The award letter says you got the grant. Your financials may tell a different story — at least for now.
The award letter arrives. The board is excited. The ED announces the grant at the next all-staff meeting. Someone updates the budget.
And then the finance team has a quiet conversation about when, exactly, this can be recognized as revenue.
For many nonprofit leaders, this is the first time they learn that receiving a grant and recognizing it as revenue are two different things. The gap between those two events — and what determines when recognition happens — is one of the more consequential things to understand about nonprofit finance.
Conditions vs. restrictions
Nonprofit accounting distinguishes between two types of donor-imposed requirements: conditions and restrictions. They sound similar. They are not.
A restriction limits how the funds can be used — a grant restricted to a specific program, for example. A restriction doesn't delay revenue recognition; it governs how the money can be spent once it's recognized.
A condition is a barrier that must be overcome before the organization has earned the revenue at all. Until the condition is met, the grant isn't income, regardless of whether the cash has arrived.
The two aren't mutually exclusive. A grant can carry both — a condition that determines when revenue is recognized and a restriction that governs how it can be spent once it is. Meeting the condition doesn't lift the restriction.
What counts as a condition
This is where it gets specific and where the accounting rules matter.
Under ASC 958, a contribution is conditional if it includes a barrier to entitlement and a right of return. A barrier is something the organization must do or achieve — not just report on, but actually accomplish — before the funder is obligated to pay. A right of return means the funder can get their money back if the condition isn't met.
Common examples: a matching grant that requires the organization to raise a certain amount from other sources before the grant is earned. A government grant that reimburses actual expenditures — the organization has to spend the money first. A grant contingent on the organization maintaining a specific program or staffing level.
What doesn't count as a condition: reporting requirements, compliance certifications, and restrictions on use. These shape how the organization manages and spends the grant. They don't determine whether the organization has earned it.
Why this matters for planning
Getting the classification right matters in both directions. Recognizing a conditional grant too early overstates revenue — if the condition isn't met, the money goes back, and in the meantime, decisions get made on income the organization hasn't actually earned. Deferring an unconditional grant unnecessarily understates it. Either way, the result is timing mismatches that are hard to explain to board members and financial statements that don't accurately reflect the organization’s financial reality.
A grant awarded and a grant earned are not the same thing. The distance between them depends on what the funder requires you to do first.
What your finance team should be doing
Every new grant should be reviewed at the time of award to determine whether it carries conditions. That review requires reading the grant agreement carefully — not just the award letter — and applying the accounting criteria, not intuition.
This is one of the places where GAAP accounting for nonprofits diverges most sharply from how most people naturally think about money. The cash may arrive before the revenue is recognized. Revenue may be recognized before cash arrives. Neither is wrong — both require the finance function to track them accurately and explain the difference to leadership when the numbers don't match expectations.
Getting this right isn't a technical nicety. It's the foundation of financial statements that actually tell the truth about where the organization stands.