Nonprofit
How Federal Funding Freezes Could Affect Nonprofits
Recent pauses in federal grants and loans are creating financial reporting challenges for nonprofits that depend on government funding. Each organization could feel the impact differently, so it’s important to carefully assess the specific implications. The Center for Plain English Accounting (CPEA) published a report discussing the potential accounting implications of these federal actions. Highlights include:
Accounting for Grant Revenue
When federal funding pauses, it can affect how nonprofits recognize grant or contribution revenue. According to the CPEA, a funding freeze alone doesn’t add a new condition or barrier related to conditional contribution accounting. However, if the federal government reinterprets the grant agreement or introduces other changes, nonprofits should take a closer look to determine whether a new barrier exists.
Assessing the Impact on Collecting Federal Contribution Receivables
Federal funding freezes may result in delayed payments but not necessarily affect an organization’s ability to collect receivables. However, the uncertainty caused by these federal actions could influence an organization’s assessment of the ability to collect contribution receivables. Nonprofits may need to evaluate how these actions influence the realizability of receivables and adjust their allowances accordingly.
Exchange Transactions
When nonprofits treat grant or other federally funded revenue as exchange revenue, it falls under the guidance of FASB ASC 606 and FASB ASC 326. The recent federal funding actions may require careful evaluation and could lead to several accounting considerations:
- Variable Consideration
If the federal government proposes changes to the terms of exchange-related contracts or transactions, organizations need to assess whether this represents a change in transaction price. This should be evaluated under Step 3 of ASC 606 using the variable consideration model. - Allowance for Credit Losses
Generally, credit risk with the federal government is considered zero, as detailed in the example at FASB ASC 326-20-55-48. The CPEA believes that the government’s refusal to pay does not represent a credit loss, and as a result, it would not be appropriate to record an allowance for credit losses in this case. - Contract Modifications
Depending on the circumstances surrounding individual federal actions, nonprofits may need to consider the contract modification guidance under FASB ASC 606. According to FASB ASC 606-10-25-10, “a contract modification is a change in the scope or price (or both) of a contract that is approved by the parties to the contract.”
Steps to Prepare for a Federal Funding Freeze
To plan for a potential funding freeze, nonprofits should take the following actions to assess their risk:
- Review Your Federal Funding Sources
Start by identifying all the federal funding your organization receives. Pay special attention to grants that may be considered at risk under the executive order’s criteria. Remember, pass-through funding—grants that come through state or local agencies—could still originate from federal sources and be affected. - Know Your Grant and Contract Terms
Review the terms and conditions of your grant agreements and contracts. Understand the conditions under which they can be cancelled or terminated, and what requirements must be met to receive future funding. - Assess the Operational Impact to Your Budget
Identify the programs, staff, contractors, and expenses supported by federal funding. Then, assess how much of your operating budget could be affected by a freeze. Based on that risk, build a contingency budget to help your organization react quickly and maintain stability. For more on cash flow planning, see our blog on cash management.
D+L: Supporting You Through Uncertainty
A potential federal funding freeze can raise difficult questions—but your nonprofit doesn’t have to face them alone. At Dugan + Lopatka, we’ve served hundreds of mission-driven organizations with specialized nonprofit accounting, audit, and advisory services. Whether you need help navigating reporting requirements or planning for operational disruptions, our team is here to provide clarity and confidence every step of the way.
That’s Accounting for What Matters.