Contribution or Exchange?


By Jason King

One area of nonprofit accounting that may stump even some of the most seasoned accountants is the determination as to whether certain transactions should be accounted for as a contribution or as an exchange transaction.

According to the Accounting Standards Codification, a contribution should be recorded when an unconditional gift of cash or other assets, including promises to give, has been received. Although gifts or donations are often accompanied by donor imposed restrictions, such as time or use limits, contributions are characterized by a nonreciprocal transfer of an economic benefit. Exchange transactions, on the other hand, involve transactions in which each party receives or sacrifices something of commensurate value. Exchange transactions should not be recognized as revenue until they have been earned. Therefore, cash advances on these transactions should be recorded on the statement of financial position as deferred revenues.

So what makes these determinations so difficult? Well, many of the terms commonly used to describe contributions by donors are interchangeable with terms used when entering into exchanges. For example, grants, sponsorships, and memberships may constitute a contribution, an exchange, or even a combination of the two. There may be a high degree of subjectivity in determining the donor’s intent when entering into the transaction and also in valuing amounts contributed in excess of value received in return. Further, in many organizations, accountants might not have direct access to the other party, which can further complicate the process.

In addition, donors may place conditions on contributions, which can be difficult to differentiate from restrictions. When conditions accompany a contribution, for example a challenge grant or a bequest, revenue should not be recognized until all material conditions have been met.

Need help? Fortunately, the Codification and the AICPA Audit and Accounting Guide for Not-For-Profit Entities provide detailed guidance and indicators useful for assisting nonprofit accountants with these determinations. As a firm with a strong commitment to serving the nonprofit sector, we would be pleased to provide our assistance to your organization as well.

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This advice is not intended or written to be used for, and it cannot be used for, the purpose of avoiding any federal tax penalties that may be imposed, or for promoting, marketing or recommending to another person, any tax related matter

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