Conditional vs unconditional grants: accounting under ASU 2018-08
Under ASU 2018-08, a grant is conditional only when the agreement contains both a barrier the recipient must overcome and a right of return (for the funder) or release (from the funder’s obligation). If either is missing, the grant is unconditional, and then you ask a separate question: is it restricted? This post works through one three-year grant on both sides of the books. It’s a companion to our grant-to-accounting integration field guide, which covers how systems should carry these decisions.
What ASU 2018-08 changed
FASB issued ASU 2018-08 in June 2018 to clarify two things in ASC 958-605. First, whether a transfer is a contribution or an exchange. Second, whether a contribution is conditional. The test for conditional is two-part. There must be “a barrier that must be overcome” and “a right of return of assets transferred or a right of release”, as BDO’s summary puts it. Indicators of a barrier include a measurable performance-related outcome, limits on the recipient’s discretion over how it conducts an activity, and a stipulation tied to the purpose of the agreement.
Two points people miss:
- It applies to both sides. The guidance covers contributions “received and made”, so a foundation uses the same test to decide when to book a grant expense.
- Restricted isn’t conditional. A grant “for the literacy programme in 2027” is restricted by purpose and time but can still be unconditional. Restriction affects net asset class. Condition affects whether anything is recognised at all.
| Conditional | Unconditional, restricted | Unconditional, unrestricted | |
|---|---|---|---|
| Test | Barrier + right of return/release | No barrier, but purpose or time limit | No barrier, no limit |
| Funder | Disclose; expense when condition met | Expense when approved and communicated | Expense when approved and communicated |
| Grantee | No revenue; cash received is a refundable advance | Revenue, with donor restrictions | Revenue, without donor restrictions |
| System field | tranche_type = conditional, condition_text, condition_met_date | restriction = purpose/time, release_date | restriction = none |
Worked example: one grant, two sets of books
A foundation awards a youth employment nonprofit $450,000 over three years for a training programme.
- Year 1: $150,000, paid on signing. No barrier.
- Year 2: $150,000, released only if at least 200 trainees complete the course in year 1, verified by the foundation. If not, the foundation is released from paying.
- Year 3: $150,000, same structure, 250 completions in year 2.
Years 2 and 3 have a measurable barrier and a right of release. They’re conditional. Year 1 is unconditional and restricted to the programme.
Funder’s books
| When | Entry | Amount |
|---|---|---|
| Board approves, letter sent | Dr Grant expense / Cr Grants payable | 150,000 |
| Year 1 paid | Dr Grants payable / Cr Cash | 150,000 |
| Years 2–3 at approval | No entry. Disclose $300,000 conditional commitments | — |
| Year 1 milestone verified | Dr Grant expense / Cr Grants payable | 150,000 |
Grantee’s books
| When | Entry | Amount |
|---|---|---|
| Letter received | Dr Grant receivable / Cr Grant revenue, with donor restrictions | 150,000 |
| Cash arrives | Dr Cash / Cr Grant receivable | 150,000 |
| Programme spend during year 1 | Reclassify: net assets with donor restrictions → without donor restrictions (release) | as spent |
| Milestone met, year 2 confirmed | Dr Grant receivable / Cr Grant revenue, with donor restrictions | 150,000 |
If the foundation advanced year 2 cash before the milestone was verified, the grantee would book Dr Cash / Cr Refundable advance, and move it to revenue only when the condition is met.
Some organisations elect a simultaneous release policy, so a restricted grant whose restriction is met in the same period can be shown as unrestricted. That’s a policy choice. Write it down and configure it once.
What this means for your systems
The accounting is the easy part. The failure is usually upstream: the condition sits in a PDF, and someone in finance has to remember to book the tranche when a programme officer emails “they hit the target”.
Make the grants system carry it:
- A tranche record per payment, not one amount per grant.
- A structured condition: type (barrier), metric, threshold, verifier, and whether a right of return or release exists.
- A “condition met” event with the user, date and evidence attached, which your connector turns into the funder’s or grantee’s entry.
- A disclosure report listing open conditional commitments by year, for the notes to the financial statements.
Where does the metric come from? Usually your programme data. “200 completions” only works as a barrier if the system that counts completions is trusted. If you’re still defining what you measure, our Theory of Change to data model guide shows how to turn milestones into fields.
The ledger then needs somewhere to put these entries without a new account per grant. That’s the subject of the sibling post, chart of accounts mapping for grant integrations.
Outside the US
- Canada: ASNPO Section 4410 uses the deferral or restricted fund method, so a restricted year 1 grant may sit as deferred contributions rather than restricted net assets.
- UK: The Charities SORP has its own income recognition criteria, including entitlement and performance conditions. SORP 2026 applies to periods beginning on or after 1 January 2026.
- India: Tranche-linked grants are common in CSR, with a utilisation certificate gating the next release. The same tranche-and-condition design works.
FAQ
Is a restricted grant the same as a conditional grant?
No. A restriction limits how or when money is used. A condition decides whether the recipient is entitled to it at all. A grant can be restricted and unconditional.
Does a reporting requirement make a grant conditional?
Not on its own. Routine reporting is usually administrative. It becomes a barrier when payment depends on a measurable outcome and the funder keeps a right of release. Ask your auditor about specific wording.
Does ASU 2018-08 apply to foundations making grants?
Yes. It covers contributions made as well as received, so funders use the same test to decide when to record grant expense.
Map one grant, end to end
Bring one grant agreement and last month’s GL export. In a 45-minute working session we’ll map that grant from approval to audit and show you where your systems will disagree.