Contributions and Exchange Transactions Are Handled Differently for Accounting

Accounting for contributions is different than for exchange transactions, so it is important to know the difference.

Income from contributions is recorded as soon as a firm commitment exists.  That is true even if the contribution is subject to restrictions, or if it won't be received until a future date.

Income from exchange transactions is recorded as costs are incurred or services performed.  Receipts or receivables from exchange transactions that require additional services should be reported as a liability (unearned income).

Unfortunately, terms like grant or contract do not provide certainty about whether you have a contribution or an exchange transaction.  Also, while governmental funders are more likely to enter into exchange transactions, they do provide some amounts that qualify as contributions.

Here is some guidance to help you differentiate contributions from exchange transactions. The following are indicators that you have an exchange transaction:

• The not-for-profit organization states it is seeking funding for specific services that they will provide.

• The resource provider states that it is transferring resources in exchange for specified services.

• The resource provider specifies the time and place of delivery of services.

• The total payment is based on the quantity of services to be provided.

• The not-for-profit organization is penalized for nonperformance beyond the amount of the payment.

• Individuals or organizations that receive services from the not-for-profit organization are closely connected to the resource provider.

You should consider each of these areas in determining proper classification.

We know how difficult it is to distinguish contributions from exchange transactions.  We discuss specific situations regularly in our office; so, please call us if you are uncertain about the treatment of payments you receive.