Revenue recognition for grants and contracts involves a lot more than luck. Characterizing exchange transactions or contributions can seem downright illogical at times! If you’re looking for some clarity, read on to begin understanding the proper revenue classification to ensure your nonprofit is compliant, transparent, and financially on point. 

 

Identify the Revenue Transaction Type 

The first step is to determine whether the transaction is an exchange transaction (reciprocal) or a contribution (non-reciprocal). An exchange transaction is one in which both parties exchange resources for goods and services that are of commensurate value. In an exchange transaction, the party purchasing the goods and services might be called a “customer” or a “resource provider.” In contrast, a contribution is non-reciprocal; the donor is voluntarily transferring resources without the expectation of receiving anything in return. 

 

Common examples of exchange transactions provided by nonprofits include: 

  • Sales of goods and services like tickets, merchandise sales, and consulting services 
  • Program service fees like tuition, early childhood education, housing program fees, and job placement fees 

 

Common examples of contributions received by nonprofits include: 

  • Financial donations like gifts and grants of cash or stock 
  • Nonfinancial donations (also known as in-kind donations) like gifts of goods, services, or property 
  • Promises to give (pledges) of financial or nonfinancial donations 

 

While this classification may seem logical, sometimes a revenue transaction can have both reciprocal and non-reciprocal components. Therefore, it’s important to examine the details of a contract or award because the transaction type will impact when revenue can be recognized.  

 

Examine Revenue Recognition Indicators 

 

Accounting guidance differs between exchange transactions and contributions, which will drive the revenue recognition process: 

  • Revenue from exchange transactions fall under contracts guidance and are typically recognized as the goods or services are provided. Thus, recognition might occur at a point in time (such as when a performance occurs) or over a period of time (as consulting services are provided). 
  • Revenue from contributions fall under contributions guidance and, if unconditional, are recognized when the contribution or pledge is made. A contribution is unconditional if there are “no strings attached,” meaning there are no donor-imposed conditions. Common donor-imposed conditions include barriers such as requests to provide proof of qualifying expenses or to meet specific matching requirements. If a donor specifies that the nonprofit is not entitled to the donation given or promised until those barriers are met, then the contribution is conditional; both the barrier and the right of return must be present for the contribution to be conditional. When conditional, revenue recognition is put on hold until the donor-imposed conditions are met. 

 

Determining whether a transaction represents an exchange transaction, or a contribution isn’t always easy. Below are a few factors to help distinguish between the two. 

 

Exchange transaction indicators: 

  • Consideration (cash) is provided in exchange for goods or services of commensurate (equal) value. 
  • The customer or resource provider receives the benefit from the transaction. 
  • There may be penalties – such as forfeiture of deposit or contract termination – for noncompliance.  

 

Contribution transaction indicators: 

  • The donor does not intend to receive any goods or services in exchange.  
  • The general public will benefit from the transaction.  
    • This is typical in government grants, where a nonprofit may be awarded funds to provide a program to a group of beneficiaries who meet specific eligibility criteria. 
  • Other than a return of any unspent funds, there are usually no economic penalties associated with contributions. 

 

 

Present Revenue Transactions Correctly 

Within the financial statements, current accounting guidance requires exchange transactions to be reported separately from contributions. Below are some financial reporting best practices. 

 

On the Balance Sheet: 

  • Disaggregate receivables by revenue source 
    • Use Accounts Receivable to track payments due on exchange transactions. 
    • Use Promises to Give (or Pledges Receivable) to track payments due on contributions made. 
  • Disaggregate liabilities by revenue source 
    • Use Deferred Revenue to record payments received in advance on unearned exchange transactions. 
    • Use Refundable Advances to record payments received in advance on conditional contributions for which the conditions have not yet been met. 

 

On the Statement of Activities (Income Statement): 

  • Disaggregate revenue by type 
    • Report exchange transactions separately from contributions revenue. 
    • Report gifts of nonfinancial assets – such as goods, services, or property – separately from financial gifts. 
  • Classify and track gifts with donor-imposed restrictions separately from those without donor-imposed restrictions  
    • For example, a donor may request that a contribution be used for a specific program or activity or be used in a later period or after a specified date.  
    • Donor-imposed restrictions have no impact on when unconditional contributions are recorded (they are recognized when made), only how they are reported within the financial statements. 
  • Report expirations of donor-imposed restrictions on a separate line 
    • This is done by reclassifying amounts from “with donor-imposed restrictions” to “without donor-imposed restrictions;” these reclassifications do not impact total revenue for the period. 

One final tip! Donor-imposed restrictions can be explicitly stated – the donor might state the purpose in an accompanying note – or implied by the circumstances. For example, a donor might respond to a nonprofit’s fundraising appeal to raise funds for a new playground. This means that nonprofits should pay careful attention to how donor solicitations are worded. 

 

Maintain Proper Documentation 

Regardless of the transaction type, it’s essential to maintain thorough documentation, including agreements, correspondence, and records of how funds were used. This documentation will support your revenue recognition decisions and provide transparency to donors and stakeholders. 

 

Understanding the nuances of nonprofit revenue recognition isn’t a gamble and YPTC is available to assist with resources, checklists, and experienced finance staff to help you apply the logic.  For more information about this topic, click here to watch the webinar or here to contact YPTC for assistance.