In January 2025, the Office of Management and Budget (OMB) ordered a pause on certain federal grants, transactions and loan fund disbursement, causing understandable concern for not-for-profits that rely on these funds for their mission. The federal government has recently initiated other actions relating to grants, including terminations, claims and adjustments that are being challenged in court. Although these actions face legal challenges, uncertainty remains.
As the impacts of these decisions continue to play out, some organizations have begun contingency plans and preparing for worst-case scenarios. No matter the outcome of the ongoing legal challenges, these federal funding developments will affect financial reporting for not-for-profits. Below are some of the potential accounting implications of the federal grant freeze.
Keep in mind that some for-profit entities will also be impacted by the federal grant freeze. While the issues detailed below are believed to be broadly applicable, they are by no means all-inclusive, meaning there could likely be other financial reporting impacts in addition to what’s listed below.
Grant Revenue and Receivable Reporting
Pauses or freezes in federal funding are already having a major impact on grant or contribution revenue accounting. Recensions of federal funding grants, or even reductions or delays are on the table, muddying the waters for not-for-profit entities trying to predict the outcomes of recent federal actions. Several factors will determine how you recognize and report receivables.
Contributions
Generally Accepted Accounting Principles (GAAP), which govern the accounting and reporting requirements for not-for-profits, are set forth in the Accounting Standards Codification (ASC) by the Financial Accounting Standards Board (FASB). When accounting for federal funding that comes with a donor-imposed condition, (i.e. a conditional contribution), a barrier must be substantially met or overcome for that revenue to be recognized. If your organization already determined that the barriers related to the federal grants have been overcome, the contributions are considered unconditional, as long as revenue and a corresponding receivable were recognized in the period the conditions were met. However, it’s not recognized grant related revenue or a receivable if your organization determined that you haven’t overcome the barriers for the federal grant. Until the conditions have been substantially met or explicitly waived by the donor, this transfer of assets should be accounted for as a refundable advance.
In many cases, the federal funding freeze itself does not represent an additional condition or barrier. Administrative stipulations do not necessarily indicate a barrier to be overcome. Evaluate other circumstances to determine whether a barrier exists.
In many cases, a federal grant and loan pause may be a payment delay that ultimately does not impact your organization’s ability to collect your receivable (in other words, it’s a matter of “when” not “if” the organization will receive the funds). However, the uncertainty of the situation may be enough to change your assessment about its collectability. You may need to evaluate how the federal pause impacts the realizability of a receivable and adjust your related allowances accordingly. FASB ASCs 958-310 and -605 provide some guidelines here.
Exchange Revenue, Allowance for Credit Losses, and Contract Modification
Review FASB ASC 606, Revenue from Contracts with Customers, and FASB ASC 326, Financial Instruments—Credit Losses, to help you distinguish between revenue adjustment and credit related adjustment accounting. Keep in mind that neither of the above applies to contributions. If the organization has accounted for all or a portion of grant or other type of revenue subjected to the federal freeze as exchange revenue, it will be subject to guidance these standards
FASB ASC 326 requires organizations to “measure all expected credit losses for financial instruments held at the reporting date.” The government’s refusal to pay or delay in payment does not normally represent a credit loss, nor would it be appropriate to record any allowance for credit losses in most circumstances.
Many contracts with the U.S. government include a “termination for convenience” clause allowing the government to one-sidedly cancel contracts for non-default reasons. Under those circumstances, the government would be responsible for reimbursing any costs incurred by the customer to date, as well as an allowance for a reasonable profit, but the termination is likely enforceable.
If the funding freeze resulted in the U.S. government electing to terminate the contract out of convenience, you’d account for the termination according to contract modification guidance in FASB ASC 606-10-24. Note: contract modifications are accounted for on the effective date of the modification.
Subsequent Events
Your organization may need to evaluate whether the federal grant and funding freeze represent subsequent events as defined by FASB ASC 855, Subsequent Events. There are two types:
- Recognized Subsequent Events: Events or transactions that provide additional evidence about conditions that existed at the date of the statement of financial position (balance sheet), including the estimates inherent in the process of preparing financial statements.
- Non-recognized Subsequent Events: Events that provide evidence about conditions that did NOT exist at the date of the statement of financial position (balance sheet) but arose subsequent to that date.
For a subsequent event to be recognized, it must be related to a condition that existed at the balance sheet date. It would be difficult for calendar year-end 2024 organizations to argue that the federal funding freeze of January 2025 represented an existing condition as of December 31, 2024. Therefore, it’s likely that any identified subsequent events related to federal funding will be recognized as Type II, non-recognized subsequent events.
Even though Type II subsequent events may not be recorded in the books (i.e., “non-recognized”), some additional financial statement disclosures may be necessary to keep the statements from being misleading. Under these circumstances, financial statements should include:
- The nature of the event/events
- An estimate of the financial statement effect of the event/events, or a statement that the estimate can’t be made
Risks and Uncertainties
An entity is required to disclose risks and uncertainties with the potential to significantly affect the amounts reported in the financial statements in the near term or the near-term functioning of the reporting entity. Disclosures are required in these areas; note that the federal freeze particularly impacts the first and last bullet points:
- The nature of the entity’s operations
- The use of estimates in the preparation of the entity’s financial statements
- Significant concentrations in certain aspects of the entity’s operations
The nature of an entity’s operation includes activities it’s currently engaged in if principal operations haven’t begun. You should disclose information about your business, the principal markets for products and services – essentially disclosures that help users of financial statements assess risks based on daily national and international events. FASB ASC 275-10-50 requires not-for-profit entities to disclose concentrations in various areas, including revenue, if they meet certain criteria:
- The concentration exists at the date of the financial statements
- The concentration makes the entity vulnerable to the risk of a near-term severe impact
- At the least, it’s reasonably possible that the events could cause a severe impact that will happen in the near-term
FASB ASC 275-10-50 includes a listing of example concentration categories.
Going Concern
There’s a chance some entities may be unable to continue their operations if the funding freeze continues, prompting an assessment of going concern. There are several steps to take to determine whether going concern disclosures are required. First, you must determine if substantial doubt, defined as the entity’s ability to meet obligations as they come due, has been raised.
To make this determination, you must conclude that it is “probable” that the entity won’t be able to meet obligations within 12 months of the financial statement issuance date (Not: this is not the year-end date. It is the date the financial statements are available to be issued. In practice, this date usually coincides with the audit report date, if an audit is performed). No further analysis or disclosure is required if substantial doubt isn’t raised. If it is, you move on to step two: determine whether substantial doubt exists, which considers your plans to alleviate the substantial doubt. Regardless of whether management’s plans alleviate the substantial doubt, additional financial statement disclosures are required.
Liquidity and Availability of Resources
Not-for-profits have a unique reporting requirement to disclose any relevant information about the liquidity or maturity of assets and liabilities in the notes to the financial statements, and provide both quantitative and qualitative information about whether your organization has sufficient resources to meet cash needs for general expenditures within a year of the date your financial statements were available for issued. These disclosures are meant to help financial statement users understand how you manage your available liquid assets to meet cash flow needs for general expenses. Include restrictions and self-imposed limits on specific items, as well as information provided on the statement of financial position, if shown.
Liquidity disclosures should be made as of the statement of financial position (balance sheet) date and should not include subsequent event effects. You can add qualitative information to the liquidity disclosure if you’re still unsure about your organization’s ability to collect any existing receivables from the federal government.
Following best practices with financial statements, disclosures and other accounting procedures can help create order out of seeming chaos. Staying organized and prepared for next steps can keep you focused on your mission.
Anders Not-for-Profit advisors closely follow local and national legislation and executive actions to ensure our clients have the information they need to make the best decisions for their organization. To learn more about how our advisors can help, and the associate costs, request a meeting below.
