businesses Under ASU 2025-10

For decades, US GAAP had no authoritative guidance on how business entities should account for government grants that fell outside ASC 606. A for-profit receiving a state economic development incentive or a federal clean energy subsidy pieced together an accounting policy by analogy, often borrowing from IAS 20 or general GAAP principles. That gap closed in December 2025 with ASU 2025-10, which establishes recognition, measurement, and presentation guidance for government grants received by business entities under Topic 832.¹

The standard defines government grants, sets recognition criteria, and requires specific disclosures covering the nature of the grant, the accounting policies applied, and significant terms and conditions including recapture provisions.³ Review the effective date and transition provisions carefully; early adoption may be permitted.

Grants Tied to Operating Expenses

When a government grant reimburses specific operating costs, recognize grant revenue in the same period you record the corresponding expense. A grant covering salaries for a workforce training program produces revenue as those payroll costs are incurred. Matching keeps the income statement reflecting the true net cost of the program instead of creating timing mismatches.

Grants Tied to Long-Lived Assets

If a grant funds a capital asset (equipment, a building, infrastructure), the entity may recognize grant revenue over the estimated useful life of that asset, often on a straight-line basis that mirrors depreciation. This matches the funding benefit with the periods the asset is consumed. Recognizing the full grant in the period received would overstate income in year one and understate it for the remaining useful life.

Compliance Requirements

Government grants routinely carry compliance requirements such as maintaining headcount, filing periodic reports, and adhering to prevailing wage rules. These generally function as ongoing obligations, not conditions that delay recognition. A genuine clawback provision triggered by noncompliance may create a contingent liability that requires disclosure or, in some cases, a reserve.

Nonprofits Receiving Government Grants

Nonprofits do not go straight to Topic 832. They apply the contribution-versus-exchange analysis first. Many government grants for social programs, public health, or community development fail the exchange test because the government receives no commensurate value; the benefit flows to the public.

Those grants land in the contribution framework under ASC 958. Evaluate whether the grant is conditional (barriers plus a clawback right) or unconditional (perhaps restricted, but with no right of return). Because federal grants almost always include a right of return for unspent funds or noncompliance, they typically end up conditional, and revenue recognition follows the barrier-clearing timeline above.

Contributed Services and In-Kind Gifts

Not all grant-related support arrives as cash. Organizations regularly receive donated professional services, volunteer labor, and tangible goods.

Under ASC 958, contributed services are recognized as revenue only if they meet one of two criteria: the services create or enhance a nonfinancial asset (a volunteer carpenter builds shelving for your facility), or the services require specialized skills, are provided by someone who has those skills, and would normally need to be purchased if not donated (a CPA donating audit preparation work, a licensed electrician donating wiring).² General volunteer time (stuffing envelopes, serving meals) does not meet these criteria and is not recognized as revenue, though organizations often disclose the nature and scope of volunteer activity in the footnotes.

In-kind gifts of tangible assets (equipment, supplies, real property) are recognized at fair value on the date received, following the same conditional-versus-unconditional analysis as cash contributions. A donor gives you lab equipment worth $50,000 with no conditions: record $50,000 in contribution revenue and a corresponding asset immediately.

Presentation and Disclosure

How grant revenue lands on the statements depends on entity type and the nature of the grant.

Income Statement and Statement of Activities

Nonprofits present contribution revenue on the Statement of Activities, classified as Net Assets Without Donor Restrictions or Net Assets With Donor Restrictions depending on whether time or purpose limitations exist.² Exchange-transaction revenue from grants typically appears as a separate line such as program service revenue, distinct from contributions.

For-profit entities present recognized grant revenue on the income statement. Under ASU 2025-10, entities must disclose the line items on the balance sheet and income statement affected by government grants and the amounts applicable to each line in the current period.¹

Balance Sheet Treatment

Grants received but not yet earned create liabilities. For exchange transactions, unearned funds are a contract liability (deferred revenue) representing your obligation to deliver future performance. For conditional contributions, cash received before the barrier is cleared is a refundable advance. Unconditional contributions subject only to restrictions sit in Net Assets With Donor Restrictions, showing the cumulative restricted balance not yet spent.

Footnote Disclosures

Footnotes need to give readers enough to assess the risks and future cash flows tied to grant funding. For contributions, disclose the aggregate amount of conditional promises not yet recognized as revenue; this signals potential future funding that is not yet on the books. For exchange transactions under ASC 606, disclose contract asset and contract liability balances, along with significant judgments made in applying the five-step model.

Business entities receiving government assistance must disclose the nature of grant transactions, the accounting policies applied, significant terms and conditions (including recapture provisions), and any legally prohibited disclosures that have been omitted along with a description of their general nature.³ A documented, consistently applied accounting policy for grant revenue is not optional. Auditors expect it, and inconsistent treatment across similar grants is one of the fastest paths to a restatement.

1
Financial Accounting Standards Board (FASB). FASB Issues New Standard to Add Guidance on Accounting for Government Grants by Businesses
2
Financial Accounting Standards Board (FASB). Accounting Standards Update 2018-08 – Clarifying the Scope and the Accounting Guidance for Contributions Received and Contributions Made
3
Financial Accounting Standards Board (FASB). Proposed Accounting Standards Update – Government Grants (Topic 832) – Accounting for Government Grants by Business Entities