Insights // Fall 2024 6
HBK Nonprofit Solutions
AU D I T & ASSU R A N C E
Contributions and Exchange Transactions: Know the Difference for Proper Revenue Recognition Hillary Kidd MANAGER | FORT MYERS, FL
There are factors to consider when classifying contributions and exchange transactions— two broader forms of revenue recognized by non-profit organizations.
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onprofit organization leaders know that Therefore, knowing how to identify a transaction is ensuring revenue is being recorded and crucial for accurate financial statement reporting. tracked in accordance with applicable Let’s first define contributions and exchange guidance takes considerable knowledge and time. transactions: Because there are various sources and forms of • A contribution is an unconditional transfer of revenue for organizations, it can become difficult to assets or an unconditional promise to give to an differentiate one from another. However, improperly entity, or a reduction, settlement, or cancellation recording revenue transactions of its liabilities, in a voluntary could result in overstating nonreciprocal transfer by another revenues and expenses, and entity acting other than as an can cause improper timing of Exchange transactions owner. Contribution revenue only revenue recognition and improper follow the rules in Topic 606, applies to transactions that relate classification of revenues. There whereas for contributions, to the entity’s ongoing major or are rules to follow depending on central activities. further considerations must the type of revenue being received. As such, identifying the type of • Exchange transactions are be made to determine if revenue being recorded is an initial reciprocal transfers between there are any conditions or step in proper revenue recognition. two entities in which one of
restrictions on using the
the entities acquires assets or For example, you receive funding revenue. Therefore, knowing services or satisfies liabilities by from a resource provider but there giving up other assets or services how to identify a transaction are stipulations to receiving the or taking on other obligations. cash. Or you are receiving cash is crucial for accurate Some examples of exchange but you are providing something financial statement reporting. transactions that nonprofit of value in exchange. There organizations may participate are factors to consider when in are member dues, service fees, ticket sales, classifying contributions and exchange transactions— and investment income. Generally, these are not two broader forms of revenue recognized by nondonor restricted—aside from income on restricted profit organizations. The two use different recognition investments—but can be restricted by the recipient procedures. Exchange transactions follow the rules in organization’s board. Topic 606, whereas for contributions, further considerations must Defining differences be made to determine if there are any A notable difference between these forms of revenue conditions or deals with whether or not the transfer of assets or restrictions settlements of liabilities is reciprocal. While there is on using the a benefit reciprocated to the resource provider in an revenue. exchange transaction, the donor of a contribution receives no direct benefit. Some may argue that a donor receives a societal benefit indirectly from the public by making a contribution. However, this wouldn’t trigger an exchange transaction since it is not deemed to be of commensurate value and the value received is incidental. Whereas with an exchange transaction, the societal benefit is secondary to the direct value received from the recipient of the