Accounting for Contract Exchange vs. Contribution
Revenue Recognition Your Nonprofit Should Know
Distinguishing the various types of nonprofit revenue transactions can be tricky, especially when it comes to contributions versus contract exchange revenue. And with the implementation of the new Financial Accounting Standards Board (FASB) revenue recognition standard and the new standard related to financial reporting (FASB 2016-14), it is essential for nonprofit management and their respective auditors to follow best practices and be consistent to avoid mistakes.
FASB Accounting Standard Codification 958-605-20 defines contributions as voluntary, unconditional transfers of assets to an entity (or voluntary, unconditional settlements or cancellations of an entity’s liabilities) by another entity acting other than as an owner.
The primary characteristic of contributions is that they are nonreciprocal, meaning one entity or individual gives an asset or cancels a liability without directly receiving commensurate value in exchange. (see: Nonprofit Fundraising: 5 Ways to Account for Promises to Give)
Contributions include transfers of cash, nonmonetary assets, services, and unconditional promises to give assets in the future. Contributions do not include the following:
- Agency, trustee, or intermediary transactions
- Exchange transactions
- Tax exemptions, tax incentives, or tax abatements
- Transfers of assets from governmental units to business enterprises
Exchange transactions are purchases of goods and services from another entity or individual. A transfer of assets that is a purchase of goods or services is not a contribution. For example, if a grant is determined to be an exchange transaction, the grant agreement may specify how the grant revenue is to be recognized. For example, income is earned as the program service is provided. It also may specify that unexpended grant funds must be returned to the grantor. In that case, amounts received from the grantor that have not been earned are recorded as refundable advances.
Another example is service fees which include, but not limited to:
- Client fees of voluntary service organizations, such as patient-care fees for home care services, charges for vocational training, counseling, therapy, etc.
- Membership dues and initiation fees of associations, clubs, and unions
- Admission fees and ticket sales for performances and exhibitions of performing arts organizations and museums
- School tuition
- Annual care fees of cemetery organizations
Service fees of nonprofit organizations are recognized as exchange transactions rather than contributions and are accounted for in the same manner as those for business enterprises (i.e., they are recognized in the period the amount is realized and earned). When the service and the charge occur in the same period, the revenue is recorded when the client is billed. For example, admission fees and ticket charges are usually recognized when the fees are charged or tickets sold. If the fees relate to ticket sales for performances that will not take place until the next year, such as advance season ticket sales, the revenue should be deferred and recognized when the performance or performances take place. It may also be necessary to defer recognition of revenue for portions of membership dues, initiation fees, life memberships, tuition charges, etc., that relate to periods after the statement of financial position date.
Remember, grants received from the government or private sources can be either exchange transactions or contributions, depending on the specific facts and circumstances of the grant. Additionally, some types of transactions, such as membership and premiums, may have elements of both contributions and exchange transactions.
We’ve included an Exhibit that presents indicators that may be helpful in determining whether a transaction is an exchange transaction, a contribution, or a combination of both. Even when using the indicators in the Exhibit, financial statement preparers need to use meticulous judgment because the relative importance of an individual indicator may be more significant in distinguishing the transaction than the total number of indicators.
Contact us for more info on proper revenue recognition for contract exchange and contributions.
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