Nonprofit Accounting for Grants: Know the Basics

Many nonprofit organizations fund the vital role they play in society through public and private grants. In fact, a 2023 survey of 2,463 U.S. and Canadian nonprofits showed that of the 91% that applied for grants, 88% won at least one grant. However, most grant funding comes with specific requirements that create challenges for nonprofit accountants and managers. To meet these challenges, nonprofit grant accounting standards demand meticulous record-keeping that shows the incoming funds from each grant and how each grant’s funds are spent, all to ensure compliance with grant requirements and government regulations.

Effective grant accounting helps nonprofits make the most out of their funding, building trust with existing and prospective grantors, maximizing the impact of its mission and shaping its long-term success.

What Is a Grant?

A grant is money given by one organization or person to another organization or person that does not need to be repaid unless the grantee fails to meet any condition specified by the grantor. Even though the vast majority of grants go to nonprofit organizations, profit-making businesses can obtain grants, too. For example, a technology company may receive a grant meant to pay for a particular kind of research from a governmental defense agency. More typically, however, nonprofits receive grants from government agencies, foundations, corporations, philanthropic organizations or individuals whose goals align with the nonprofit’s mission. Grants help nonprofits move closer to their aspirations through investments in education, social progress, scientific advancements and other charitable causes.

Although grants don’t need to be repaid, there is a “price” to pay: They’re usually awarded only after an arduous application process that adds to an organization’s administrative and accounting burdens. In addition, grant funds, once awarded, usually come with conditions that restrict their use to support a specific project, program or initiative. Such conditions bring special reporting requirements, necessitating careful nonprofit-specific accounting processes. If a nonprofit fails to comply with these stipulations, it may need to repay the funds — and its nonprofit status could be put in jeopardy.

What Is Grant Accounting?

Grant accounting encompasses the financial management practices used by nonprofits to track, record and report on grant funds. Grant accounting involves budgeting, recognizing revenue, allocating expenses, monitoring compliance and preparing accurate financial reports. Because grants normally must be spent in specific ways, nonprofits managing incoming funds from multiple grants must account for each fund separately in order to show that the money is being spent according to the grantors’ requirements. Effective grant accounting and reporting can boost an organization’s trustworthiness, helping it to entice new and returning grantors. Furthermore, the historical information generated by good grant accounting can inform internal decision-makers in their planning for, and implementation of, future grants.

Key Takeaways

• Grants are essential funding sources for nonprofits, but they come with challenges, such as limitations on how the funds can be spent and added reporting and compliance requirements.
• Most grants come with conditions that involve properly documenting grantor requirements and tracking how and when they are met.
• Nonprofit accounting includes rules for tracking grants and related spending to assure that funds are going toward appropriate expenses in pursuit of a grant’s stated purpose.
• Depending on where in the world a nonprofit is based, different financial accounting and reporting standards may apply. It’s important for nonprofits to choose the most appropriate approaches for their organization and jurisdiction.

Nonprofit Accounting for Grants Explained

Grant accounting is essential to financial management for nonprofits that use grants to fund all or part of their operations. Nonprofits with detailed and organized financial records can more effectively convince potential funding sources that grant money will be put to good use furthering the mission — a crucial requirement for grants. Unlike direct fundraising to individuals, grant applications are more formal, complete with application paperwork and an approval process that can be complex and lengthy, especially for small or new nonprofits operating without a dedicated team of grant experts. During this application period, a nonprofit must make a compelling case to the grantor about why its organization would deliver results more effectively than other applicants could. Without evidence of good grant accounting practices, the grantor is unlikely to have much confidence that the nonprofit can deliver on its promises.

Additionally, grant accounting involves establishing and maintaining internal controls to catch and correct mistakes early, and to prevent and detect fraud or misuse of funds. This is achieved through accurately documenting expenses and conducting regular reconciliations to verify reports. Nonprofit grant accounting lays the foundation for transparency that supports open lines of communication with grantors, enabling regular updates on project progress, financial status and any challenges or deviations from the original plan. By adhering to grant accounting best practices, nonprofits can maintain strong relationships with grantors and increase their chances of future funding.

GAAP and IFRS Compliance and Reporting Requirements for Grants

When a nonprofit receives a grant, one of its responsibilities is to reflect the requirements of that grant and related expenses in financial reports that also comply with the accounting rules for the jurisdiction(s) in which it operates. A grant can stipulate requirements that range from how funds are to be used to specific types of reporting, including deadlines, frequency and format. Because these restrictions are highly variable — depending on the type of grant and the grantor’s expectations — nonprofits must assess a grant’s terms carefully and track their progress in accordance.

In addition, depending on where a nonprofit located, its financial reports may have to comply with one or both of the U.S. Generally Accepted Accounting Principles (GAAP), established by the U.S. Financial Accounting Standards Board (FASB), and/or the International Financial Reporting Standards (IFRS), set by the International Accounting Standards Board (IASB). IFRS is followed in 168 countries but not required in the U.S. Both standards provide grant accounting guidance for nonprofits that are similar in intent. For example, both use the “fund accounting” method, which first separates grants into restricted and unrestricted funds and then further segregates restricted grants into funds based on their restrictions. But GAAP and IFRS differ in the details based on the overarching differences between the two standards: IFRS is principles-based, which means it establishes a conceptual framework and focuses more on substance and intent than rule-following. GAAP, on the other hand, is a rules-based approach, providing more specific guidelines.

While the IASB and the FASB have been working together since 2002 to converge the two styles, many differences remain. For grant accounting, these differences include how revenue is recognized, how grants are classified and how financial statements are disclosed. For example, IAS 20 (the 2023 International Accounting Standard) only discusses rules for government grants; it does not issue guidance for private grants. But under GAAP regulations, both government and private grants have specific accounting rules. Therefore, it is important that grantees consult accounting professionals and check local accounting regulations, especially for businesses operating in multiple countries.

Here’s an overview of salient grant accounting guidelines from GAAP and IFRS.

GAAP:

• For conditional grants, revenue is recognized as the grant’s conditions are met over time. For unconditional grants, revenue is recognized immediately when the grant is committed.
• Grants may be treated as “exchange transactions” if something of roughly equal value is given to the grantor in return. For these, revenue is recognized when the good or service is provided.
• GAAP standards apply to both private and public grants.

IFRS:

• Like under GAAP rules, revenue is recognized as grant conditions are met. Unconditional grants —which recipients can use as they see fit — are not explicitly referenced, but revenue is generally recognized immediately since there are no conditions to prevent recognition.
• The IFRS includes different guidelines for asset-related grants, called the capital approach (discussed later in this article), which has no GAAP equivalent.
• Exchange transactions and contributions are not separate categories, as they are in GAAP.
• The IFRS specifies only government grants. It does not explicitly address private grants.

Three Types of Grants Under GAAP

Grants come in many shapes and sizes, so understanding the differences between grant types is vital to making sure that their terms are met. If a nonprofit misuses grant funds — even through honest error — major consequences could follow, including reputational harm and loss of tax-exempt status. It is illegal, for instance, for a nonprofit to pay the rent with money earmarked for research. Under GAAP, one important way grants are categorized is as unconditional, conditional and reimbursable.

1. Unconditional Grants

   Unconditional grants are those given without any specific criteria or conditions about how they can be spent. These grants are more flexible than conditional grants; they can be put toward general support, ongoing activities and operational costs. Revenue for unconditional grants is recognized as soon as the receiving organization has met any eligibility criteria and received an award letter. This often occurs before the cash is received, so nonprofit accountants may create a “grants receivable” account — similar to a for-profit company’s accounts receivable — to collect and manage incoming funds and ensure they are properly documented and applied to their corresponding program accounts.

2. Conditional Grants

   Conditional grants have specific requirements about how the funds must be spent. For example, a donor can give a conditional technology grant to a university that includes rules on how many computers must be bought and which departments can use them. Conditional grants commonly require regular reporting to show the grantor the status of the project it is supporting. If grant terms are not met, the nonprofit may have to return the funds to the grantor. Under GAAP, revenue from conditional grants is recognized as the terms of the grant are met, though that may vary depending on the grant’s specific terms or whether verification is required before funds are released. A variation of conditional grants is a “matching” grant, which requires a nonprofit to contribute a portion of the funds themselves through other fundraising means. For example, New York’s NYSTAR program offers matching grants to eligible higher education and not-for-profit research institutions with a 2:1 matching rule, meaning that for every $1 the institution receives from NYSTAR, it must receive at least $2 from other sources. Those “other sources,” of course, may have their own stipulations.

3. Reimbursable Grants

   Reimbursable grants are contributions for specific projects that are given after the project is completed or at milestones defined by the grant. Either way, it means the nonprofit must pay the costs up front. Under GAAP, revenue from reimbursable grants is recorded as the grant’s conditions are met, but expenses are recorded first, as they occur. A simple example would be a reimbursable grant for the construction of a new research center, requiring a nonprofit to first pay for the construction and record the expenses. Once the building is finished, the grant reimburses the nonprofit and revenue is recognized. In practice, however, such a grant would rarely be an all-or-nothing proposition; it would have interim payment milestones along the way, and revenue would be recognized at each milestone. Reimbursable grants typically require rigorous records and itemized expense reports to ensure proper payments.

Three Principles of Nonprofit Grant Accounting Under IFRS

Unlike GAAP, IFRS defines three primary principles of nonprofit grant accounting, called the capital approach, the deferred income approach and the income approach.

1. Capital Approach

   The capital approach is used for grants that specify purchases of long-term capital or fixed assets, such as equipment or real estate. Under this approach, grants are not directly recognized on the statement of activities (the nonprofit equivalent of an income statement) but, instead, decrease the initial cost of the asset on the statement of financial position (a nonprofit’s balance sheet). Essentially, the grant decreases the carrying value, or book value, of the related asset, which also reduces the depreciation expense.

2. Deferred Income Approach

   The deferred income approach also focuses on grants for capital assets. But under the deferred income approach, the grant is considered income that is earned over time as the asset is used (i.e., depreciated), rather than decreasing the grant from the carrying amount of an asset. The IAS 20 describes the differences between the two this way: “One method recognizes the grant as deferred income that is recognized in profit or loss on a systematic basis over the useful life of the asset. The other method deducts the grant in calculating the carrying amount of the asset.”

3. Income Approach

   The income approach is broader than grants for capital assets; it’s used for grants made to support specific program initiatives, general expenses or other relevant purposes, depending on the nature of the grant. The income approach recognizes revenue from grants over time, as related expenses occur. If the grantor has no specific criteria for the period over which a grant will be spent, income may be recognized when the funds are initially made available.

   Both the deferred income approach and income approach are similar to approaches specified by GAAP, but there is no GAAP equivalent to IFRS’s capital approach.

GAAP’s Exchange Transactions vs. Contributions

Under GAAP, some nonprofit grants may be classified as exchange transactions, meaning something of equal value is given in exchange for the grant. For example, a government research grant for new technology may come with the requirement that, once the research is completed, the government agency that provided the grant will own the rights to any results and all of the benefits that accompany it. For exchange transactions, revenue is normally recorded when the final good or service is provided. When an equal exchange isn’t expected, the grant is considered a contribution and will follow the accounting rules associated with the appropriate type of contribution — unconditional, conditional or reimbursable. GAAP rules put more emphasis on the differences between exchange transactions and contributions, while IFRS rules do not specify any differences between how they should be accounted for and follow the standard rules that accompany the conditions of the grant provided.

Nonprofit Grant Management Requirements

Managing grants can present challenges for nonprofit organizations, especially when they have multiple conditional grants funding different programs. The following requirements for good grant management can help nonprofits maintain meticulous records and reports that serve to demonstrate compliance with the grantors’ conditions, as well as governmental and accounting regulations.

• Segregate Grant Funds

  Conditional grant funds can be used only for specific purposes and programs and, therefore, must be segregated from other funding sources as they are received. For example, if a government agency gives a grant to a nonprofit medical company to research a new type of drug, those incoming funds must be kept separate to prevent the nonprofit from spending them on unrelated expenses, such as marketing or fundraising.

• Track Grant Expenditures

  When funds are spent, expenses must be properly tracked and documented. If, for example, the nonprofit medical company purchases lab equipment to support its research grant, that purchase should be documented so that the organization can later report that grant funds were spent on appropriate expenses. This demonstrates the direct impact of funds and shows grantors that their funds are being effectively spent. In addition to what the funds can be spent on, some grants, especially government grants, may also stipulate how funds may be spent. For example, when spending government grants, there may be a requirement that the project have a request for proposal (RFP) and go to the lowest bidder. Or it may prioritize a type of provider, such as women-owned businesses or union shops. These requirements and their implementation must also be well documented to show proof of compliance.

• Maintain Accurate Records

  Maintaining accurate records allows nonprofits to budget for future grants and create detailed and effective grant applications and forecasts. Additionally, organized and accessible records increase transparency for grantors and regulatory bodies and support compliant reporting. If the nonprofit is audited, either for internal analysis or for an external party, accurate records can help make the process as quick and painless as possible.

• Prepare Financial Reports

  Financial reports provide a comprehensive snapshot of a business’s health over a specific time, and nonprofits are no exception. Unlike for-profit financial statements, nonprofit statements don’t typically show high cash reserves or net income because contributors don’t want to see their donations sitting in a bank account — they want to see effective spending and maximized impact. Important financial statements for nonprofits include the statement of financial position (analogous to a for-profit balance sheet), the statement of activities (income statement), statement of cash flows and a statement of functional expenses. In the medical nonprofit example, a statement of cash flow would show incoming and outgoing funds similar to a for-profit’s cash flow statement; expenses would be segmented by program on the statement of functional expenses, so that grantors can quickly see how effectively the organization is spending their money.

• Comply With Grantor Reporting Requirements

  Grantors may set their own requirements on financial reporting, such as format, frequency and the specific information included. By complying with these requirements, nonprofits can help assuage any grantor worries that funds are being misused. This also gives nonprofits the ability to quickly identify any unforeseen complications and make adjustments throughout the life of the grant and the program(s) it funds. This helps build the nonprofit’s reputation, as it can show an ability to go above standard requirements to satisfy a grantor’s needs. The medical nonprofit may need to report interim research results to the grantor to show any progress or setbacks throughout the project, rather than reporting it all at the end, when it may be too late for course corrections.

• Comply With Government Regulations

  If a nonprofit is unable to comply with government regulations, it risks losing its nonprofit status and the special tax privileges that accompany it, including income tax exemptions. It’s important to check local rules and regulations before establishing internal standards for reporting, record-keeping, labor practices and other operational activities. Government regulations are customarily designed to establish transparency and accountability, especially when public funds from government grants are involved. Some nonprofits hold themselves to higher standards than government regulations to help establish higher credibility and gain an advantage when competing for grants.

• Monitor Subrecipients

  Just as for-profit businesses use subcontractors, nonprofits may need to delegate some processes or responsibilities to subrecipients. In doing so, they must take steps to properly oversee and manage those external organizations. Similar to how grantors can set requirements on grantees, nonprofits can set their own reporting requirements to ensure that their subrecipients are following the grant’s guidelines, complying with all rules and regulations, and effectively delivering results. Effective and regular monitoring helps mitigate the risks of fund misuse and fraud, letting nonprofits uphold high standards for responsible management, even when outsourcing grant activities. Considering the medical nonprofit again, some of its research tasks may need to be performed by external labs with specialized equipment. The company must take steps to certify that those labs maintain the high standards expected by the grantor.

• Maintain Internal Controls

  Internal controls help nonprofits prevent and detect fraud and safeguard the integrity of funds. Many nonprofits strive to maintain checks and balances by implementing segregation-of-duty policies that prevent a single person from having sole authority over any funds. That way no one is above oversight or accountability. In practice, however, this is often a significant challenge, especially for small nonprofits with small staffs and limited expertise to effectively segregate duties. Beyond detecting fraud, internal controls can also help catch errors and irregularities before the problems compound and become major headaches. If multiple people oversee ordering lab equipment for the medical nonprofit, for example, no one person will have the ability to misuse funds or mistakenly buy equipment outside of the grant’s scope.

• Maintain Compliance Records

  Nonprofits may need to show proof of their compliance with grant requirements and accounting standards long after the grant’s funds have come and gone. Robust compliance records play an essential role in audits and other evaluations, and help organizations maintain their nonprofit status year after year. Compliance records do more than just focus on the past: They can help nonprofits grow by establishing a pattern of reliability to future grantors or remind past grantors of successes when it’s time to apply for future opportunities. After its research is completed and the results published, the medical company can take records of the successful outcomes to future grantors — both new and repeating — to increase the likelihood of winning other grants.

Best Accounting Methods for Grants

In general, nonprofit accounting follows many of the same basic accounting rules as other types of accounting. However, nonprofits have additional layers of requirements that for-profit accountants typically do not have to worry about, especially for grants. They must often combine several of the following accounting methods to meet their goals and overcome their challenges.

• Fund Accounting

  Fund accounting refers to a specialized set of nonprofit-specific accounting principles used to separate and track spending for funds assigned to different programs. First, fund accounting segments restricted and unrestricted funds, then further breaks down restricted funds in separate accounts according to their restrictions. The result is that nonprofits commonly have many funds, each with a separate set of accounts. For example, grants that go toward scholarships must be kept in their own fund to prevent the money from being accidentally spent elsewhere, such as for rent, which would violate grant conditions. This also applies to other aspects of nonprofit revenue streams, as non-grant contributions are also often restricted to specific purposes. In addition to revenue, these separate funds also help nonprofit accountants track program-specific budgets, liabilities, assets, equity, unrealized gains and other relevant financial measures.

• Accrual Accounting

  The accrual accounting method is required for GAAP compliance and is commonly followed by both nonprofit and for-profit companies. Under the accrual method, revenue and expenses are recognized when they are earned and incurred, respectively —not when cash is received or spent. This helps nonprofits track their financial activities and overall financial strength based on actual business transactions, regardless of how quickly cash is exchanged, which may come long after a grant application is approved. The other main accounting method, the cash method, recognizes revenue and expenses only when cash changes hands. The accrual method is the standard for public and nonprofit companies, but it becomes increasingly complex as businesses grow. As a result, many nonprofit and for-profit companies use accounting software specialized to their needs to manage their books and give grantors the transparency they want to feel confident that their money is being used effectively to further the nonprofit’s mission.

• Activity-Based Accounting

  Activity-based accounting groups financial information for specific activities together, regardless of whether they are part of the same program or fund. For example, consider a university that has a grant-funded tutoring center. Activity-based accounting would group all the expenses of running that center — tutor salaries, facility expenses and utilities, etc. — under the “tutoring” activity. Other activities may include career counseling and after-school programs, which would be tracked as separate activities. Activity-based accounting can help nonprofits compare costs that are involved in multiple programs and give accountants insights into some costs that may not fit into specific programs, such as administrative or fundraising expenses.

• Program-Based Budgeting

  Program-based budgeting organizes finances by program, painting a granular and detailed financial picture. This transparent budgeting method can facilitate better decision-making, resource allocation and accountability for specific programs, giving grantors more detailed information on where their money will go and the impact it can have. Program-based budgeting allows nonprofits to track their progress more accurately toward goals and course-correct when programs experience setbacks or hit unexpected roadblocks.

• Grant-Specific Accounting

  Rather than tracking specific programs that grants go toward, grant-specific accounting treats every grant as an individual fund and tracks the revenue, expenses and requirements associated with it. This helps nonprofits ensure that every grant complies with its requirements and allows accountants to create an organized report for every grant. A grant-specific approach can present challenges as nonprofits grow, as more grants mean more accounting effort when using this method. Some nonprofits may use grant-specific accounting for complex grants with many requirements, while more general grants may go into a program-specific or general fund. For example, an educational institution may rely on several grants to fund a scholarship program and may keep a fund for multiple scholarship grants. But if the institution receives a grant that’s targeted for a specific type of student, say a nursing student with a specific GPA threshold, it may use the grant-specific method for that grant.

Benefits of Accounting for Grants

Maintaining accurate accounting records is a must to ensure that grants are being properly utilized. But there is more to effective grant accounting than just tracking and spending funds. Many nonprofits go above and beyond minimum accounting requirements to maximize benefits and create a healthier organization that can continue to deliver on its mission for the long term.

• Improved Financial Management

  When nonprofits keep more detailed and accurate accounting records, it gives managers at all levels better access to up-to-date financial information to improve decision-making. This not only enhances how grant revenue and corresponding expenses are tracked, but it can also improve how finances are managed throughout the organization. For example, say a nonprofit specializes in building houses in areas affected by natural disasters. With effective grant accounting, the nonprofit can have an accurate view of the aspects of the operation that are fully funded by grants, such as raw materials and tools, and what may need additional funding, like labor. With up-to-date financial records, the nonprofit can create and manage more accurate budgets and fundraising initiatives to make sure every aspect of the mission is supported, whether through grants or other donations.

• Transparency and Accountability

  Grant accounting provides detailed records of a grant’s incoming and outgoing cash flow, giving stakeholders and grantors the transparency they need to see that their funds are being properly used. With itemized expenses and financial reports, grant accounting helps managers see exactly how much of the grant’s revenue is left and provides visibility into where their money was spent and why. If the funding runs out before the planned goals are reached, detailed accounting can show exactly where budgets and forecasts fell short, which will help inform the path forward. Additionally, if any funds are left over, detailed records can help grantors and nonprofits collaborate on where those funds can do the most good.

• Compliance With Regulations

  Grants present challenges for nonprofit accounting due to their stringent reporting guidelines, restricted fund usage and specific filing deadlines. Nonprofits must adhere to these regulations, which include regular reporting to the grantor and annual tax filings, each with its own requirements. If a nonprofit fails to comply, it may pay penalties and/or lose the trust and credibility needed to continually win grant applications over competitors. Good grant accounting practices produce the financial data needed for financial reports that are fully compliant with all relevant accounting standards.

• Enhanced Grant Application Process

  Nonprofits with robust grant accounting practices can use their records to streamline and improve future grant application processes. Prior budgets, timelines and expense reports can inform detailed and realistic plans for potential grants and show potential grantors how committed the nonprofit is to delivering on its promises. Additionally, extensive records on past grant applications can help streamline the application process by giving relevant staff effective strategies to quickly find and submit everything the grantor requires, reducing the likelihood of missing deadlines, forgetting necessary information or missing out on a grant due to a clerical error. Robust grant accounting records can also give insights into which grants best align with the mission and inform future decisions on which grants to apply for.

• Reduced Risk of Fraud and Misuse

  Comprehensive grant accounting practices can flag any misused or fraudulent fund uses before they become repeating or systemic problems. Once the parties are identified, detailed record-keeping can help ensure the responsible parties are held accountable and that any vulnerabilities are remediated. This is also useful in catching accounting mistakes early, increasing the likelihood that the issue can be fixed before it has major implications on the funding of a project. For example, if an education nonprofit manager incorrectly assigns grant money for school supplies that should have gone toward a scholarship, early identification can help fix the mistake by notifying the manager to return the items and reallocate the funds before it’s too late.

• Better Decision-Making

  Effective accounting lets nonprofits do more accurate analysis on key measures, such as return on investment (ROI), budget accuracy and cost forecasts. This can inform future program budgets and help decision-makers set realistic goals. Once these goals are set, analysts can assess the financial feasibility of new initiatives and what kind of funding — grant or otherwise — will be needed to reach those goals. Robust financial data can also help a nonprofit decide which programs are successfully furthering its mission and which should be reworked or retired, increasing the long-term success of the nonprofit.

• Increased Credibility:

  Nonprofits can use the transparency that comes with effective grant accounting to build their credibility and increase their funding sources through earning trust from new grantors and other contributors. For example, a successful implementation of a high-profile government grant can raise the awareness of a nonprofit’s mission and lead to an increase in individual contributions from donors who believe in the cause and want to contribute to future successes.

Drawbacks of Grants Addressed by Grant Accounting

Grants present various challenges for nonprofits, especially smaller organizations just starting out. As nonprofits grow, and the number of grants they rely on grows with them, they must be flexible and use good grant accounting practices to avoid common drawbacks.

• Increased Administrative Burden

  Every grant comes with unique requirements — they can’t be molded into a one-size-fits-all workflow — making grants a difficult revenue source to scale as nonprofits grow. Nonprofits often must expand their staff, increasing their overhead. Unfortunately, higher overhead costs have the potential to make nonprofits look less efficient and give donors pause before contributing. This creates the catch 22 of nonprofit growth — donors want to see nonprofits grow and expand their mission without increasing overhead costs. To address this increased administrative burden, nonprofits often deploy specialized accounting software that can automate many grant-specific accounting processes.

• Compliance and Reporting Requirements

  Grants come with an enormous compliance and reporting burden, required by grantors, governments and accounting standards. Grant accounting helps nonprofits navigate the complexities of producing compliant reports. Nonprofits that don’t have the resources to hire a team of dedicated experts customarily rely on accounting software to enforce compliance with relevant regulations, reducing the burden on staff.

• Consequences of Noncompliance

  Noncompliance with grant requirements can have severe consequences for nonprofits. It can lead to the grantor cutting off funds, imposing fines and other financial penalties, legal actions and barring the nonprofit from future grant opportunities. It can also cause reputational harm, reducing the likelihood of other funding opportunities, such as grants from other sources. Additionally, failure to comply with nonprofit regulations around grants and other business practices can threaten an organization’s nonprofit status, which can cause its special tax privileges to be revoked. Nonprofits should prioritize compliance and implement detailed grant accounting and reporting practices, often assisted by external experts or nonprofit-specific accounting software.

• Difficulty in Tracking and Reporting Expenditures

  Nonprofits must maintain rigorous internal controls to ensure that appropriate expenses are linked to their respective grants and that funds are never misused for expenses outside a grant’s scope. When managing multiple grants simultaneously, it can be difficult to effectively compartmentalize accounts and maintain separate funding sources, especially when programs overlap. It can also be difficult to separate which operational costs fall under a grant’s purview and which must be covered by other funding sources. Comprehensive grant accounting is necessary to maintain accurate expense records and prove compliance with grantor requirements.

• Limited Flexibility in Grant Funding

  Due to the stringent requirements on many grants’ funds, nonprofits have limited flexibility on how and where funds can be spent. If any unexpected expenses occur during the fulfillment of a grant — say, a natural disaster that forces a change in location — those costs might not be applicable to the original grant. Additional funds from other donations or funding sources may be needed. For many grants, the original proposed budget was part of the application process and must be followed to maintain the grant’s funding. Nonprofits must regularly monitor expenses and cash flow to ensure that any complications are caught early and addressed before they threaten to divert funds or interrupt the project. Grant accounting helps with all of this.

• Dependence on Grant Funding

  Overreliance on grants can lead to many challenges for nonprofits, from the threat of financial instability when a grant ends to “mission drift” — when a nonprofit begins to subtly realign its focus to be more in sync with grantors, rather than staying focused on its original core mission. This can lead to financial challenges when budgeting, such as funding gaps and uncertainty about future revenue flow. An overreliance on grants can prevent nonprofits from investing money in growth or other areas not allowed under the requirements of a specific grant. Diversifying funding sources and implementing strong financial strategies can help nonprofits mitigate the challenges associated with an overdependence on grant funding.

• Increased Risk of Audits

  Many corporate and governmental agency grantors require audits before they provide significant funding. If a nonprofit is unable to provide independent audits of its financial reports, or an audit finds material omissions or mistakes in its financial statements, trust and credibility are called into question. While audits can be time-consuming and costly — and divert resources away from the core mission —nonprofits can mitigate the risks and potential disruption of audits by keeping detailed and robust accounting records for all of their finances, not only grants.

Keep Up With Nonprofit Accounting Requirements With NetSuite

Nonprofits of any size often struggle with balancing the complexities of accounting with their desire to grow and have a larger impact on their mission, especially nonprofits that rely on conditional grants with unique rules. NetSuite’s nonprofit accounting software can help ease the burden of nonprofit accounting and compliance monitoring with real-time expense and revenue updates and enhanced visibility to give decision-makers detailed insights into program progress and overall business strength.

With NetSuite’s Cloud Accounting system, nonprofits can manage separate projects, funds and activities and create customizable reports to give grantors access to exactly what they need and none of what they don’t. NetSuite’s cloud-based system can set automated reminders to help nonprofits meet every required deadline — from both grantors and regulatory agencies — and help ensure every step of the grant process is smooth and effective. NetSuite helps nonprofits focus less on running the books and more on maximizing their social impact and furthering their cause.

Grants are a vital part of nonprofit funding because, unlike loans, they don’t need to be repaid. But more often than with other types of contributions, grants come with strict rules stipulating how and when the funds can be spent. When coupled with the accounting guidelines nonprofits must follow to maintain their special tax privileges, grants can add a level of complexity that might overwhelm many nonprofits as they grow. Many nonprofits use accounting software to automate the ins and outs of grant accounting without skyrocketing overhead costs. This way, nonprofit leaders can focus on furthering their causes, rather than worrying about complying with every rule and regulation necessary to run a grant-funded mission.

Nonprofit Grant Accounting FAQs

How do you account for grant income for nonprofits?

For unconditional grants, income is typically recognized when the grant is awarded. For conditional grants, income is usually recognized as the conditions are met. For reimbursable grants, revenue is recognized as the grant is received, but expenses are incurred first. For grants that go toward assets, income may be recognized in different ways, depending on the accounting method used.

How do you account for grants in accounting?

Grant accounting requires separating grants into funds for specific programs or purposes. Effective financial management is needed to ensure that funds are spent appropriately and that the grantor’s conditions — as well as any government regulations — are met. Failure to properly account for grants can lead to reputational damage, refunding of the grant and a loss of an organization’s nonprofit status.

What is the difference between a grant and a loan?

Grants typically do not need to be repaid, while loans do, with the latter typically accumulating interest. Loans give a nonprofit more flexibility about how and when the funds can be spent, while grants are often used for specific purposes and come with conditions.

What are the common mistakes nonprofits make when accounting for grants?

Some common mistakes when accounting for grants include the inadequate tracking of funds and expenses, failure to properly record revenue and mixing grant funds with unconditional revenue sources. Many nonprofits also struggle to comply with grantor or government requirements due to a lack of internal controls. These mistakes can lead to reputational damage, difficulty when applying for future grants and potential legal risks.

How can nonprofits ensure they comply with grantor reporting requirements?

Nonprofits can ensure compliance with grantor reporting requirements by establishing clear processes and timelines for reporting and closely reviewing and understanding the rules of the grant agreement. During the execution of the grant, nonprofits must maintain accurate and detailed records of grant-related activities and expenses, set internal controls to track and monitor grant funds, and conduct regular reconciliations between financial records and grant reports. These records can be useful when communicating with the grantor throughout the reporting period and updating them on progress and any setbacks. Ensuring compliance requires effectively allocating resources, including staff and technology, to fulfill reporting obligations promptly and accurately.

What is the Uniform Guidance, and how does it apply to nonprofit grant accounting?

The U.S. Office of Management and Budget (OMB) issues guidelines for governments on hiring nonprofits. These rules are often called Uniform Guidance, and they outline the responsibilities of organizations that receive grants, including nonprofits. These rules also include guidance for managing and auditing grants to ensure transparency and compliance with regulations. Nonprofits should regularly view any updates to the Uniform Guidance to ensure they are following the latest rules.

How can nonprofits improve their grant accounting practices?

Perhaps the most important practice a nonprofit can implement to limit the likelihood of errors, fraud or misuse of funds is segregation of duties. Many nonprofits also rely on accounting software to help manage the complexities that often accompany grant accounting, such as managing multiple funds and the grant application and approval process.

Are grants considered revenue for a nonprofit?

Yes, grants are customarily considered revenue for nonprofits. But how and when grant revenue is recognized depends on the type of grant and any conditions attached to it. It also depends on the accounting standards that the nonprofit is using, such as GAAP or IFRS.

How do nonprofits account for pass-through grants?

For grant funds that “pass through” a nonprofit, how much of the grant is recognized as revenue by the nonprofit depends on many factors. For example, in the case of government funds granted to a nonprofit and intended to be paid out to individuals as vouchers or cash assistance, only the portion allocated for administrative expenses can be recognized. Not all pass-through grants will include additional revenue, so it is important for nonprofits to properly document and track all incoming and outgoing funds. In some cases in which the nonprofit is not the primary beneficiary of a grant, the funds might be recognized as a liability (because the nonprofit has an obligation to pass the funds on to another entity) until they are distributed to the ultimate recipients. This is a form of agency fund accounting.