DIFFERENTIATING CONTRIBUTIONS AND EXCHANGE TRANSACTIONS – REVENUE RECOGNITION

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By Gavin Fox, CPA – Senior Accountant

When a not-for-profit entity receives cash or other assets, a determination must be made of whether the transaction should be accounted for as a contribution or an exchange transaction (earned revenue). This determination will impact when the receipt is recognized as revenue and how the transaction is classified in the statement of activities.

Generally, a contribution received by a not-for-profit organization (NFP) is defined as a voluntary unconditional transfer of assets. While the receipt may be accompanied by donor restrictions, the intent of the asset transfer is nonreciprocal, as the donor does not receive a correlating economic benefit. Alternatively, the FASB glossary defines exchange transactions as reciprocal transfers between entities that result in an entity obtaining assets/services in exchange for either other assets/services or liabilities, of approximately equal value.

The facts and circumstances of each transaction should be evaluated by the NFP upon receipt of the assets/services or upon notice of an award to determine the underlying substance of the transaction. Indications of contribution activity include the following: the NFP solicited for the assets/services as contributions; the donor received no value in return for the transfer, or the value returned to the donor is incidental compared to other potential uses in the market place; the NFP must return unspent amounts or is not penalized for nonperformance; and the NFP determines the time or place of delivery of the assets/services to its third-party recipients. In contrast, indicators of exchange transactions include: the NFP solicited for or the resource provider is transferring the assets/services in exchange for specified benefits; nonperformance by the NFP may reach beyond return of unspent amounts; and the resource provider stipulates the delivery of the assets/services to the NFP's recipients. However, no single indicator determines the classification, so the transaction should be evaluated in light of the underlying transaction.

Identifying whether the transaction is a contribution or exchange transaction determines the timing of revenue recognition. Contributions received, or unconditional promises to give, should be recognized at the time of receipt or notification. Conversely, a transfer of assets or services in an exchange transaction is subject to the earning process. Generally, this means the transaction should be recognized as revenue when the NFP's obligation(s) to the resource provider has been fulfilled. In most cases, a determination is easily made as to whether the transaction is a contribution or an exchange transaction. However, certain transaction may have an element of both, such as event tickets whose cost exceeds the face value of the goods received. In this instance, a contribution is recognized for the amount in excess ticket cost less the benefit received by the attendee.

A not-for-profit organization should give careful consideration of the resources received by the organization or at the inception of the award. This inherently contains a degree of judgment, however, considering the factors above, as well as the resource provider's perspective, will aid in the interpretation of the transaction. If you are uncertain of the appropriate treatment or would like to discuss unique issues related to your organization, we would be pleased to provide our assistance.