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

Accounting for grants under US GAAP starts with one classification question that determines everything else: is the grant a contribution governed by ASC Topic 958, or an exchange transaction governed by ASC Topic 606? Contributions are one-way transfers given to support your mission. Exchange transactions are two-way deals in which the funder receives something of roughly equal value back. Business entities receiving government grants now have a third framework to consider: ASU 2025-10, issued by the FASB in December 2025, which added authoritative recognition and measurement guidance under Topic 832 where none previously existed.¹

Get the classification wrong and every downstream decision — when to book revenue, where to present it, what to disclose — comes out wrong with it. So start there, grant by grant.

Contribution or Exchange Transaction

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

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 specific deliverables.

ASU 2018-08 directs entities making this call 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 question is whether the funder is getting something back that it could sell, use, or consume. Public benefit flowing to the general population does not count as commensurate value to the funder.

This analysis happens one grant at a time. A single organization can hold contributions from one funder and exchange-transaction awards from another simultaneously, each following different recognition rules.

Contributions Under ASC 958

Once you classify a grant as a contribution, 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. If a donor pledges $100,000 with no strings beyond a general purpose limitation, that full amount hits your Statement of Activities when the pledge is made, at fair value.

Conditional Contributions

A conditional contribution has two elements: a barrier you must overcome, and either a right of return (the funder can demand the money back) or a right of release (the funder is freed from its pledge if you fail).² Both have to be present. If the agreement has a barrier but no clawback mechanism, the grant is unconditional.

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

Once 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 the barrier was cleared.

Restrictions Are Not Conditions

This is where organizations most often get tangled. A donor-imposed restriction limits how or when you spend the money, but it does not delay revenue recognition. A condition delays recognition entirely until the barrier is overcome. The accounting consequences differ completely.

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, the amount reclassifies from Net Assets With Donor Restrictions to Net Assets Without Donor Restrictions. That net asset release appears on the Statement of Activities in the period the restriction is satisfied. If you receive a $500,000 grant restricted for building construction and spend $200,000 on foundation work this year, $200,000 moves out of restricted net assets in this year’s financials.²

A practical test: if the funder can demand money back because you failed to do something, you likely have a condition. If the funder simply wants you to spend the money on a particular program but has no clawback right, you have a restriction.

Exchange Transactions Under ASC 606

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

Step 1 — Identify the contract. Confirm the grant agreement meets the basic contract criteria: 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, and performing community outreach. Each distinct promise is a separate performance obligation.
Step 3 — Determine the transaction price. Generally the total grant amount, adjusted for any 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 work if sold separately, you allocate 80 percent and 20 percent.
Step 5 — Recognize revenue upon satisfaction. Recognize revenue when you transfer control of the promised good or service to the funder, either at a point in time or over time.

Point in Time or Over Time

Research grants requiring continuous effort, where the funder simultaneously receives the benefit of your work as it progresses, are typically recognized over time. You measure progress using 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 you deliver and the funder accepts the final output. Any cash received before that point sits on the balance sheet as a contract liability (deferred revenue), which reduces as you satisfy obligations.

Government Grants to Business Entities Under ASU 2025-10

For decades, US GAAP had no authoritative guidance on how business entities should account for government grants falling outside ASC 606. A for-profit company receiving a state economic development incentive or a federal clean energy subsidy had to piece together an accounting policy by analogy, often borrowing from international standards (IAS 20).

In December 2025, the FASB closed that gap 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, establishes recognition criteria, and requires specific disclosures about 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, since early adoption may be permitted.

Grants Tied to Operating Expenses

When a government grant reimburses specific operating costs, the typical approach is to recognize grant revenue in the same period you record the corresponding expense. A grant covering salaries for a workforce training program generates revenue as those payroll costs are incurred. The matching keeps your income statement reflecting the true net cost of the program rather than creating artificial timing mismatches.

Grants Tied to Long-Lived Assets

If the 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 mirroring depreciation. This matches the funding benefit with the periods in which 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, or adhering to prevailing wage rules. These function as ongoing obligations rather than conditions that delay recognition. A genuine clawback provision triggered by noncompliance, however, may create a contingent liability that requires disclosure or, in some cases, a reserve.

Government Grants to Nonprofits

Nonprofits receiving government grants apply the same contribution-versus-exchange analysis first. Many government grants for social programs, public health, or community development fail the exchange-transaction test because the government receives no commensurate value. The benefit flows to the public, not to the agency writing the check.

These grants typically land in the contribution framework under ASC 958. The organization then evaluates whether the grant is conditional (barriers plus a clawback right) or unconditional (perhaps restricted, but with no right of return). Federal grants almost always include a right of return for unspent funds or noncompliance, which makes them conditional. Revenue recognition follows the barrier-clearing timeline described above: cash sits as a refundable advance until the barrier is substantially met, then reclassifies to contribution revenue.

Contributed Services and In-Kind Gifts

Not every form of grant-related support arrives as cash. Donated professional services, volunteer labor, and tangible goods all have recognition rules of their own.

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. If a donor gives you lab equipment worth $50,000 with no conditions, you record $50,000 in contribution revenue and a corresponding asset immediately.

Presentation and Disclosure

Where grant revenue appears on the financial statements depends on your entity type and the nature of the grant.

Statement of Activities and Income Statement

Nonprofits present contribution revenue on the Statement of Activities, classified as either Net Assets Without Donor Restrictions or Net Assets With Donor Restrictions based 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 appear in Net Assets With Donor Restrictions, reflecting the cumulative restricted balance not yet expended.

Footnote Disclosures

Financial statement footnotes have to give readers enough information to assess the risks and future cash flows associated with 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 any significant judgments made in applying the five-step model.

Business entities receiving government assistance must disclose the nature of grant transactions, 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 Developing 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