Nonprofit organizations receive funding from various sources, but it can be difficult to determine how to account for these funds. When should revenue be recognized? This depends on whether funds come from contributions or exchange transactions.
A contribution is an unconditional transfer of an asset, such as cash, or a settlement of liabilities in a voluntary transaction that is non-reciprocal. In other words, it is a donation with no benefit to the donor.
An exchange transaction is a reciprocal transaction in which each party exchanges something of equal value.
It is also possible to have a transaction that is both a contribution and exchange. For example, if one organization sells something to a nonprofit at a significant discount, this would be an exchange transaction. The value of the item received more than the amount paid would be a contribution.
The challenge is often determining whether the donor or provider of the funds/asset intends to make a donation. Sometimes an agreement can be unclear as to whether anything of value is required in exchange for the funds received. This requires the judgment of the non-profit organization. The table below from Withum – Audit, Tax, Advisory provides insight on how to make the right determination.
|Recipient not-for-profit (NFP) entity’s intent in soliciting the asset*||Recipient NFP asserts that it is soliciting the asset as a contribution.||Recipient NFP asserts that it is seeking resources in exchange for specific benefits|
|Resource providers expressed intent about the purpose of the asset to be provided by recipient NFP||Resource provider asserts that it is making a donation to support the NFP’s programs.||Resource provider asserts that it is transferring resources in exchange for specified benefits.|
|Method of delivery||The time or place of delivery of the asset to be provided by the recipient NFP to third-party recipients is at the discretion of the NFP.||The method of delivery if the asset to be provided by the recipient to third-party recipients is specified by the resource provider.|
|Method of determining the amount of payment||The resource provider determines the amount of the payment.||Payment by the resource provider equals the value of the assets to be provided by the recipient NFP, or the assets’ cost plus markup; the total payment is based on the quality of assets to be provided.|
|Penalties assessed if NFP fails to make timely delivery of assets||Penalties are limited to the delivery of assets already produced and the return of the unspent amount. (The NFP is not penalized for nonperformance.)||Provisions for economic penalties exist beyond the amount of payment. (The NFP is penalized for nonperformance)|
|Delivery of assets to be provided by the recipient NFP||Assets are to be delivered to individuals or organizations other than the resource provider.||Assets are to be delivered to the resource provider or to the individuals or organizations closely connected to the resource provider.|
|* This table refers to assets. Assets may include services. The terms assets and services are used interchangeably|
If the transaction is determined to be a contribution, revenue should be recognized in the period it is received. If the transaction is an exchange transaction, revenue should be recognized in the period the services are completed or goods are provided. If you have further questions please contact us and we would be happy to help answer any questions.
Written by Allison Griesbach