Among the topics addressed with accounting for nonprofits, revenue recognition has been in the spotlight recently. With the recent FASB updates changing revenue recognition guidelines and standards for nonprofits, it’s more important than ever to be clear on how your organization recognizes revenue.
One area in which many nonprofits struggle is whether revenue should be recognized as contributions or exchange transactions. The determination between exchange transactions and contributions can be made by examining the differences between the two groups.
Exchange Transactions:
- Resource provider states that it is providing a resource in exchange for benefits.
- Payment by the resource provider equals the value of the assets to be provided by the recipient, not for profit (NFP) organization, or the asset cost plus a markup.
- NFP is penalized for nonperformance or for not completing the project.
- Assets are delivered by a provider to individuals or organizations closely related to the nonprofit.
Contributions:
- The not for profit solicits for a contribution. It’s clear they are seeking contributions.
- NFP is not penalized for nonperformance.
- Resource provider states or insists that it is making a contribution.
As you can see between the two groups there can be some gray areas. That’s why many nonprofit accountants ask clients to bring in anything they aren’t certain of to ensure it’s recorded correctly. It helps to get a second opinion on many of these issues.
Difficult Judgment Calls
Sometimes, the judgment call between a contribution and exchange transactions can be difficult. Some accountants suggest having a consultation between auditors and preparers to ensure the information is clearly defined.
Conditional or Unconditional?
FASB Accounting Standards Codification (ASC) Section 958-605-25 asks that nonprofits wait to recognize contributions unless they are sure that all of the conditions around contributions are met. For example, if you’re running a matching donation program, wait to record the donations until the conditions of the match are met. Otherwise, you run the risk of having to correct numerous entries.
There are some examples when conditions can be so easily met that it is acceptable practice to report the contributions immediately. If the conditions of a donation are simple, such as a thank you letter or public acknowledgment, this can be made quickly and easily. It may be a simple matter to report the contribution immediately.
Another gray area may be the difference between promises to give and intentions to give. What’s the difference? Let’s say that someone calls a nonprofit organization and claims they will give it $10,000 in their will. That’s merely an intention to give. There is no binding, legal information holding that person to their claim. On the other hand, an actual will, filed in a court jurisdiction, that includes a legally binding statement of the gift of $10,000 may be accepted as a promise to give. In that case, it is now an obligation of a creditor. The estate is held to account and must complete the transaction, so the amount can be recorded by the nonprofit.
As you can see, there are many areas where professional judgment and discernment must be used to determine when, how, and why to record items in specific ways. Accounting may be viewed as a very black and white profession, and while it is true that $1 is $1 no matter how you look at it, the type and category under which that amount may be recorded may be subject to an accountant’s scrutiny and judgment.
That’s why it is so important with accounting for nonprofits to find a professional services firm that you can trust. Your accountant will make many judgment calls and help guide you through the many state and federal laws and guidelines to handle your nonprofit finances. With a good accounting firm by your side, you can rest easy, knowing that your finances are handled to the benefit of your organization and its constituents.
Beck & Company
Beck & Company works 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.