A Quick Guide to Revenue Recognition for Nonprofits
When accountants talk about “revenue recognition” it may sound a little cloudy. Throw “nonprofit accounting” into the conversation, and the topic becomes clear as mud.
That’s because determining whether or not a source of funds is revenue can be a real challenge. Nonprofits often struggle with questions such as “How do we account for contributions?” “Do we have an obligation that makes this an exchange transaction?” “What about money we haven’t received but have been promised?” “What if there are strings attached?”
So to help you make sense of this important aspect of nonprofit accounting, I’ve listed three distinct types of revenue nonprofits should consider, along with rules related to each. I’ve also included a few tips for distinguishing between agency transactions and contributions.
So without further ado, here are the three types of revenue nonprofits should consider:
Contributions are unconditional transfers of assets (or a settlement of liabilities) to a nonprofit entity that are nonreciprocal — meaning the donor receives nothing of value in exchange for the donation.
Contributions can be classified as unrestricted, temporarily restricted, or permanently restricted. (That’s another story — see our post on conditions and restrictions.) Also, contributions can be in the form of cash or noncash, such as tangible property or services, or they could be recognized as a donor’s promise to give (see item #2 below) cash or noncash resources.
A contribution should be recognized at its fair market value in the period it was received and/or unconditionally given. Donor-imposed restrictions do not affect the timing or value of the recognition.
2. Promises to give (sometimes called pledges)
A promise to give is a written or oral agreement to contribute cash or other resources (or a settlement of liabilities). Sounds a lot like a contribution, right? It is, but a promise to give could have strings attached (i.e., it could be conditional). Conditional promises to give include donor-imposed “barriers” that must be overcome before it can be recognized as a contribution. These restrictions direct the recipient organization on how and/or when they can use the donated assets. Conditions could serve to keep open the possibility of right of return of the assets given by the donor, or they could release the donor from the obligation to give.
Not all promises to give are conditional, however. Unconditional promises to give should be recognized as a contribution as noted above.
One more thing about promises to give — they can be long-term. If this is the case, consideration needs to be given to fair value. Present value or a different type of valuation technique may be used; however, the value should be periodically reviewed for a possible value adjustment until the promised contribution is fully collected.
3. Exchange transactions
Exchange transactions are reciprocal transactions in which the nonprofit entity receives assets (or satisfies liabilities) by transferring other assets, providing services or incurring other obligations. Sometimes it’s very easy to distinguish between contributions and exchange transactions. Other times, grants, sponsorships, fundraising events tickets and even membership dues could be recognized as 100% contribution revenue, 100% exchange transaction or a combination of both.
Exchange transaction revenue is recognized when the amounts are realized (or realizable) and are earned.
Agency transactions vs. contributions
An agency transaction is an exchange transaction in which a nonprofit entity acts as an agent, trustee or intermediary for another party. In this type of scenario, a donor transfers assets to an organization that, in turn, must transfer the assets to a third-party recipient per the donor’s instructions. This does not count as a contribution to the nonprofit entity because the organization has little to no discretion over the use of the assets received. For example: A government agency gives money to an inner-city nonprofit for the purchase and distribution of transportation vouchers, and the nonprofit is paid a small percentage of the total dollars allocated to this program. In this case, the total amount received by the nonprofit does not count as revenue — only the small percentage they keep.
I hope this post has cleared the revenue recognition waters a bit, rather than stirring it up more. But if you like mud, feel free to read the postscripts below.
PS: The Financial Accounting Standards Board (FASB) issued a new accounting standard, Revenue Recognition from Contracts with Customers, which could, if not postponed, become effective for periods beginning after December 15, 2017. This new standard will supersede all other revenue recognition standards (FASB ASC 605) other than contributions received (FASB ASC 958-605).
PSS: On April 22, 2015, FASB issued a proposed Accounting Standards Update, Not-for-Profit Entities (Topic 958) and Health Care Entities (Topic 954): Presentation of Financial Statements of Not-for-Profit Entities, for public comment. This will likely be the new reporting standard by the end of the year and may have some effect on all of the above.
Jack Abdo, CPA, is AEM’s Nonprofit Segment Leader. A true “numbers guy,” Jack’s passion for balance sheets is second only to his passion for helping nonprofits further their mission. You can reach Jack at 952.715.3051 or at firstname.lastname@example.org.