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Contribution or Grant: Knowing the Difference

Thursday, February 6, 2014

In Depth Accounting Fund Management For Executive Directors For Nonprofit Accountants

Simply, a contribution is a gift of funds, typically with no stipulations (though more on that later), frequently given by individuals. A grant is funds awarded as part of an application process, usually given by a foundation that sets specific rules for allocating money. Of course, there’s more to it than first meets the eye--knowing the difference between contributions and grants can be difficult because they share many of the same characteristics.

In their accounting policy on the subject, The University of Notre Dame states that, “sponsoring entities, private foundations and/or donors may use the terms [grant and contribution] interchangeably in both conversation and in the donative instruments, contributing to the complexity.” However, while the terms may be used interchangeably, they probably shouldn’t be--the meanings differ greatly.

Defining grant vs. contribution

The University of Notre Dame states that a gift (also called a contribution) is a voluntary and irrevocable transfer of money, services or property from an external donor for either unrestricted or restricted use in promoting the University’s goals. No commitment of resources or services is required other than the stated donor restrictions.

Loyola University Chicago states that a grant (aka sponsored program funding, award) is the transfer of money or property from a sponsor to an institution that may require performance of specific duties such as research, budget reports, progress reports, and return of unused funds.

Despite the similarities between contributions and grants, they are completely different entities and cannot be used as if they are the same. Below are the characteristics of each to further aid you in differentiating them.

Contributions

Individuals and businesses usually make contributions, though they come in several types.

What are the types of contribution transfers?

Unconditional transfer of funds

  • This means that the donor is giving you funds that you may spend as you wish, and that they have no ability to rescind their gift.

Conditional transfers

  • These depend upon certain events happening or not happening in the future.
    • For example, the donor may state that they will donate $5,000 to your organization, but only after your Saturday program has served 100 children
  • A condition can also include time. For example, that same donor could state that the program be operational for six months before their funds be used

In either situation, your organization cannot claim rights to the funds or assets until the conditional event/time has occurred.

Understanding contribution classifications:

Contributions fall into one of three classifications:

  • Unrestricted assets: This is revenue that has no impositions from the donor.
  • Temporarily restricted assets: This revenue is restricted for one reason or another, on a short-term basis. Once the time or purpose attached to it is fulfilled, it is released.
  • Permanently restricted assets: This contribution is characterized by a restriction that can never be removed.

Grants

  • Government entities and foundations usually award grants.
  • They usually have a contract and budget set.
  • The frequency of grant reports can vary from monthly to quarterly to yearly; failure to report can cause your funding to stop.
  • Grantors may audit your organization, and can request a refund if the money is not fully spent.

What types of grants are there?

  • Pass-through and nondiscretionary assistance grants: This grant is received by a nonprofit and transferred to another entity, or spent on behalf of another entity.
  • Third-party reimbursements: Payment is made by a third party to a nonprofit for goods delivered or services rendered to the nonprofits beneficiaries.
  • Cost-reimbursement grants: This type of grant reimburses specified costs incurred by the nonprofit in the performance of a specific program activity.
  • Program support (operating) grants: These provide funding for the operation of an entire organization or one of its programs. Unless conditions are placed on the grant, it is recognized as revenue at the time it is awarded.
  • Challenge grants: A nonprofit is required to raise gifts from other contributors in order to receive the challenge grant proceeds. The grant is not reported as revenue until the target level is reached.
  • Unit of service performance grants: A specified amount is paid by the grantor according to a formula based on units of service provided by the nonprofit organization.
  • Clinical trial agreements: A grant provided to an institution to test a new drug, process or product.
  • Research grants: Virtually the same as clinical trial agreements, except funds are used to conduct research and development activities.

Need more clarity?

If you’re still having difficulty telling them apart, you can view a full guide on these differences from Clifton Gunderson LLP.

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