Revenue Recognition Topics in Nonprofit Accounting

 

Revenue recognition is an important topic for nonprofit accounting. Recent FASB updates changing revenue recognition guidelines and standards for nonprofits make it more important than ever to be clear on how your organization recognizes revenue.

Many nonprofits struggle with the decision to recognize revenue as contributions or exchange transactions. The distinction between the two can be made when you examine the differences between them.

Contributions:

  • The not-for-profit solicits for a contribution. It’s clear they are seeking contributions.
  • NFP is not penalized for nonperformance.
  • Resource provider states or insists that it is making a contribution.

Exchange Transactions:

  • Resource provider states that it is providing a resource in exchange for benefits.
  • Payment by the resource provider equals the value of the assets to be provided by the recipient, not-for-profit (NFP) organization, or the asset cost plus a markup.
  • NFP is penalized for nonperformance or for not completing the project.
  • Assets are delivered by a provider to individuals or organizations closely related to the nonprofit.

There are certainly gray areas between the two. Many nonprofit accountants ask clients to bring in anything they aren’t certain of to ensure it’s recorded correctly. It helps to get a second opinion on many of these issues.

Making a Difficult Judgment Call

It is often a judgment call as to whether something should be recognized as a contribution or exchange.

FASB Accounting Standards Codification (ASC) Section 958-605-25 asks that nonprofits wait to recognize contributions unless they are sure that all the conditions around contributions are met. For example, if you’re running a matching donation program, wait to record the donations until the conditions of the match are met. Otherwise, you run the risk of having to correct numerous entries.

There are some examples when conditions can be so easily met that it is acceptable practice to report the contributions immediately. If the conditions of a donation are simple, such as a thank you letter or public acknowledgment, this can be made quickly and easily. It may be a simple matter to report the contribution immediately.

Another area that may be a judgment call is the difference between promises to give and intentions to give. What’s the difference? Let’s say that someone calls a nonprofit organization and claims they will give it $50,000 in their will. That’s merely an intention to give. There is no binding, legal information holding that person to their claim. On the other hand, an actual will, filed in a court jurisdiction, that includes a legally binding statement of the gift of $50,000 may be accepted as a promise to give. In that case, it is now an obligation of a creditor. The estate is held to account and must complete the transaction, so the amount can be recorded by the nonprofit.

Certainly, there are many areas where professional judgment must be used to determine when, how, and why to record items in specific ways. Accounting may be viewed as a very black and white profession, and while it is true that $1 is $1, no matter how you look at it, the type and category under which that amount may be recorded may be subject to an accountant’s scrutiny and judgment.

That’s why it is so important with nonprofit accounting to find a professional services firm you can trust. Your accountant will make many judgment calls and help guide you through the many state and federal laws and guidelines to handle your nonprofit finances. With a good accounting firm by your side, you can rest easy, knowing that your finances are handled to the benefit of your organization and its constituents.

RBP Methods

RBP Methods helps right-brained people navigate a left-brained world. We offer nonprofit software and consulting services. We’d love to talk to you about your online fundraising or other needs. Contact us today or call 503-648-9051.