Nonprofit Revenue Recognition: Contribution Vs. Exchange Transaction

June 23, 2021

In order to apply the correct revenue recognition accounting, nonprofits must consider if a transaction is a contribution or an exchange transaction. At times, it’s not as easy as it reads. Poorly written agreements, misinformation and confusion interpreting the accounting standards can make this process seem overwhelming. First, let’s take a look at the definitions:

According to FASB ASC 958:

A contribution is defined as an unconditional transfer of cash or other assets, as well as an unconditional promise to give, to an entity or a reduction, settlement, or cancellation of its liabilities in a voluntary nonreciprocal transfer by another entity acting other than as an owner.

An exchange transaction is defined as a transaction that is a reciprocal transfer in which each party receives and sacrifices approximately commensurate value.

Now let’s break down the definitions. The first thing we need to consider is what are the benefits received, if any. The FASB clarified that benefits provided need to be received directly by the resource provider and not the general the public. A few questions you can ask yourself are:

  • What are the benefits?
  • Who is receiving them?
  • How are they being used?
  • Is there commensurate value?
  • How is the amount determined?
  • Are they purchasing goods or services? (this should be clear)
  • How was the transaction initiated?

If there are no benefits, or the payer is not receiving, or using the benefits, you most likely have a contribution and not an exchange transaction. Remember that positive sentiment or fulfillment of resources providers mission, does not mean you are providing commensurate value.

Commensurate value means reciprocal benefits of equal value. For example, you hire an accountant to prepare your tax return or purchase a new computer. In either situation, you are paying cash or transferring other resources in exchange for the good or services received. The transaction price is determined by the provider of the good/service or negotiated with the customer and there is expressed intent to exchange goods or services for payment.

Contributions and exchange transactions are typically initiated differently. Contributions are solicited based on how the funds received will help the nonprofit, it’s members/program recipients, or the general public. If you give me this money, I’ll do all this good with it and it will benefit all these people, but not you directly. While exchange transactions, are different. You are selling something. A good or service(s), which is intended to benefit the customer directly.

Don’t overthink it. Talk to the development and program departments and try to find out what the benefits are and who is receiving them, if any. Is this a contribution or are you selling goods or services? It’s also best practice to incorporate this analysis in the agreement/engagement acceptance processes. That way whoever is most familiar with the agreement, can provide this information upfront on a coversheet for all to see and understand. This will save you time trying to figure it out later.

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