Article

Revenue Recognition for Non-Profit Entities, Part 1: Contributions vs. Exchange Transactions

When it comes to non-profits, revenue recognition can get a bit tricky. Non-profit leaders need to look closely at each of their many sources of income and assess whether they fall under the scope of the FASB’s standards on revenue recognition. The process of making that assessment is, to say the least, complex. 

Learn More
< Back to Insights
Insights  <  Revenue Recognition for Non-Profit Entities, Part 1: Contributions vs. Exchange Transactions

When it comes to non-profits, revenue recognition can get a bit tricky. Non-profit leaders need to look closely at each of their many sources of income and assess whether they fall under the scope of the FASB’s standards on revenue recognition. The process of making that assessment is, to say the least, complex. 

The Financial Accounting Standards Board (FASB) and International Accounting Standards Board (IASB) issued their final standards on revenue recognition (ASC 606) in 2014 – and, if you’ve been following along with previous blumshapiro newsletters, you know that revenue recognition is a subject we’ve dedicated quite a bit of ink to over the last few months.

When it comes to non-profits, revenue recognition can get a bit tricky. Non-profit leaders need to look closely at each of their many sources of income and assess whether they fall under the scope of the FASB’s standards on revenue recognition. The process of making that assessment is, to say the least, complex.

It’s so complex, in fact, that FASB felt the need to release a clarification of its original revenue recognition standards (ASC 606). Technically, the Update (ASU 2018-08) applies to all entities, but it was specifically written in the interest of non-profits. Released in full in 2018 and entitled Clarifying the Scope and the Accounting Guidance for Contributions Received and Contributions Made, this update to the FASB standards aimed to, well, do exactly what its title promises.

More specifically, ASU 2018-08 set out to assist entities in 1) evaluating whether transactions should be accounted for as contributions or as exchange transactions, and 2) determining whether a contribution is conditional or unconditional. The 68-page document includes dozens of major and minor changes that will impact non-profit financial statements, but – for the purposes of this article – let’s start with those two key areas.

* * *

Contributions vs. Exchange Transactions

The question of whether a specific piece of funding should be considered a contribution or an exchange transaction is at the crux of the majority of non-profit accounting headaches. The distinction between the two is incredibly important, because compliance laws require that entities follow different accounting standards in order to record them on their financial statements.

Contributions are defined by FASB’s master glossary as “nonreciprocal transfers of cash or other assets, as well as promises to give.” In other words, Person A likes the organization’s mission, and decides she likes it enough to donate $100 without asking or expecting anything of commensurate value in return. Because they do not entail any “contracts,” contributions do not fall in the scope of the revenue recognition standards laid out in ASC 606 and should be reported as revenue following the guidance found in ASC 988-605.

Exchange transactions, or simply exchanges, are defined as “reciprocal transfers in which each party receives and sacrifices approximately commensurate value.” If the donor is receiving anything in return for her donation to a non-profit entity – whether that’s entrance into a charity golf tournament, their name on the outside of a building, or anything in between – their donation will more than likely be considered by FASB to be an exchange transaction. Exchange transactions do fall under the scope of ASC 606 and should be reported using the five-step revenue recognition model provided in the guidance.

Conditional vs. Unconditional Contributions

As we outlined above, the primary difference between contributions and exchanges is that contributions are made and accepted without any promise or expectation of commensurate value. However, that doesn’t mean contributions can’t carry conditions.

Conditional and unconditional contributions both fall outside the scope of ASC 606 and should both be accounted for under the guidance in ASC 988-605. The reason it’s important for non-profit entities to accurately distinguish the two is in the timing of when the contribution should be recognized as revenue.

The best example of an unconditional contribution is a typical donation made by an individual donor to a non-profit entity of their choice without requiring the non-profit meet any performance obligations in order to receive – or recognize – the revenue. Unconditional contributions should be immediately recognized as revenue under the guidance found in ASC 988-605.

Conditional contributions come with some sort of a catch, or – as defined in the guidance – a “barrier.” There are countless examples of conditional contributions. They could be gimmicky; say, a local celebrity promises to donate X amount of dollars to a local organization if and only if her Facebook post earns X number of “Likes.” Or they can be more pragmatic; say, a wealthy philanthropist promises she’ll foot the bill of a new building as long as said building is completed within a certain timeframe.

The conditional aspects of these contributions – in these hypotheticals, the Facebook Likes and the construction timeframe – are defined as barriers. Conditional contributions, according to ASU 2018-18, should be recognized as revenue under the guidance found in ASC 988-605 as the barriers are overcome.

* * *

As we mentioned at the beginning of this article, navigating revenue recognition regulations can be challenging for non-profit entities. No matter how many clarification updates FASB releases, there will always be exceptions to the rules.  

Our best advice for non-profit entities looking to stay on top of the rapidly changing revenue recognition landscape is to contact their financial professionals as soon as possible.

 

Continue the Conversation with Our Team
Get in touch with us.

Contact Us