Nonprofit Revenue Recognition: Exchange Revenue vs. Contribution Revenue

Nonprofits are unique in that they sometimes obtain cash (or other assets) without providing an exchange of commensurate value. Accountants know that as contribution revenue. Sometimes it is hard to determine if a transaction is contribution revenue or exchange revenue, or how to account for it, especially in cases involving government grants and contributions. ASU 2018-08 Clarifying the Scope and the Accounting Guidance for Contributions Received and Contributions Made explains clearly when revenue is exchange versus contribution.

Who is paying and who is receiving goods or services?

The first step in ascertaining the accounting is determining who is paying the money and who, if anyone, is getting goods or services from the transaction. If the nonprofit gets funds from a payor and provides that payor direct commensurate value in return, that is an exchange transaction. An example would be when you purchase a training class from your membership organization − you pay the value of what you are receiving. If the nonprofit gets funds from a payor and no value is paid out to anyone at that time, that is clearly a contribution. If the nonprofit gets funds from a payor, such as the federal government, with the purpose of the nonprofit providing the goods and services to a third party, the general public or a subsegment thereof, that is also a contribution. When the general public, or someone other than the payor, receives the goods or services, it is a contribution.

Transactions that include both a contribution and an exchange

Sometimes transactions include both a contribution and an exchange portion. For example, many zoos, museums, etc. have membership structures where for a certain amount you can get a family membership which provides unlimited entrances to the establishment for a year. However, there is another membership level where the cost is more than the family membership, and the “additional benefits” are really just getting your name published as being a higher class of member or a donor. In these instances, we may need to bifurcate the revenue. We need to determine what value is actually received for a membership, potentially that could be the cost of the regular family membership. The value received for the membership is exchange revenue, and the additional amount paid is a contribution. This is common when there are multiple levels of memberships, in sponsorship agreements, fundraising events, and many other places. Once you know what portion is contribution revenue and what portion is exchange revenue, you can start accounting for it.

Accounting for exchange transactions

The exchange revenue portion uses the same accounting as for-profits use. The revenue is recognized when, or as, the goods and services (performance obligations) are transferred. Any money collected before the goods or services are transferred is deferred revenue (a liability). If the goods or services are provided before the cash changes hands, an account receivable is recorded at the time the goods or services transfer hands. All exchange revenue amounts are unrestricted (without donor restrictions), because there is no donor involved. Under the new revenue recognition standards, significant disclosures, including the total amount of exchange revenue, will be required.

Although the actual accounting for exchange revenue is likely to be straightforward, the new revenue recognition rules will take significant time and effort to implement. In order to obtain the disclosures, each revenue transaction cycle needs to be analyzed in detail. In many cases, this will be a significant amount of time and effort without any material change in the revenue numbers. The distinction between exchange and contribution revenue becomes more important this year, even if all the revenue is recorded in the same fiscal year, due to these disclosures. See Yeo & Yeo’s Revenue Recognition for Nonprofits eBook for more details.

Accounting for contributions

The contribution accounting isn’t quite so straightforward. We know that it is contribution revenue, but we need to determine if it is conditional or unconditional. If the contribution transaction has both a right of return (or right of release) and a barrier, then the contribution is conditional and no revenue is recognized until the conditions are met. A right of return or right of release means the contributor can request the funds be returned or doesn’t have to pay the nonprofit the funds unless the barrier is met. The barriers are measurable performance-related barriers, stipulations related to the purpose of the agreement (not administrative reporting tasks), or limited discretion by the recipient (such as having allowable cost requirements narrower than what the organization or program as a whole could do). This is a new definition; likelihood of a condition being met is no longer a criteria in determining conditional versus unconditional.

If the contribution is conditional, revenue is not recorded until it becomes unconditional (the contributor no longer has a right of return or right of release because the barrier has been met). If money is received before the contribution becomes unconditional, it is recorded as a liability (advance or deferred revenue). Conditional contributions require, as has always been the case, that you disclose the amounts of conditional contributions and what the conditions are. This means for federal grants, for example, you will need to know the total amount of grants that have been granted but the funds have not yet been earned (presumably have not yet been requested). The disclosure would indicate that there is $X of conditional contributions subject to 2 CFR 200 requirements.

If the contribution is unconditional, it gets recorded as revenue as soon as the contribution is made, regardless of whether it is yet collected. It is recorded at the present value of future cash flows. That means not only short-term contributions receivable, but also long-term ones, are recorded. If an organization promises unconditionally to give the nonprofit $100,000 per year for five years, the present value of the full $500,000 is recorded as revenue and a contribution receivable in the year the promise is made! 

Donor restrictions

You also must determine if there are donor restrictions as to the use of the funds. If the funds are to support a specific time period or a specific program (which is narrower in scope than the mission), they get recorded as with donor restrictions. If there is a multi-year contribution receivable, there is an implied time restriction that the amounts are not to be used until the year in which they are to be received, so that would be recorded as with donor restrictions. If the amounts are to be invested in perpetuity and only the income used, that would also be recorded as with donor restrictions. Note that many of the conditional contributions from the federal government are also with donor restrictions; they can only be used for certain programs. However, the condition and the restriction may both be satisfied at the same time. Because of this, there is a policy election for contribution revenues where the restriction and condition are both met at the same time; this can be recorded in either with or without donor restrictions and this policy election is separate from other with donor restriction contributions that are met in the same year.

In summary:

• All exchange revenue is considered without donor restriction, because there is no donor. All cash collected for exchange revenue before the money is earned is a liability (deferred revenue). Exchange revenue never results in net assets with donor restrictions, as there is no donor.
• Contribution revenue, once unconditional, can be with donor restrictions or without donor restrictions. Contribution revenue is recorded as soon as it becomes revenue, and not when the corresponding expenses are paid. If the contribution revenue is with donor restrictions, the release from restriction will be recorded when the expenses have been made that release the restriction. Contribution revenue is only a liability if it is a conditional contribution that was received and the conditions have not yet been met.

This distinction will become more important when the revenue recognition standards, and the related disclosure requirement to say how much revenue is from contracts (exchange), are implemented.