Have you ever heard someone say: “Nonprofit accounting? Oh, that’s easy”? To that I say, HA! Whether it’s accounting for endowments in accordance with UPMIFA, determining how to value in-kind donations or dealing with donor restrictions, nonprofit organizations can have some very challenging accounting issues.
One of those perplexing issues has always been determining whether to account for a revenue transaction as a contribution or an “exchange.” The Financial Accounting Standards Board (FASB) has come to the rescue with ASU 2018-08, which provides more guidance on when transactions are contributions versus exchange transactions.
Why Is It Important to Know Whether Your Transaction is a Contribution or an Exchange?
Under GAAP, non-exchange, or “contribution” transactions are recognized as revenue immediately in the period the pledge or cash contribution is made. With contributions, there is no assessment of whether there is a customer, which obligation(s) have to be met before the revenue is recognized, or whether the revenue should be recognized at some point in time or over some period of time. None of those activities are required under ASC 958, which governs accounting for contributions.
Under ASU 2018-08, if you don’t have a contribution, then you have an “exchange” transaction that must be accounted for under ASC 606, Revenue From Contracts With Customers. Revenue transactions under ASC 606 are much more complex than the simple immediate recognition of contributions.
Read “How to Create Your Revenue Recognition Accounting Policy and Prepare for the New Disclosures”
What is an Exchange Transaction and Why Is Commensurate Value So Important?
An exchange transaction is one in which there is a commensurate (reciprocal) exchange of value between the nonprofit and a resource provider. These transactions are essentially the same in nature as those engaged in by commercial entities. An easy to understand example is tuition revenue of a private school. The school charges tuition and in turn provides a specified period of education for the student. The tuition paid represents commensurate value for the education provided (a reciprocal exchange of value), and we have an exchange transaction to be accounted for under ASC 606. That sounds pretty straight forward, right? So why did we even need ASU 2018-08 for guidance?
While some exchange transactions are pretty obvious, such as the above tuition example, others are not. The most common type of transactions that caused disparity in practice were transactions with government entities. Some believed that governmental entities could not give a “contribution” and that all such transactions were exchanges in nature, while others did not. ASU 2018-08 helps settle this disparity.
Under ASU 2018-08, if the benefit of the nonprofit activity paid for by a governmental entity is received by the general public, rather than the government itself, the arrangement is not an exchange of commensurate value and the transaction is non-exchange. On the other hand, if the governmental entity identifies specific beneficiaries of the nonprofit’s services, then the arrangement is considered to be an exchange. An example would be where a county mental health authority provides a nonprofit clinic with a capitated payment to provide services to specified persons who are registered with that authority. Contrast that with a grant from the same authority to the nonprofit clinic for general program operations, which would be a contribution.
4 Transaction Categories to Help You Decide
The guidance under ASU 2018-08 clarifies whether a transaction is an exchange in nature or not by breaking transactions into four groups:
- There is direct commensurate value to the resource provider (exchange)
- The resource provider has identified specified customers to which its payment relates (exchange)
- The resource provider identifies groups of beneficiaries with eligibility criteria (non-exchange)
- The benefit provided by the nonprofit is to the general public (non-exchange)
With a solid of “commensurate value” and how it impacts your revenue recognition, as well as the additional guidance offered by ASU 2018-08, it should be easier to determine what type of transaction you are trying to record for your not-for-profit. The ASU is effective for nonprofits with fiscal years beginning after December 15, 2018.
Contact Steve Guarini at firstname.lastname@example.org or a member of your service team to discuss this topic further.
Cohen & Company is not rendering legal, accounting or other professional advice. Information contained in this post is considered accurate as of the date of publishing. Any action taken based on information in this blog should be taken only after a detailed review of the specific facts, circumstances and current law.