Nonprofit organizations have various sources of revenue, and one of the trickiest areas of financial reporting for a nonprofit organization is distinguishing an item as a contribution or an exchange transaction, especially when a transaction has elements of both.
Most individuals in this field understand the basic rule – contributions are nonreciprocal, meaning an asset is given without directly receiving value in exchange. However, what about those more complex transactions that many organizations face, such as corporate sponsorships, life membership fees, or special events?
In order to help distinguish between a contribution and exchange transaction, below are some characteristics for identifying each. It is important to keep in mind that no single characteristic should be used to determine the classification of the transaction.
- The donor asserts that it is contributing to support the nonprofit organization’s programs.
- The nonprofit organization asserts that it is soliciting a contribution.
- The delivery method of assets provided by the nonprofit organization to recipients are at the discretion of the nonprofit organization.
- The nonprofit organization is not penalized for nonperformance beyond the return of any unspent amount.
- The donor asserts that it is transferring resources in exchange for specified benefits.
- The nonprofit organization asserts that it is seeking resources and will provide specified benefits.
- The nonprofit organization receives an amount from the donor equal to the value of the assets provided by the nonprofit organization.
- The nonprofit organization may be penalized for nonperformance.
There are also situations when an event is both a contribution and an exchange transaction. This occurs when the transfer of the asset is exchanged for another asset, rights, and/or privileges of which the value is substantially lower. In this case, the organization must value all assets, rights, and privileges when determining if the commensurate value is exchanged. The excess of the value transferred over the value received by the donor is a contribution.