Recording a Contribution vs. an Exchange

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Correctly categorizing contributions, donations, and grants for proper revenue recognition on the income statement has generally been a complicated exercise.  Fortunately, the Financial Accounting Standards Board (FASB) has updated the guidance needed to assist in properly recording these revenue sources.

FASB Accounting Standards Update (ASU) 2018-08, Clarifying the Scope and the Accounting Guidance for Contributions Received and Contributions Made, went into effect for all recipient organizations with annual periods beginning after December 15, 2018.  While this update is primarily to not-for-profit entities, it applies to any entity that receives or makes contributions of cash or other assets, including promises to give (within a certain scope).  

Why an Update is Needed

The primary purpose of ASU 2018-08 is to clarify and improve the understanding of the accounting guidance for contributions received and contributions made. This update helps an entity to determine whether a transaction should be accounted for as a contribution (which is a nonreciprocal transaction) or an exchange (a reciprocal transaction).

What is the difference between a contribution and an exchange?  

A contribution transaction is recognized as revenue immediately in the period the pledge or cash contribution is received.  There are no additional steps to complete, such as determining if there is a customer, whether an obligation has to be met prior to recognition, and if the revenue has to be recognized at a different point in time or over several points in time.  The guidance for recording contributions is found in Accounting Standards Codification (ASC) 958.  However, if a transaction is not a contribution then it is considered an exchange transaction and covered in ASC 606 which is a more complex accounting standard for recording revenue transactions.  

Understanding an Exchange

An exchange transaction is one in which there is a reciprocal exchange of value between an entity and a resource provider.  A simple exchange transaction is similar to a purchase conducted at a store register with an exchange of funds for an item.  Some exchange transactions are straightforward and easy to understand; however, there are some exchange transactions that are quite complicated.  Transactions between a not-for-profit and a governmental entity can be more complex.   

Below are four categories outlined in ASU 2018-08 to help determine if a transaction is an exchange or not.:

  1. There is direct commensurate value to the resource provider - this is an exchange

  2. The resource provider has identified specific customers to which its payment relates - this is an exchange

  3. The resource provider identifies groups of beneficiaries with eligibility criteria - this is not an exchange

  4. The benefit provided by the entity is to the general public - this is not an exchange

If a governmental entity pays for a benefit to the non-profit organization and the benefit is received by the general public and not the governmental entity, then the transaction is a non-exchange transaction.  A grant received for general program operations would also be considered a non-exchange transaction.  If the governmental entity specifies the recipient or beneficiary of an entity’s services, then the transaction is considered an exchange transaction and cannot be recorded as a contribution