Learning objectives

• Identify the differences between exchange transactions and contributions.
• Determine how to recognize exchange transactions.

Background

FASB states a contribution is “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.”

Contributions are by definition non-exchange transactions. When a contribution is promised or received, the not-for-profit (NFP) would debit cash (or asset) and credit contribution revenue. In a non-exchange transaction, the donor does not receive something of equal value for the contribution. Some exceptions to the nonreciprocal contribution treatment include investments or distributions to owners and non-voluntary transfers, including fines and imposed taxes. Although they are not reciprocal, they are either transactions with owners or not voluntary.

FASB defines an exchange transaction as “a reciprocal transfer between two entities that results in one of the entities acquiring assets or services or satisfying liabilities by surrendering other assets or services or incurring other obligations.” In exchange transactions, each party receives and sacrifices of approximately commensurate value. Exchange transactions are not contributions. Purchasing an item from a museum store or buying tickets to the ballet are exchange transactions. The NFP would recognize a debit to cash and a credit to service revenue.

NFPs often receive grants, awards, and sponsorships. Determining if the item is a contribution or exchange transaction requires consideration of whether the resource provider receives value in exchange. In 2018, FASB addressed diversity in practice with respect to these types of items.

The NFP Advisory Committee and the AICPA’s NFP Expert Panel raised concerns with the difficulty in practice among NFPs with characterizing grants and similar contracts with government agencies as either exchange transactions (reciprocal) or contributions (nonreciprocal). This has been a longstanding issue for NFPs. However, with the implementation of the revenue recognition standard, it became more important for NFPs to get the classification correct. Accounting Standards Update (ASU) No. 2014-09, Revenue from Contracts with Customers (Topic 606), applies only to exchange transactions. Despite the degree of existing guidance, there is significant diversity in practice on the conclusions being reached in these scenarios. In some instances, similar grants are accounted for as nonreciprocal transactions (generally conditional) by some NFPs and as reciprocal transactions (exchanges) by other NFPs.

In June 2018, FASB issued ASU No. 2018-08, Clarifying the Scope and the Accounting Guidance for Contributions Received and Contributions Made, to clarify when the resource provider is receiving commensurate value. FASB indicated that a resource provider is not synonymous with the general public and indirect benefit received by the public as a result of the assets transferred is not equivalent to commensurate value received by the resource provider. In addition, execution of a resource providers’ mission or the positive sentiment from acting as a donor would not constitute commensurate value received by a resource provider for purposes of determining whether a transfer of assets is a contribution or an exchange. Therefore, fewer items would be subject to Topic 606.

ASU No. 2018-08 also clarifies that when a resource provider is not itself receiving commensurate value for the resources provided but the transfer of assets represents a payment from a third-party payer on behalf of an existing exchange transaction between the recipient and an identified customer, then the transaction is not a contribution. An example would be a patient who sees a doctor (patient revenue) but has no insurance, so the government (third party) pays the doctor. The doctor would recognize patient revenue and not a contribution.

Transfers to NFPs come in a variety of methods. Some transfers are agency transactions. Once it is determined that a transfer is not an agency transaction, the next determination is whether there is any portion of the transfer that represents a reciprocal transfer.

Sometimes, NFPs provide premiums, for example, address labels or calendars to donors or to potential donors. The cost of premiums that are part of mass fundraising appeals is a fundraising expense. Premiums do not cause a transfer to be a reciprocal transfer because recipients can keep the item whether or not they contribute. On the other hand, the cost of premiums given to donors to acknowledge the receipt of a contribution have to be assessed to determine whether the value received is more than nominal. If the costs of the premiums are nominal in value compared with the value of the goods or services donated by the resource provider, the entire amount would be treated as a contribution. The NFP would recognize the entire amount received as a contribution and fundraising expense for the value of the nominal item. The cost of premiums greater than nominal in value should be reported as cost of sales. If premiums are greater than nominal in value, transactions would be reported as part exchange transaction and part contribution.

Transactions that are part contribution and part exchange include an inherent contribution. FASB defines an inherent contribution as “a contribution that results if an entity voluntarily transfers assets (or net assets) or performs services for another entity in exchange for either no assets, or for assets of substantially lower value, and unstated rights or privileges of a commensurate value are not involved.”

NFPs should first determine the fair value of the exchange portion of the transaction. The difference between the contribution and the exchange portion would be reported as a contribution.

Sometimes, the determination of whether an item is a contribution or an exchange transaction is more complicated including items like sponsorships, naming rights, and grants. NFPs would then use the following indicators to determine the appropriate treatment.

Knowledge check

1. Which would be indicators of a contribution?
   1. Transferring resources in exchange for specified benefits.
   2. Payments that equal the value of assets to be received or cost plus markup.
   3. NFP is not penalized for nonperformance.
   4. The transaction is a third-party payment to an existing exchange transaction.
2. The NFP provides Christmas cards to donors who contribute more than $100. The Christmas cards are valued at $5. What is the proper treatment of Christmas cards?
   1. Expense $5 as general and administrative.
   2. Expense $5 as fundraising.
   3. Expense $5 as cost of sales.
   4. Expense $5 as program expense.
3. Big Software Inc. decides to provide a university a $50,000 grant to support the research activities of the science department. The grant provides that the university must provide a report showing how the funds were used, and that any unused funds must be returned to the state. What is the proper treatment?
   1. Exchange.
   2. Agency.
   3. Contribution.
   4. Part exchange and part contribution.

Case study

Part A

Identify if the transactions listed as follows are exchange transactions, contributions, or part exchange and part contributions. Write the journal entry the NFP would recognize for each transaction.

1. Natalie donates $50 to the ballet. As a thank you, her name is listed in the playbill as a donor.

    

    

2. Natalie donates $1,000 to her local science museum. She receives a pin and a mug. Her name is listed among donors in the annual giving report.

    

    

3. Natalie donates $10,000 to her favorite charity to sponsor their annual gala. She receives 10 tickets to the gala (worth $50 each) and her name is listed as a Platinum donor.

    

    

4. Natalie donates $50,000 to a hospital’s research department. The hospital agrees to name a laboratory after Natalie.

    

    

5. Natalie donates $100,000 from her business to her alma mater that is building a new physics lab. The new building displays Natalie’s company’s logo and is named after Natalie’s company. No other company can have its logo on the building.

Part B

Identify if the following transaction is an exchange transaction or a contribution. Explain your reason.

1. Jane Hoya is enrolled at CPA University. Jane’s total tuition charged for the semester is $45,000. She receives a $20,000 grant to use toward tuition that is paid directly by the federal government to CPA University.

    

    

2. ReSurch University applied for and was awarded a grant from the federal government. The university must follow the Uniform Guidance. ReSurch University is required to incur qualifying expenses to be entitled to the assets and any unspent money during the grant period is forfeited. Additionally, the university is required to return any advanced funding that does not have related qualifying expenses. ReSurch University is required to submit a summary of research findings to the federal government, but the university retains the rights to the findings and has permission to publish the findings if it desires.