When accountants discuss “revenue recognition” it may sound just a bit cloudy. When nonprofit accounting becomes part of the discussion, you may think that it is confusing.
Deciding whether or not a source of funds is revenue can be difficult to determine. Not-for-profit businesses have trouble answering questions like “How do we account for contributions?” “Do we have an obligation that makes this an exchange transaction?” “What about the money we have not yet received but have been promised?” “What if there are strings attached?” I am going to help you make sense of this essential part of not-for-profit accounting.
In order to help you understand this essential part of not-for-profit accounting, it is important to understand the three types of revenue that not-for-profits should think about that are all very different in nature as well as the guidelines about each type of revenue.
Contributions are transfers of assets that come without any conditions (or a settlement of liabilities) to a not-for-profit business that is nonreciprocal. That means that the person making the donation is not getting anything in return for their donation. There are three different types of contributions.
The three different types of contributions are no restrictions, restricted on a temporary basis, or restricted forever. Contributions can be cash and noncash, such as tangible property or services. We can also view contributions as a donor’s promise to donate. You should recognize a contribution at its fair market value during the period that the not-for-profit business was given it without any conditions by the donor.
Promise to Give (Also Known as a Pledge)
A promise to give, also called a pledge, can be stated verbally or agreed upon in a document. The contributor can give cash or other resources. You may think that is very similar to a contribution. However, you may not know that, unlike a contribution, a pledge may come with conditions. The donor can have rules and regulations in place when it comes to the donation.
The donor may have rules and regulations in place that have to be overcome before the pledge can be thought of as a contribution. They may include how or when the organization that is getting the funds can use the funds. The conditions make it possible for the donor to get the donation back if they want it back or for the donor to back out of making the donation at all.
Not every pledge will have conditions attached to it. However, they should be thought of as a contribution and not a pledge. We also need to know that a promise to give can be long-term. However, if that does happen, present value or a different type of valuation method can be used. You need to keep in mind that the value does need to be looked at from time to time just in case we need to adjust the value until all of the promised contributions are collected.
The last type of contribution is an exchange transaction. Exchange transactions are reciprocal transactions where the not-for-profit business gets assets (or settles a liability) by transferring other assets, providing services, or incurring other obligations. At times, it is very simple to know the difference between a contribution and an exchange transaction.
Sometimes, it is very easy to tell the difference between a contribution and an exchange transaction. Other times, grants, scholarships, and fundraising event tickets and even membership dues could be recognized as a full contribution, exchange revenue, or a mixture of both. An exchange transaction takes place when the amounts are realized or realizable and earned. The last thing we are going to do is compare agency transactions and contributions.
Comparing Agency Transactions and Contributions
Agency transactions are exchange transactions where a not-for-profit business has the role of an agent, trustee, or intermediary for another party. When this takes place, a donor transfers assets to a business that, in turn, must transfer the assets to a third-party recipient per the guidelines of the donor. It is not considered to be a contribution to the not-for-profit organization though.
This is not a contribution to the not-for-profit organization because the organization really has no control over how the funds are used. An example of this is when a government agency gives money to an inner-city nonprofit for the purchase and sharing something to a number of recipients that get transportation vouchers, and the nonprofit is paid a small percentage of the total dollars distributed for a particular purpose to this program. In a case similar to this, the total amount of funds received by the not-for-profit does not count as revenue- only the small amount that they get to keep.
Government entities and foundations are typically the ones that disperse grants. They usually have a budget and contracts already in mind. How frequent grants reports are distributed can vary from monthly, quarterly, to on an annual basis. If businesses or people get grants, the funding can stop if they do not send out their grant reports. The companies that give out the grant money can audit an organization and tell them that they need to return the money that they do not spend. There are different kinds of grants as well.
One type of grant is a pass-through and nondiscretionary grant. It is given to a not-for-profit organization and they give it to another organization or spend it on behalf of that organization. Third-party reimbursements are payments by a third party to a not-for-profit organization for goods delivered or services rendered to the beneficiaries of the not-for-profit organization. A cost-reimbursement grant reimburses specific costs incurred by the not-for-profit while they were performing a specific program activity
Program support (operating) grants disburse funds to an organization or one of their programs can operate. Unless the donor places conditions on the grant, it is looked at as revenue as soon as it is given out. A challenge grant is when a not-for-profit organization has to raise funds from other donors in order to get the funds from the challenge grant. A unit of service performance grant is a specific amount paid by the grantor according to a formula based on units of service provided by the not-for-profit organization. A clinical trial agreement is a grant that is given to an institution so they can have a drug, process, or product tested out. Research grants are basically the same as a clinical trial grant except these funds are to conduct research and development activities.
I truly hope that you now understand the world of revenue recognition and what it is all about.
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