Exchange Transaction or Contribution (avoiding management letter comments, part 5)
Organizations receive many different types of revenue including contributions, grants, contracts, and dues. Some of these revenue types are recorded in a similar manner while others are very different. It can also be hard to tell the difference between of the types. For example, grants and contracts usually have a written agreement, but they are recorded differently.
One of the most important questions to consider is who is receiving the benefit. If the benefit is going to be received by the public or a group not related to the donor, then money is probably a contribution. If there is some product or service that is going back to the organization that is providing the money, then it is probably an exchange transaction.
The first step is to determine if the revenue is an exchange transaction or a contribution. Exchange transactions are recorded based on when the revenue is earned and affect revenue, receivables, and deferred revenue. Contributions are recorded when received or pledged and affect revenue, receivables, and temporarily restricted net assets.
Below are some things to consider when deciding if there is an exchange transaction or a contribution:
| Consideration: | Contribution | Exchange Transaction |
| Recipient not-for-profit entity’s (NFP) intent in soliciting the money | Recipient NFP asserts that it is soliciting the money as a contribution. | Recipient NFP asserts that it is seeking money in exchange for specified benefits. |
| Resource provider’s expressed intent about the purpose of the goods/services 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 money in exchange for specified benefits. |
| Method of determining payment | The resource provider determines the amount of the payment. | Payment by the resource provider equals the value of the goods/services to be provided by the recipient NFP, or the goods/services’ cost plus markup; the total payment is based on the quantity of goods/services to be provided. |
| Penalties assessed if NFP fails to make timely delivery of goods/services | The NFP is not penalized for nonperformance. Just have to return unspent money. | Provisions for economic penalties exist beyond the amount of payment. (The NFP is penalized for nonperformance). |
| Delivery of goods/services to be provided by the recipient NFP | Goods/services are to be delivered to individuals or organizations other than the resource provider. | Goods/services are to be delivered to the resource provider or to individuals or organizations closely connected to the resource provider. |
| Method of delivery | The time or place of delivery of the goods/services to be provided by the recipient NFP to third-party recipients is at the discretion of the NFP. | The method of delivery of the goods/services to be provided by the recipient NFP to third-party recipients is specified by the resource provider. |
Once the type of revenue has been determined, it is time to decide how to record the transaction. If the revenue is from a contribution, then it is recorded when the organization either receives the money (as cash and revenue) or when the organization receives notification that they will be receiving the money (as receivable and revenue).
If the revenue is from an exchange transaction, then the revenue is not recorded until work has been performed. If payment is received up front, then the revenue is deferred until it is earned by recording cash and deferred revenue liability. When the work is performed and the revenue earned, it is recorded (as deferred revenue and revenue). If money is received after the work has been performed, then the revenue is recorded as receivable and revenue.
Revenue recognition can be a complex area and requires careful reading of any grants, agreements, or contracts to properly determine how to record the transaction.
This is part 5 of a continuing series on common management letter comments. Click here to read part 1, part 2, part 3, and part 4.
#nonprofit #revenuerecognition #nonprofitaccounting
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