This is sometimes a common question that nonprofits ask when looking to record revenue. The definitions for a contribution and an exchange transaction are almost diametrically opposed. However, a transaction often has elements of both, making it difficult to break the pieces apart to ensure that it is recorded properly.

In a contribution, cash or assets are voluntarily surrendered by the donor who does not expect anything in return other than the satisfaction of helping a cause. In an exchange transaction, the payee agrees to exchange cash or assets and expects to receive some agreed upon benefit in return. Giving a donation to an annual campaign is an example of a contribution. The organization records contribution revenue upon receipt of the donation.  A contract is an example of an exchange transaction whereas the organization accepts cash in exchange for agreeing to complete the services that are outlined in the contract.  If the organization receives cash before the contract stipulations are fulfilled, the organization records a liability or deferred revenue as it has an obligation to earn the contract before it can recognize revenue. There is usually a performance report that must be filed periodically with the contract to ensure compliance.

Here are two examples that illustrate how difficult properly recording the revenue of a transaction may be.

A.) A museum sells tickets for a fundraising dinner. The ticket revenue should be recorded as both event revenue and contribution revenue. The fair value of the meal provided is event revenue, because the purchaser has the expectation to be fed. Contribution revenue is equal to the difference between the ticket price and the value of the meal.

B.) A local community theatre holds a fundraising drive where the donor receives a coffee mug for a donation of $100 or four tickets to a play of their choice, valued at $200, for a donation of $1,000. In the first instance, contribution revenue should be recorded for $100, as the donor does not receive anything of nominal value in return for a donation. In the second instance, contribution revenue should be recorded for $800, and ticket revenue should be recorded for $200.

Example B shows why it is important to properly capture the activity.  If the fundraising drive was successful and no ticket revenue was recorded, a year-end analysis of the profitability of theatre operations would be skewed and may lead management to make decisions based on incorrect information. It is important to take time to evaluate all revenue transactions, especially ones that do not occur on a recurring basis, in order to ensure that they are recorded properly.

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Sandy Jensen
I joined Hawkins Ash CPAs in 2001 and am a partner in the firm's La Crosse office. I provide audit services to nonprofit and educational agency audits. I also have extensive experience providing audit services to credit unions. I am chair of the firm’s nonprofit service group and a member of the firm’s Audit and Accounting Committee.

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