Let’s face it – accounting for nonprofits can be complicated. Revenue recognition is one area, for a nonprofit organization, that can be especially complex.
Revenue recognition for many organizations is straightforward. But if your organization’s revenues arrive through multiple, separate channels, you may need to develop a procedure for categorizing revenues so that their recognition is consistent.
Added to these challenges, of course, is the new FASB revenue recognition rules for nonprofits and the new reporting standards. Taken together, it may seem like an unwieldy group of challenges. If, however, you begin to sort through each point separately, you can make sense of it all and put into place a streamlined, standardized method of accounting for nonprofits that make sense.
Accounting for Nonprofits: Revenue Categories
Revenue may fall into the following general categories:
- Contributions
- Exchange transactions
- Promise to give
Within the “promise to give” category, you must also determine whether the gift is conditional or unconditional and whether the promise is legally enforceable. For example, a will is a legally enforceable promise to give if the deceased specifies an amount to be given to your nonprofit upon their death; a verbal promise is not legally enforceable.
Such as the general categories. Let’s delve into each one and explore how revenue recognition fits into each category.
Contributions or Exchange Transactions
Most your revenues are likely to be contributions or exchange transactions. Contributions, as the name implies, are generally resources donated to a nonprofit for its use. Monetary contributions, donations of equipment, automobiles or building supplies, and other items are generally accepted as contributions. The donor gives them to the organization without receiving any monetary or tangible property in return.
Exchange transactions, on the other hand, usually occur when a nonprofit indicates that it is seeking resources in exchange for unspecified benefits. Payment by the resource provider equals the value of the assets, or the value plus a markup. The nonprofit may be penalized for nonperformance, or some other expectation may be affixed to the transaction.
An example of an exchange transaction is when a nonprofit contracts lectures, seminars, or professional development activities to their members. There is a fee given to the nonprofit in anticipation and expectation of specific services to be performed. There may be a penalty for failing to provide these services.
It can be challenging to distinguish between these two types of revenues in certain circumstances. Accounting for nonprofits has its share of gray areas, and this may be one of them. Accountants preparing the financial statements for a nonprofit organization may wish to consult with auditors before preparing the financial statements to discuss how to recognize tricky revenues. Then, guidelines can be put into place to categorize similar revenues in the future.
Conditional and Unconditional Gifts
FASB Accounting Standards Codification (ASC) Section 958-605-25 states that nonprofits wait to recognize revenues from gifts until they are reasonably sure that they will receive the gift; in other words, that there is a low likelihood that the conditions surrounding the gift will not be met.
An example is a donor who decides to give an organization $100,000 on the condition that matching revenues are raised. The donation isn’t recognized until the conditions are met.
On the other hand, that same donor may give the organization $100,000 with very easy conditions attached to it. They may require an annual report demonstrating how the finances are to be used or a personal tour of the organization each year. In such a case, the revenues may be recognized immediately since the conditions are so easy to meet.
If you aren’t sure what to do, you have several options. Speak with your accountant and discuss the matter together to determine the appropriate method to recognize revenues for gifts. If the conditions surrounding the gift seem murky, then a call to the donor may be in order to ensure that you are adequately meeting their conditions for the gift. It doesn’t hurt to ask.
Help with Accounting for Nonprofits
As you can see, there are many challenges with revenue recognition for nonprofits. Some items may be quite easy to categorize, while others may be difficult. When in doubt, contact a professional accounting firm that works exclusively with nonprofit organizations. Beck & Company is one such firm with the experience and insight into the world of nonprofits to help you with these and other issues pertaining to accounting for nonprofits.
Beck & Company
Beck & Company are Washington DC nonprofit advisors. We also are Virginia certified nonprofit accountants. We work with nonprofits of all sizes serving many different constituents nationwide, providing a variety of consulting, auditing, and accounting services. For more information, please contact us at 703-834-0776 x8001.