Learning objectives

• Identify key concepts regarding exchange (reciprocal) transactions.
• Identify some of the critical characteristics of contributions and the conditions and restrictions that may be placed upon them.
• Identify how to recognize and report promises to give and contributed services.

Introduction

All engines need some type of fuel to function. Not-for-profits (NFPs) also need fuel (that is, resources) to function and achieve their mission. Exchange transactions and contributions are key sources of fuel that power NFPs to make a vital difference in our society and the world. In this chapter, we will discuss exchange transactions and contributions and how they are accounted for and reported. We will also address the concept of agency transactions.

In June 2018, FASB issued Accounting Standards Update (ASU) No. 2018-08, Clarifying the Scope and the Accounting Guidance for Contributions Received and Contributions Made. This standard is intended to clarify and improve current guidance about whether a transfer of assets is an exchange transaction or a contribution. If the donors or grantors receive commensurate value in return for the resources provided, the asset transfer is an exchange (reciprocal) transaction.

For contributions (nonreciprocal transactions), the standard requires that an entity determine whether a contribution is conditional based on whether an agreement includes a barrier that must be overcome and either a right of return of assets transferred or a right of release of a promisor’s obligation to transfer assets. Conditional contributions are recognized as liabilities or not recognized at all until the barriers are overcome, at which point the transaction is recognized as unconditional and classified as either net assets with restrictions or net assets without restrictions. Unconditional contributions are recognized as revenue when received. This chapter reflects the requirements of ASU No. 2018-08.

Resources for the mission

NFPs receive inflows of resources from a variety of sources as shown in exhibit 2-1.

How these resources are classified will result in differences in how they are recognized and reported. As shown in exhibit 2-1, the inflow of resources can come from the following:

• Exchange (reciprocal) transactions. Inflows from exchange transactions arise when both parties receive goods and services of commensurate value.
• Contributions (nonreciprocal) transactions. Inflows from an unconditional transfer of assets, as well as unconditional promises to give, or reduction, settlement, or cancellation of debt in a voluntary nonreciprocal transfer by an entity other than an owner.
• Other inflows. NFPs receive resources from other activities such as investment activities.
• Agency transactions . Inflows from transfers in which the entity is acting as an agent, trustee, or other intermediary for the donor.

Exhibit 2-2 is a flowchart that provides guidance for determining whether a transfer of assets includes a contribution.

Step 1

Step 1 is to identify the contract with the customer. A contract is an agreement between two or more parties that creates enforceable rights and obligations. A contract can be written, oral, or implied by an entity’s customary business practices. An entity should apply the requirements to each contract that meets the following criteria:

1. There is approval and commitment of the parties.
2. The rights of the parties have been identified.
3. The payment terms have been identified.
4. The contract has commercial substance.
5. It is probable that the entity will collect the consideration to which it will be entitled in exchange for the goods or services that will be transferred to the customer.

Step 2

Step 2 is to identify the performance obligations in the contract.

A performance obligation is a promise in a contract with a customer to transfer a good or service to the customer. If an entity promises in a contract to transfer more than one good or service to the customer, the entity should account for each promised good or service as a performance obligation only if it is (1) distinct or (2) a series of distinct goods or services that are substantially the same and have the same pattern of transfer.

A good or service is distinct if both of the following criteria are met:

1. It is capable of being distinct. The customer can benefit from the good or service either on its own or together with other resources that are readily available to the customer.
2. It is distinct within the context of the contract. The promise to transfer the good or service is separately identifiable from other promises in the contract.

A good or service that is not distinct should be combined with other promised goods or services until the entity identifies a bundle of goods or services that is distinct.

The following are examples of promised goods or services (performance obligations):

• Sale of goods produced by an entity
• Resale of goods purchased by an entity
• Constructing, manufacturing, or developing an asset on behalf of a customer
• Granting licenses

Step 3

Step 3 is to determine the transaction price. The transaction price is the amount of consideration to which an entity expects to be entitled in exchange for transferring promised goods or services to a customer, excluding amounts collected on behalf of third parties.

To determine the transaction price, an entity should consider the following:

Step 4

Step 4 is to allocate the transaction price to each performance obligation in the contract in an amount that depicts the consideration to which the entity expects to be entitled in exchange for satisfying each performance obligation.

To do this, an entity must determine the stand-alone selling price at contract inception of the distinct goods or services underlying each performance obligation. The transaction price then would typically be allocated on a relative stand-alone selling price basis.

If a stand-alone selling price is not observable, an entity must estimate it.

Sometimes, the transaction price includes a discount or variable consideration that relates entirely to one of the performance obligations in a contract. The requirements specify when an entity should allocate the discount or variable consideration to one or more performance obligations rather than to all performance obligations in the contract.

An entity should allocate to the performance obligations in the contract any subsequent changes in the transaction price on the same basis as at contract inception. Amounts allocated to a satisfied performance obligation should be recognized as revenue, or as a reduction of revenue, in the period in which the transaction price changes.

Step 5

Step 5 is to recognize revenue when (or as) the performance obligations are satisfied. A performance obligation is satisfied by transferring a promised good or service to a customer, and a good or service is transferred when (or as) the customer obtains control of that good or service.

For each performance obligation, an entity should determine whether the entity satisfies the performance obligation over time by transferring control of a good or service over time, that is, by determining if one of the following criteria is met:

1. The customer simultaneously receives and consumes the benefits provided by the entity’s performance as the entity performs.
2. The entity’s performance creates or enhances an asset (for example, work in process) that the customer controls as the asset is created or enhanced.
3. The entity’s performance does not create an asset with an alternative use to the entity, and the entity has an enforceable right to payment for performance completed to date.

If a performance obligation is not satisfied over time, an entity satisfies the performance obligation at a point in time. To determine the point in time at which a customer obtains control of a promised asset and an entity satisfies a performance obligation, the entity would consider indicators of the transfer of control, which include, but are not limited to, the following:

1. The entity has a present right to payment for the asset.
2. The customer has legal title to the asset.
3. The entity has transferred physical possession of the asset.
4. The customer has the significant risks and rewards of ownership of the asset.
5. The customer has accepted the asset.

For each performance obligation that an entity satisfies over time, an entity should recognize revenue over time by consistently applying a method of measuring the progress toward complete satisfaction of that performance obligation. Appropriate methods of measuring progress include output methods and input methods. As circumstances change over time, an entity should update its measure of progress to depict the entity’s performance completed to date.

Membership dues

Some entities receive dues from their members. These dues may be considered exchange, part exchange and part contribution, or all contribution. Classifying dues depends on tangible or intangible benefits received. For example, if an entity has a membership fee of $100 and the only tangible benefit a member receives is an annual publication with a fair value of $25, the entity would classify $75 of the dues as a contribution and $25 as an exchange transaction. If dues are classified as exchange transactions, they should be recognized as revenue as the earnings process is completed.

Revenue derived from membership dues in exchange transactions should be recognized over the period to which the dues relate. Nonrefundable initiation and life membership fees received in exchange transactions should be recognized as revenues in the period in which the fees become receivable if future fees are expected to cover the costs of future services to be provided to members. If nonrefundable initiation and life membership fees, rather than future fees, are expected to cover those costs, nonrefundable initiation and life member fees received in exchange transactions should be recognized as revenue over the average duration of membership, the life expectancy of members, or other appropriate time periods.

Naming opportunities

Many entities offer naming opportunities for resources providers. For example, a college may provide the opportunity to name a building or classroom for receiving a certain dollar amount. An entity needs to consider if the resources received are a contribution, exchange transactions or some combination of both.

If the public recognition and accompanying rights and privileges are nominal in value to the resource provided, the entity has received a contribution. However, the entity needs to consider specific facts and circumstances around the naming opportunity. Exhibit 2-3 contains a list of indicators that may be helpful in determining if a naming opportunity is a contribution, exchange transaction, or a combination of both. Some indicators may be more significant than others: however, no single indicator is determinative of the classification of a particular transaction.

Conditional contributions

As stated previously, donations can contain conditions, restrictions, or both. ASU No. 2018-08 provides guidance on reporting conditional and restricted contributions. For contribution to be considered conditional, it must have both of the following:

1. One or more barriers that must be overcome before the NFP is entitled to the assets transferred or promised
2. A right of return to the contributor for assets transferred (or for a reduction, settlement, or cancellation of liabilities) or a right of release of the promisor from its obligation to transfer assets (or to reduce, settle, or cancel liabilities)

An NFP needs to consider facts and circumstances to determine if a barrier exists. To determine if an agreement contains a barrier, ASU No. 2018-08 provides the following indicators (some indicators may be more significant than others):

• The agreement requires the NFP to achieve a measurable outcome (for example, provide a specific number of units of output or meet a matching requirement).
• The NFP has little discretion over the conduct of the activity (for example, following requirements for incurring qualifying expenses or requiring the hiring of specific individuals).
• The agreement contains stipulations related to the purpose of the agreement (for example, providing a research report on the effects of certain allergies). This excludes trivial or administrative requirements.

A conditional contribution is different from a donor-imposed restriction that limits the use of a contribution to some specific purpose that is narrower than the broad nature and purpose of the organization.

An example of a conditional contribution is when a donor pledges $100,000 if the entity can raise an additional $100,000 in the next 12 months. It contains both a barrier and a right to be released from the promise to provide resources. An example of a restricted contribution is when a donor stipulates that a $10,000 gift must be used for a specific program of an organization.

Knowledge check

5. Which is accurate of conditional contributions?
   1. A conditional promise to give should be recognized only when the conditions are substantially met.
   2. A donor pledging $100,000 if the entity can raise an additional $100,000 in the next 12 months is an example of an unconditional contribution.
   3. Donor-imposed conditions should not be substantially met by the entity before the receipt of assets (including contributions receivable) is recognized as a contribution.
   4. Conditional promises to give cannot contain restrictions.

Restricted contributions

Contributions made to entities may or may not have donor-imposed restrictions. Donor-imposed restrictions (donors include other types of contribution such as certain grants) specify the use of a contributed asset that is more specific than the broad limits resulting from the nature of the NFP, the environment in which it operates, and the purposes specified in its articles of incorporation or bylaws or comparable documents for an unincorporated association. Donor-imposed restrictions can either perpetually or temporarily limit the use of contributed assets. Generally, restrictions are stipulated explicitly by the donor in a written or oral communication accompanying the gift. In addition to explicit donor-imposed restrictions, there are certain contributions that may have implied restrictions.

In addition to explicit donor-imposed restrictions, there are certain contributions that may have implied restrictions as follows:

• Restrictions that result implicitly from the circumstances surrounding the receipt of the contributed asset (for example, a contribution received in response to an appeal to raise resources for a new building).
• Contributions of unconditional promises to give with payments due in future periods should be reported as restricted contributions unless the donor expressly stipulates, or circumstances surrounding the receipt of the promise make clear, that the donor intended it to be used to support activities of the current period.

Some entities receive contributions of long-lived assets (for example, equipment and buildings) or cash and other assets restricted to the purchase of long-lived assets. Often, the donor will not expressly stipulate how or how long the long-lived asset must be used by the organization. Absent donor stipulations specifying how long such donated assets or assets constructed or acquired with cash restricted for such acquisition or construction must be used, restrictions on long-lived assets, if any, expire when the assets are placed in service as required by FASB ASC 958-205-45-12.

Contributions with donor-imposed restrictions (explicit or implied) will increase net assets with donor restrictions. Contributions with no donor-imposed restrictions increase net assets without donor restrictions.

Some donor restrictions are perpetual in nature and limits the use of assets that neither expire by passage of time nor can be fulfilled or otherwise removed by the organization’s action. For example, a gift of securities to establish an endowment. Some donor restrictions limit the use of assets by donor-imposed stipulations that either expire by passage of time (time restriction) or can be fulfilled and removed by actions of the entity pursuant to those stipulations (purpose restriction). For example, a restriction on a contribution to acquire certain equipment expires when the equipment is acquired by the organization.

In some cases, donor-imposed restrictions are met in the same period that the contribution is received. An entity may adopt an accounting policy that would report such contributions as net assets without donor restrictions. For example, suppose a library receives a donation during the year restricted to the purchase of books and expends those resources to purchase books during the same year. The library may adopt a policy to report such contributions as increases in net assets without donor restrictions. Such a policy would have to be consistent from period to period and properly disclosed in the notes to the financial statements. The entity would also have to have a similar policy for investment gains and income that have donor-imposed restrictions.

Knowledge check

6. Which is accurate of restricted contributions?
   1. Donor-imposed restrictions can either be purpose, time or perpetual in nature.
   2. Donor-imposed restrictions are never met in the same period that the contribution is received.
   3. Restrictions are not generally stipulated explicitly by the donor in a written or oral communication accompanying the gift.
   4. Contributions cannot have implied restrictions.

Promises to give

Unconditional promises to give cash or other assets in the future are contributions and would be reported as receivables and contribution revenues in the period the unconditional promises are made. An unconditional promise to give can be either a written or an oral agreement.

There should be sufficient verifiable evidence that an unconditional promise to give has been made. Such evidence may include written agreements and pledge cards. For oral promises, evidence can include tape recordings, written minutes, and follow-up written confirmations.

In addition to unconditional promises to give, some entities may also receive intentions to give. Intentions to give are not unconditional promises to give and would not be recorded because individuals retain the ability to rescind their intention to give. For example, an individual may indicate that an entity has been included in their will as a beneficiary. Because the individual retains the ability to change the will, this is considered an intention to give and would not be recorded. NFP entities should disclose information about conditional promises in valid wills.

Unconditional promises to give that are due in future periods generally increase net assets with donor restrictions, rather than net assets without donor restrictions. If, however, the donor explicitly stipulates that the promise to give is to support current-period activities or if other circumstances surrounding the promise make it clear that the donor’s intention is to support current-period activities, unconditional promises to give should be reported as increases in net assets without donor restrictions.

Contributed services

Many NFP entities depend on volunteers for a variety of functions. Some contributed services should be recognized in the financial statements as illustrated in the following:

Just because an individual has a specialized skill does not mean that it meets the criteria to be reported. For example, a CPA may volunteer for an entity in a position that does not require his or her CPA skills or create or enhance a nonfinancial asset. Therefore, this contributed service would not be reported in the financial statements. However, for example, if the CPA contributes his or her services to a position that requires those skills and typically the entity would have to pay for those services, it would be reported in the financial statements.

FASB ASC 958-720 provides additional guidance for the situation when service is contributed from employees of a separately governed affiliated entity. Specifically, it requires an NFP entity to recognize all services received from personnel of an affiliate that directly benefit the organization. Those services should be measured at the cost recognized by the affiliate for the personnel providing those services, or, if elected, at the fair value of the service because the measurement at cost will significantly overstate or understate the value of the service received.

The standard applies to NFP entities that receive services from personnel of an affiliate that directly benefit the recipient NFP entity and for which the affiliate does not charge the recipient NFP entity. Charging the recipient NFP entity means requiring payment from the recipient NFP entity at least for the approximate amount of the direct personnel costs (for example, compensation and any payroll-related fringe benefits) incurred by the affiliate in providing a service to the recipient NFP entity or the approximate fair value of that service.

Other contributions

Some entities receive noncash assets, which are often referred to as gifts in kind. Gifts in kind that can be used internally or sold should be reported as revenues at fair value. If the gift has no value (such as certain used clothing) and cannot be used internally (or for program purposes) or sold, the item received should not be recorded.

Some entities receive items that will be used for fund-raising purposes (such as tickets to events or gift certificates) as part of a fund-raising event. For example, tickets to a play may be donated to an entity that will auction them off as part of an annual fund-raising event. Such items should be recorded as contribution revenue at fair value when received. When the item is sold, the difference between the amount received and the amount the item was initially recorded at should be recorded as an adjustment to the original contribution. For example, a gift certificate with a fair value of $50 donated to an entity for a charity auction would initially be recorded as a contribution revenue of $50. If the item is sold at the auction for $40, a reduction of $10 in contribution revenue would be recorded.

NFPs may receive unconditional contributions of the use of electric, telephone, and other utilities and of long-lived assets (such as a building or the use of facilities) in which the donor retains legal title to the long-lived asset. Entities receiving such contributions should recognize contribution revenue in the period in which the contribution is received and expenses in the period the utilities or long-lived assets are used. If the transaction is an unconditional promise to give for a specified number of periods, the promise should be reported as contributions receivable and as restricted support that increases net assets with donor restrictions.

Unconditional promises to give the use of long-lived assets (such as a building or other facilities) for a specified number of periods in which the donor retains legal title to the long-lived asset may be received in connection with leases or may be similar to leases but have no lease payments. For example, NFP entities may use facilities under lease agreements that call for lease payments at amounts below the fair rental value of the property. In such circumstances, the NFP entity should report a contribution for the difference between the fair rental value of the property and the stated amount of the lease payments. (However, amounts reported as contributions should not exceed the fair value of the long-lived asset at the time the entity receives the unconditional promise to give.) The contribution receivable may be described in the financial statements based on the item whose use is being contributed, such as a building, rather than as contributions receivable.

Collections

Many entities hold certain assets that are collections. Collections represent works of art, historical treasures, or similar assets that meet all of the following criteria:

• They are held for public exhibition, education, or research in furtherance of public service rather than financial gain.
• They are protected, kept unencumbered, cared for, and preserved.
• They are subject to an organizational policy that requires the proceeds of items that are sold to be used to acquire other items for collections.

Measurement of contributions

The fair value of contributed services that create or enhance nonfinancial assets should be estimated based on (a) the fair value of the services received or (b) the fair value of the assets created (or the change in the fair value of the asset that is being enhanced), whichever is more readily determinable. A fair value measurement should be determined based on the assumptions that market participants would use in pricing the asset. Market participant assumptions should include assumptions about the effect of a restriction on the sale or use of an asset if market participants would consider the effect of the restriction in pricing the asset.

FASB ASC 820-10-55-51 Example 6: Restricted Assets explains that restrictions that are an attribute of an asset, and therefore would transfer to a market participant, are the only restrictions reflected in fair value. Donor restrictions that are specific to the donee are reflected in the classification of net assets, not in the measurement of fair value.

Major uncertainties about the existence of value of a contributed asset may indicate that a contribution should not be recognized. Such uncertainties are often present when an item has no use other than for scientific or educational research or for its historical significance. Examples of such items include flora, fauna, photographs, and objects identified with historic persons, places, or events.

If a promise to give has not previously been recognized as contribution revenue because it was conditional, fair value should be measured when the conditions are met.

The present value of the future cash flows is one valuation technique for measuring the fair value of contributions arising from unconditional promises to give cash; other valuation techniques also are available, as described in FASB ASC 820. Exhibit 2-5 illustrates the use of present value techniques for initial recognition and measurement of unconditional promises to give cash that are expected to be collected one year or more after the financial statement date.

Appendix A includes excerpts from the AICPA white paper Measurement of Fair Value for Certain Transactions of Not-for-Profit Entities that discuss fair value measurement of a promise to give cash and other financial assets that are due in one year or more.

A present value technique is one valuation technique for measuring the fair value of an unconditional promise to give noncash assets; other valuation techniques also are available, as described in FASB ASC 820. If present value techniques are used, the fair value of contributions arising from unconditional promises to give noncash assets might be determined based on the present value of the projected fair value of the underlying noncash assets at the date and in the quantities that those assets are expected to be received, if the date is one year or more after the financial statement date. (Both the [a] likelihood of the promise being fulfilled and [b] future fair value of those underlying assets, such as the future fair value per share of a promised equity security, should be considered in determining the future amount to be discounted.) In cases in which the future fair value of the underlying asset is difficult to determine, the fair value of an unconditional promise to give noncash assets may be based on the fair value of the underlying asset at the date of initial recognition. (No discount for the time value of money should be reported if an asset’s fair value at the date of initial recognition is used to measure the fair value of the contribution.)

If present value techniques are used to measure the fair value of unconditional promises to give, an NFP entity should determine the amount and timing of the future cash flows of unconditional promises to give cash (or, for promises to give noncash assets, the quantity and nature of assets expected to be received). In making that determination, NFP entities should consider all the elements in FASB ASC 820-10-55-5, including when the receivable is expected to be collected, the creditworthiness of the other parties, the organization’s past collection experience and its policies concerning the enforcement of promises to give, expectations about possible variations in the amount or timing of the cash flows (that is, the uncertainty inherent in the cash flows), or both, and other factors concerning the receivable’s collectibility.

Knowledge check

7. Which is accurate of identifying gains and losses?
   1. Examples of activities that may be reported as gains and losses would include changes in fair value of equity securities.
   2. Whether an item is a revenue or expense, or a gain or loss is not an important determination in financial reporting for NFPs.
   3. An example of something that may be reported as gains and losses would be donations received at an annual fund-raising event.
   4. All gains and losses are reported as net assets without donor restrictions.

Agency transactions

There are several situations in which an NFP entity receives assets it has little discretion over the use of. In these cases, the NFP entity may be acting as an agent, trustee, or intermediary in helping a donor make a contribution to another entity or individual. FASB ASC 958-605 provides guidance on how to report such transactions.

Some examples of entities that receive assets that will be passed to other entities are federated fund-raising entities, community foundations, and institutionally related entities, but any entity can function in those capacities. An example of this type of transaction is a situation in which a donor passes assets to an NFP entity (recipient organization) and instructs that entity to transfer those assets to another entity (the beneficiary) named by the donor.

The donor may specify the beneficiary by

• name.
• stating that all entities that meet a set of donor-defined criteria are beneficiaries.
• actions surrounding the transfer that make clear the identity of the beneficiary.

In general, the recipient entity should not recognize contribution revenue when it receives such assets and should not report a donation when it transfers the assets to the beneficiary. Instead, the recipient entity would record an increase to assets and liabilities for the fair value of assets received. When assets are transferred to the beneficiary, the recipient entity would reduce assets and liabilities.

In some cases, a donor may explicitly grant a recipient entity the unilateral power to redirect (variance power) the transferred assets to an entity other than the beneficiary specified by the donor. When this happens, the recipient entity would recognize contribution revenue for the amount of transferred assets as long as the named beneficiary is unaffiliated with the donor. If the donor names itself or its affiliates, the recipient entity would not recognize contribution revenue.

Summary

NFP entities receive inflows of resources from a variety of sources. The source of the inflows affects how the transactions are measured and reported. Due to the variety of sources, the accounting and reporting for this area can become complex. However, this information is important to financial statement users.

NFPs must first determine whether a transaction is an exchange transaction or a contribution. For exchange transactions, revenue is recognized when an NFP satisfies a performance obligation by transferring a promised good or service to a customer.

For a contribution, the NFP must then determine if it is conditional or unconditional. Revenue is recognized when the contribution becomes unconditional. Contributions can also contain donor-imposed restrictions that will increase net assets with donor restrictions.

Practice questions

1. A donor unconditionally promises to give an NFP museum $1,000 next year to support general operations. How should this promise be reported in the statement of activities?
   1. Not reported until the cash is received.
   2. Deferred revenue.
   3. Revenue that increases net assets without donor restrictions.
   4. Revenue that increases net assets with donor restrictions.
2. An NFP museum has adopted a policy of not capitalizing its collection of works of art. The museum receives a donation of a painting with a fair value of $30,000 that is added to the collection. How should this contribution be reported in the statement of activities?
   1. It would not be reported in the statement of activities.
   2. Revenue that increases net assets with donor restrictions.
   3. Revenue that increases net assets without donor restrictions.
   4. Reported as a gain that increases net assets without donor restrictions.
3. An attorney volunteers 100 hours a year serving meals at an NFP shelter. The attorney’s normal billing rate is $50 an hour. What amount of donated services should the shelter report in the statement of activities?
   1. $0.
   2. $1,000.
   3. $2,500.
   4. $5,000.
4. An NFP entity receives a notice that a donor plans to list the entity as a $10,000 beneficiary in her will. How should the entity record this notice in the statement of activities?
   1. Contribution revenue for the net realizable value of the pledge.
   2. Contribution revenue for the face value of the pledge.
   3. No amount of revenue should be reported.
5. For the following items, indicate how the item generally should be reported using one of the following:
   1. Exchange transaction (E)
   2. Contribution revenue that increase net assets without donor restrictions (UC)
   3. Contribution revenue that increase net assets with donor restrictions (RC)
   4. Not reported in statement of activities (NR)
      1. _____ Unconditional promises to give with payments due in future periods
      2. _____ Gift of a car the entity plans to sell
      3. _____ Dues that cover the cost of publications
      4. _____ Gift of securities to create an endowment fund
      5. _____ Gift of art work to a collection (collection not capitalized)
      6. _____ Donated accounting services by a CPA
      7. _____ Free use of office space in the current year
      8. _____ Conditional promise to give if an organization can raise a certain amount
      9. _____ Donated services to replace a roof