All engines need some type of fuel to function. Not-for-profits (NFPs) also need fuel (that is, resources) to function and achieve their mission. Exchange transactions and contributions are key sources of fuel that power NFPs to make a vital difference in our society and the world. In this chapter, we will discuss exchange transactions and contributions and how they are accounted for and reported. We will also address the concept of agency transactions.
In June 2018, FASB issued Accounting Standards Update (ASU) No. 2018-08, Clarifying the Scope and the Accounting Guidance for Contributions Received and Contributions Made. This standard is intended to clarify and improve current guidance about whether a transfer of assets is an exchange transaction or a contribution. If the donors or grantors receive commensurate value in return for the resources provided, the asset transfer is an exchange (reciprocal) transaction.
For contributions (nonreciprocal transactions), the standard requires that an entity determine whether a contribution is conditional based on whether an agreement includes a barrier that must be overcome and either a right of return of assets transferred or a right of release of a promisor’s obligation to transfer assets. Conditional contributions are recognized as liabilities or not recognized at all until the barriers are overcome, at which point the transaction is recognized as unconditional and classified as either net assets with restrictions or net assets without restrictions. Unconditional contributions are recognized as revenue when received. This chapter reflects the requirements of ASU No. 2018-08.
NFPs receive inflows of resources from a variety of sources as shown in exhibit 2-1.
How these resources are classified will result in differences in how they are recognized and reported. As shown in exhibit 2-1, the inflow of resources can come from the following:
Exhibit 2-2 is a flowchart that provides guidance for determining whether a transfer of assets includes a contribution.
Exchange (reciprocal) transactions are transfers in which each party receives and sacrifices something of commensurate value. For example, fees charged for providing goods and services to members, clients, students, and customers that receive commensurate benefits are revenues from exchange transactions. This is similar to how a business enterprise would define revenue.
The core principle of the revised revenue recognition standard is that an entity should recognize revenue to depict the transfer of goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those good or services.
To apply the revenue recognition standard, ASU No. 2014-09, Revenue from Contracts with Customers (Topic 606), an entity should follow these five steps:
Under the new standard, revenue is recognized when an entity satisfies a performance obligation by transferring a promised good or service to a customer (which is when the customer obtains control of that good or service).
In some situations, judgment is required to determine whether an increase in net assets should be reported as a revenue or as a gain. Exchange (reciprocal) transaction revenues result from an entity providing goods and services that are part of the entity’s ongoing major or central activities. Revenues are different than gains. Gains result from activities that are peripheral or incidental to the entity. Some activities that are reported as revenue by some entities would be reported as gains by others. A library that has a major, annual book sale would report this activity as revenue, whereas a church that sells a cookbook as part of a 25-year anniversary celebration would likely report this activity as a gain.
It may be difficult to determine if an activity is peripheral or incidental to an entity or if the activity is part of the organization’s ongoing major or central operations. In making this determination, an entity should consider the frequency of the events and the significance of the event’s gross revenue and expenses. Events are considered ongoing major and central if
Step 1 is to identify the contract with the customer. A contract is an agreement between two or more parties that creates enforceable rights and obligations. A contract can be written, oral, or implied by an entity’s customary business practices. An entity should apply the requirements to each contract that meets the following criteria:
Step 2 is to identify the performance obligations in the contract.
A performance obligation is a promise in a contract with a customer to transfer a good or service to the customer. If an entity promises in a contract to transfer more than one good or service to the customer, the entity should account for each promised good or service as a performance obligation only if it is (1) distinct or (2) a series of distinct goods or services that are substantially the same and have the same pattern of transfer.
A good or service is distinct if both of the following criteria are met:
A good or service that is not distinct should be combined with other promised goods or services until the entity identifies a bundle of goods or services that is distinct.
The following are examples of promised goods or services (performance obligations):
Step 3 is to determine the transaction price. The transaction price is the amount of consideration to which an entity expects to be entitled in exchange for transferring promised goods or services to a customer, excluding amounts collected on behalf of third parties.
To determine the transaction price, an entity should consider the following:
In the case of variable consideration, the entity will need to estimate the amount to include in the transaction price using either the expected value (that is, the probability-weighted amount) or the most likely amount, depending on which method management expects will better predict the amount of consideration to which the entity will be entitled. FASB specifies that the estimate of variable consideration should be included in the transaction price only to the extent it is probable that no significant reversal in the amount of cumulative revenue recognized will occur when the uncertainty associated with the variable consideration is subsequently resolved.
An entity should adjust the promised amount of consideration for the effects of the time value of money if the timing of the payments agreed upon by the parties to the contract (either explicitly or implicitly) provides the customer or the entity with a significant benefit of financing for the transfer of goods or services to the customer. In assessing whether a financing component exists and is significant to a contract, an entity should consider various factors. As a practical expedient, an entity need not assess whether a contract has a significant financing component if the entity expects at contract inception that the period between payment by the customer and the transfer of the promised goods or services to the customer will be one year or less.
Noncash consideration (or promise thereof) should be measured at fair value. If an entity cannot reasonably estimate the fair value of the noncash consideration, it should measure the consideration indirectly using the stand-alone selling price of the goods or services promised in exchange for the consideration.
If an entity pays, or expects to pay, consideration to a customer in the form of cash or items (for example, a coupon, credit, or voucher) that the customer can apply against amounts owed, the entity should account for the payment (or expectation of payment) as a reduction of the transaction price, as a payment for a distinct good or service, or both.
Step 4 is to allocate the transaction price to each performance obligation in the contract in an amount that depicts the consideration to which the entity expects to be entitled in exchange for satisfying each performance obligation.
To do this, an entity must determine the stand-alone selling price at contract inception of the distinct goods or services underlying each performance obligation. The transaction price then would typically be allocated on a relative stand-alone selling price basis.
If a stand-alone selling price is not observable, an entity must estimate it.
Sometimes, the transaction price includes a discount or variable consideration that relates entirely to one of the performance obligations in a contract. The requirements specify when an entity should allocate the discount or variable consideration to one or more performance obligations rather than to all performance obligations in the contract.
An entity should allocate to the performance obligations in the contract any subsequent changes in the transaction price on the same basis as at contract inception. Amounts allocated to a satisfied performance obligation should be recognized as revenue, or as a reduction of revenue, in the period in which the transaction price changes.
Step 5 is to recognize revenue when (or as) the performance obligations are satisfied. A performance obligation is satisfied by transferring a promised good or service to a customer, and a good or service is transferred when (or as) the customer obtains control of that good or service.
For each performance obligation, an entity should determine whether the entity satisfies the performance obligation over time by transferring control of a good or service over time, that is, by determining if one of the following criteria is met:
If a performance obligation is not satisfied over time, an entity satisfies the performance obligation at a point in time. To determine the point in time at which a customer obtains control of a promised asset and an entity satisfies a performance obligation, the entity would consider indicators of the transfer of control, which include, but are not limited to, the following:
For each performance obligation that an entity satisfies over time, an entity should recognize revenue over time by consistently applying a method of measuring the progress toward complete satisfaction of that performance obligation. Appropriate methods of measuring progress include output methods and input methods. As circumstances change over time, an entity should update its measure of progress to depict the entity’s performance completed to date.
The recognition, measurement, and display of revenues and related receivables arising from exchange (reciprocal) transactions are similar for both NFP and for-profit entities using accrual accounting. Revenue is recognized when a company satisfies a performance obligation by transferring a promised good or service to a customer (which is when the customer obtains control of that good or service). Revenues should be measured by the increase in cash, receivables, or other assets or by the decrease in liabilities resulting from the transaction. Revenues from exchange (reciprocal) transactions are reported as increases in net assets without donor restrictions in a statement of activities.
Revenues from exchange transactions are reported gross of any related expenses. If the entity regularly provides discounts (such as financial aid for students that is not reported as an expense, reduced fees for services, or free services) to certain recipients of its goods or services, revenues should be reported net of those discounts.
Receivables arising from exchange transactions should be reported at net realizable value if the amounts are due within one year. Long-term receivables should be reported in conformity with FASB ASC 310-10-35. Pursuant to FASB ASC 210-10-45-13, a valuation allowance for uncollectible receivables should be deducted from the receivables to which the allowance relates and should be disclosed.
As we will soon discuss, contributions are an unconditional transfer of cash or other assets, as well as unconditional promises to give, to an entity or a reduction, settlement, or cancellation of its liabilities in a voluntary nonreciprocal transfer by another entity acting other than as an owner. Sometimes an entity will give such things as calendars or mailing labels to potential donors. Also, some entities give things like coffee mugs or T-shirts to actual donors. Because something of value is given, does this make it an exchange transaction? Generally no, if the items given are of nominal value. In such cases, the full amount received would be considered a contribution and the cost of the items given would be a fund-raising expense.
Is it possible for a transaction to be considered part exchange and part contribution? Yes. For example, if the item given to a donor has more than nominal value, but is less than the value of the donation received, the transaction would be considered part exchange and part contribution.
In determining whether a transfer of assets is an exchange transaction in which a resource provider (for example, a government agency, a foundation, a corporation, or other entity) receives commensurate value in return for the resources transferred or a contribution, the type of resource provider shall not factor into the determination and an entity shall evaluate the terms of an agreement and consider the following:
A single transaction may be part exchange and part contribution. For example, an individual may enter into an agreement to transfer land to an NFP at a price substantially lower than fair value. Following the steps described earlier, the NFP would assign a price to the performance obligation for the transfer of the land. The difference between the price assigned to the land and the amount paid would be a contribution.
Some entities receive grants, awards, or sponsorships from other entities. Many of these are contributions, but some of these items may be exchange transactions. If the value received by the resource provider is nominal or incidental to the potential public benefit from the resource provided, the transaction would be considered a contribution. ASU No. 2018-08 explicitly states that societal benefit is not commensurate value, even if it furthers the resource provider’s charitable mission
However, in some cases, grants, awards, or sponsorships are considered an exchange transaction. For example, a company may engage an NFP university to conduct research on the effects of a new drug. The company specifies the requirements for the research and also retains the rights to the results from the research.
Some entities receive dues from their members. These dues may be considered exchange, part exchange and part contribution, or all contribution. Classifying dues depends on tangible or intangible benefits received. For example, if an entity has a membership fee of $100 and the only tangible benefit a member receives is an annual publication with a fair value of $25, the entity would classify $75 of the dues as a contribution and $25 as an exchange transaction. If dues are classified as exchange transactions, they should be recognized as revenue as the earnings process is completed.
Revenue derived from membership dues in exchange transactions should be recognized over the period to which the dues relate. Nonrefundable initiation and life membership fees received in exchange transactions should be recognized as revenues in the period in which the fees become receivable if future fees are expected to cover the costs of future services to be provided to members. If nonrefundable initiation and life membership fees, rather than future fees, are expected to cover those costs, nonrefundable initiation and life member fees received in exchange transactions should be recognized as revenue over the average duration of membership, the life expectancy of members, or other appropriate time periods.
Many entities offer naming opportunities for resources providers. For example, a college may provide the opportunity to name a building or classroom for receiving a certain dollar amount. An entity needs to consider if the resources received are a contribution, exchange transactions or some combination of both.
If the public recognition and accompanying rights and privileges are nominal in value to the resource provided, the entity has received a contribution. However, the entity needs to consider specific facts and circumstances around the naming opportunity. Exhibit 2-3 contains a list of indicators that may be helpful in determining if a naming opportunity is a contribution, exchange transaction, or a combination of both. Some indicators may be more significant than others: however, no single indicator is determinative of the classification of a particular transaction.
Individuals, foundations, businesses, and other entities make all kinds of donations to NFP entities. Donations can take the form of things such as cash or other assets, including securities, land, buildings, use of facilities or utilities, materials and supplies, intangible assets, services, and unconditional promises to give those items in the future. Contributions represent unconditional transfers of cash or other assets, as well as unconditional promises to give, to an entity or a reduction, settlement or cancellation of its liabilities in a voluntary nonreciprocal transfer by another entity acting other than as an owner. In a contribution transaction, the resource provider often receives value indirectly by providing a societal benefit, although the benefit is not considered to be of commensurate value.
Unconditional contributions received are recognized as revenue in the period received. Some contributions can come with conditions, restrictions, or both. This following section will cover when and how contributions are measured.
As stated previously, donations can contain conditions, restrictions, or both. ASU No. 2018-08 provides guidance on reporting conditional and restricted contributions. For contribution to be considered conditional, it must have both of the following:
An NFP needs to consider facts and circumstances to determine if a barrier exists. To determine if an agreement contains a barrier, ASU No. 2018-08 provides the following indicators (some indicators may be more significant than others):
A conditional contribution is different from a donor-imposed restriction that limits the use of a contribution to some specific purpose that is narrower than the broad nature and purpose of the organization.
An example of a conditional contribution is when a donor pledges $100,000 if the entity can raise an additional $100,000 in the next 12 months. It contains both a barrier and a right to be released from the promise to provide resources. An example of a restricted contribution is when a donor stipulates that a $10,000 gift must be used for a specific program of an organization.
Contributions made to entities may or may not have donor-imposed restrictions. Donor-imposed restrictions (donors include other types of contribution such as certain grants) specify the use of a contributed asset that is more specific than the broad limits resulting from the nature of the NFP, the environment in which it operates, and the purposes specified in its articles of incorporation or bylaws or comparable documents for an unincorporated association. Donor-imposed restrictions can either perpetually or temporarily limit the use of contributed assets. Generally, restrictions are stipulated explicitly by the donor in a written or oral communication accompanying the gift. In addition to explicit donor-imposed restrictions, there are certain contributions that may have implied restrictions.
In addition to explicit donor-imposed restrictions, there are certain contributions that may have implied restrictions as follows:
Some entities receive contributions of long-lived assets (for example, equipment and buildings) or cash and other assets restricted to the purchase of long-lived assets. Often, the donor will not expressly stipulate how or how long the long-lived asset must be used by the organization. Absent donor stipulations specifying how long such donated assets or assets constructed or acquired with cash restricted for such acquisition or construction must be used, restrictions on long-lived assets, if any, expire when the assets are placed in service as required by FASB ASC 958-205-45-12.
Contributions with donor-imposed restrictions (explicit or implied) will increase net assets with donor restrictions. Contributions with no donor-imposed restrictions increase net assets without donor restrictions.
Some donor restrictions are perpetual in nature and limits the use of assets that neither expire by passage of time nor can be fulfilled or otherwise removed by the organization’s action. For example, a gift of securities to establish an endowment. Some donor restrictions limit the use of assets by donor-imposed stipulations that either expire by passage of time (time restriction) or can be fulfilled and removed by actions of the entity pursuant to those stipulations (purpose restriction). For example, a restriction on a contribution to acquire certain equipment expires when the equipment is acquired by the organization.
In some cases, donor-imposed restrictions are met in the same period that the contribution is received. An entity may adopt an accounting policy that would report such contributions as net assets without donor restrictions. For example, suppose a library receives a donation during the year restricted to the purchase of books and expends those resources to purchase books during the same year. The library may adopt a policy to report such contributions as increases in net assets without donor restrictions. Such a policy would have to be consistent from period to period and properly disclosed in the notes to the financial statements. The entity would also have to have a similar policy for investment gains and income that have donor-imposed restrictions.
Unconditional promises to give cash or other assets in the future are contributions and would be reported as receivables and contribution revenues in the period the unconditional promises are made. An unconditional promise to give can be either a written or an oral agreement.
There should be sufficient verifiable evidence that an unconditional promise to give has been made. Such evidence may include written agreements and pledge cards. For oral promises, evidence can include tape recordings, written minutes, and follow-up written confirmations.
In addition to unconditional promises to give, some entities may also receive intentions to give. Intentions to give are not unconditional promises to give and would not be recorded because individuals retain the ability to rescind their intention to give. For example, an individual may indicate that an entity has been included in their will as a beneficiary. Because the individual retains the ability to change the will, this is considered an intention to give and would not be recorded. NFP entities should disclose information about conditional promises in valid wills.
Unconditional promises to give that are due in future periods generally increase net assets with donor restrictions, rather than net assets without donor restrictions. If, however, the donor explicitly stipulates that the promise to give is to support current-period activities or if other circumstances surrounding the promise make it clear that the donor’s intention is to support current-period activities, unconditional promises to give should be reported as increases in net assets without donor restrictions.
Many NFP entities depend on volunteers for a variety of functions. Some contributed services should be recognized in the financial statements as illustrated in the following:
Just because an individual has a specialized skill does not mean that it meets the criteria to be reported. For example, a CPA may volunteer for an entity in a position that does not require his or her CPA skills or create or enhance a nonfinancial asset. Therefore, this contributed service would not be reported in the financial statements. However, for example, if the CPA contributes his or her services to a position that requires those skills and typically the entity would have to pay for those services, it would be reported in the financial statements.
FASB ASC 958-720 provides additional guidance for the situation when service is contributed from employees of a separately governed affiliated entity. Specifically, it requires an NFP entity to recognize all services received from personnel of an affiliate that directly benefit the organization. Those services should be measured at the cost recognized by the affiliate for the personnel providing those services, or, if elected, at the fair value of the service because the measurement at cost will significantly overstate or understate the value of the service received.
The standard applies to NFP entities that receive services from personnel of an affiliate that directly benefit the recipient NFP entity and for which the affiliate does not charge the recipient NFP entity. Charging the recipient NFP entity means requiring payment from the recipient NFP entity at least for the approximate amount of the direct personnel costs (for example, compensation and any payroll-related fringe benefits) incurred by the affiliate in providing a service to the recipient NFP entity or the approximate fair value of that service.
Some entities receive noncash assets, which are often referred to as gifts in kind. Gifts in kind that can be used internally or sold should be reported as revenues at fair value. If the gift has no value (such as certain used clothing) and cannot be used internally (or for program purposes) or sold, the item received should not be recorded.
Some entities receive items that will be used for fund-raising purposes (such as tickets to events or gift certificates) as part of a fund-raising event. For example, tickets to a play may be donated to an entity that will auction them off as part of an annual fund-raising event. Such items should be recorded as contribution revenue at fair value when received. When the item is sold, the difference between the amount received and the amount the item was initially recorded at should be recorded as an adjustment to the original contribution. For example, a gift certificate with a fair value of $50 donated to an entity for a charity auction would initially be recorded as a contribution revenue of $50. If the item is sold at the auction for $40, a reduction of $10 in contribution revenue would be recorded.
NFPs may receive unconditional contributions of the use of electric, telephone, and other utilities and of long-lived assets (such as a building or the use of facilities) in which the donor retains legal title to the long-lived asset. Entities receiving such contributions should recognize contribution revenue in the period in which the contribution is received and expenses in the period the utilities or long-lived assets are used. If the transaction is an unconditional promise to give for a specified number of periods, the promise should be reported as contributions receivable and as restricted support that increases net assets with donor restrictions.
Unconditional promises to give the use of long-lived assets (such as a building or other facilities) for a specified number of periods in which the donor retains legal title to the long-lived asset may be received in connection with leases or may be similar to leases but have no lease payments. For example, NFP entities may use facilities under lease agreements that call for lease payments at amounts below the fair rental value of the property. In such circumstances, the NFP entity should report a contribution for the difference between the fair rental value of the property and the stated amount of the lease payments. (However, amounts reported as contributions should not exceed the fair value of the long-lived asset at the time the entity receives the unconditional promise to give.) The contribution receivable may be described in the financial statements based on the item whose use is being contributed, such as a building, rather than as contributions receivable.
Many entities hold certain assets that are collections. Collections represent works of art, historical treasures, or similar assets that meet all of the following criteria:
The fair value of contributed services that create or enhance nonfinancial assets should be estimated based on (a) the fair value of the services received or (b) the fair value of the assets created (or the change in the fair value of the asset that is being enhanced), whichever is more readily determinable. A fair value measurement should be determined based on the assumptions that market participants would use in pricing the asset. Market participant assumptions should include assumptions about the effect of a restriction on the sale or use of an asset if market participants would consider the effect of the restriction in pricing the asset.
FASB ASC 820-10-55-51 Example 6: Restricted Assets explains that restrictions that are an attribute of an asset, and therefore would transfer to a market participant, are the only restrictions reflected in fair value. Donor restrictions that are specific to the donee are reflected in the classification of net assets, not in the measurement of fair value.
Major uncertainties about the existence of value of a contributed asset may indicate that a contribution should not be recognized. Such uncertainties are often present when an item has no use other than for scientific or educational research or for its historical significance. Examples of such items include flora, fauna, photographs, and objects identified with historic persons, places, or events.
If a promise to give has not previously been recognized as contribution revenue because it was conditional, fair value should be measured when the conditions are met.
The present value of the future cash flows is one valuation technique for measuring the fair value of contributions arising from unconditional promises to give cash; other valuation techniques also are available, as described in FASB ASC 820. Exhibit 2-5 illustrates the use of present value techniques for initial recognition and measurement of unconditional promises to give cash that are expected to be collected one year or more after the financial statement date.
Appendix A includes excerpts from the AICPA white paper Measurement of Fair Value for Certain Transactions of Not-for-Profit Entities that discuss fair value measurement of a promise to give cash and other financial assets that are due in one year or more.
A present value technique is one valuation technique for measuring the fair value of an unconditional promise to give noncash assets; other valuation techniques also are available, as described in FASB ASC 820. If present value techniques are used, the fair value of contributions arising from unconditional promises to give noncash assets might be determined based on the present value of the projected fair value of the underlying noncash assets at the date and in the quantities that those assets are expected to be received, if the date is one year or more after the financial statement date. (Both the [a] likelihood of the promise being fulfilled and [b] future fair value of those underlying assets, such as the future fair value per share of a promised equity security, should be considered in determining the future amount to be discounted.) In cases in which the future fair value of the underlying asset is difficult to determine, the fair value of an unconditional promise to give noncash assets may be based on the fair value of the underlying asset at the date of initial recognition. (No discount for the time value of money should be reported if an asset’s fair value at the date of initial recognition is used to measure the fair value of the contribution.)
If present value techniques are used to measure the fair value of unconditional promises to give, an NFP entity should determine the amount and timing of the future cash flows of unconditional promises to give cash (or, for promises to give noncash assets, the quantity and nature of assets expected to be received). In making that determination, NFP entities should consider all the elements in FASB ASC 820-10-55-5, including when the receivable is expected to be collected, the creditworthiness of the other parties, the organization’s past collection experience and its policies concerning the enforcement of promises to give, expectations about possible variations in the amount or timing of the cash flows (that is, the uncertainty inherent in the cash flows), or both, and other factors concerning the receivable’s collectibility.
We have already addressed several aspects regarding the treatment of gains and losses. Now we will briefly further address the identification of gains and losses. Gains and losses result both from an organization’s peripheral or incidental activities and from events and circumstances that stem from the environment and that are largely beyond the control of a particular entity and its management. The following are some examples of activities that may be reported as gains and losses:
There are several situations in which an NFP entity receives assets it has little discretion over the use of. In these cases, the NFP entity may be acting as an agent, trustee, or intermediary in helping a donor make a contribution to another entity or individual. FASB ASC 958-605 provides guidance on how to report such transactions.
Some examples of entities that receive assets that will be passed to other entities are federated fund-raising entities, community foundations, and institutionally related entities, but any entity can function in those capacities. An example of this type of transaction is a situation in which a donor passes assets to an NFP entity (recipient organization) and instructs that entity to transfer those assets to another entity (the beneficiary) named by the donor.
The donor may specify the beneficiary by
In general, the recipient entity should not recognize contribution revenue when it receives such assets and should not report a donation when it transfers the assets to the beneficiary. Instead, the recipient entity would record an increase to assets and liabilities for the fair value of assets received. When assets are transferred to the beneficiary, the recipient entity would reduce assets and liabilities.
In some cases, a donor may explicitly grant a recipient entity the unilateral power to redirect (variance power) the transferred assets to an entity other than the beneficiary specified by the donor. When this happens, the recipient entity would recognize contribution revenue for the amount of transferred assets as long as the named beneficiary is unaffiliated with the donor. If the donor names itself or its affiliates, the recipient entity would not recognize contribution revenue.
NFP entities receive inflows of resources from a variety of sources. The source of the inflows affects how the transactions are measured and reported. Due to the variety of sources, the accounting and reporting for this area can become complex. However, this information is important to financial statement users.
NFPs must first determine whether a transaction is an exchange transaction or a contribution. For exchange transactions, revenue is recognized when an NFP satisfies a performance obligation by transferring a promised good or service to a customer.
For a contribution, the NFP must then determine if it is conditional or unconditional. Revenue is recognized when the contribution becomes unconditional. Contributions can also contain donor-imposed restrictions that will increase net assets with donor restrictions.