Exchanges vs. Contributions
Accounting for contribution vs. exchange transactions can be a complicated topic for most nonprofit organizations. Not only are the accounting standards confusing and difficult to grasp, poorly written agreements or miscommunication can lead to an overwhelming process. Below, our non-profit team at Reese Henry differentiates between the two, which will hopefully help save some headaches.
Nonprofit organizations apply different accounting rules to contributions and exchange transactions. Contributions following the accounting scope of ASC Topic 958, “Not-for-Profit Entities”, while exchange type revenue typically follows ASC Topic 606, “Revenue from Contracts with Customers.” The application of these different rules will affect when revenue is recognized. For instance, unconditional contributions are recognized in the period when either assets or specified assets are received or promised, while exchange transactions are recognized as revenue when performance obligations are satisfied.
Exchange transactions include the sale of goods or services to a customer. For example, sales of inventory or other goods, service fees, tickets to an event or camp, etc. Grants can also be considered exchange transactions. The key difference between an exchange transaction and a contribution is that an exchange transaction has commensurate value, which refers to reciprocal benefits of equal value between two parties in an agreement. To be considered an exchange transaction, the benefits of the grant need to be received directly by the grantor. If the benefits of the grant are for the general public, then the grant would be accounted for similar to a contribution. To identify who is receiving the benefits of the grant, it’s best to first ask yourself:
Who is benefiting from the transaction? The grantor or the general public?
How are the benefits being used?
What is the value of benefits given to the grantor?
Who is determining the value of the benefits?
Is there a clear purchase of goods or services?
Contributions are funds given by a donor that will be for the benefit of the entire non-profit and/or the general public. The contributor receives no goods or services in return for their contribution.
Further, contributions to nonprofits can be conditional or unconditional (donor restricted). Determining what is a condition versus what is a donor restriction can be complicated and not always immediately clear.
Our team here at Reese Henry is available to help you in identifying if an amount is a contribution or exchange transaction, and what conditions, if any, exist and need to be met by the Organization. If you have any questions on when or how to recognize your revenue, please contact your trusted Reese Henry team.