Thrive: Non-Profit Success Stories | Contribution Accounting for Non-Profits
Published on by Patrick Frambes, Christa Woelfel, in Video, Not-for-Profit
Can’t watch the video? Get the transcript.
Accounting for contributions is one of the most common (and most complex) areas non-profits face during an audit. With funding coming from individuals, private foundations, government agencies, and other sources, it gets real, fast.
In this episode of our Thrive Non-Profit Success Story series, top non-profit pros Patrick Frambes and Christa Woelfel unpack the key concepts of contribution accounting and answer the questions they hear most often. Here’s what they talked about.
Is it a contribution or an exchange transaction?
The determining factor? Reciprocal value.
If your donor is receiving something of equal value from your non-profit in return, the transaction is an exchange transaction – a lot like a contract with a customer.
If they’re not receiving direct value in return? It’s generally considered a contribution.
In a lot of non-profit scenarios (especially with donations from individuals or foundations) the funding qualifies as a contribution. Others, like private school tuition or some federally funded service programs like Medicare or Medicaid reimbursements often qualify as exchange transactions.
Is the contribution conditional or unconditional?
OK, so it’s a contribution. Now – is it a conditional contribution or an unconditional contribution?
Unconditional contributions
An unconditional contribution doesn’t have any barriers the organization must overcome, and there’s no requirement to return funds if the goal isn’t achieved. With an unconditional contribution, your organization can recognize revenue when either the cash is received or the pledge is made (but in the case of the pledge, only if it’s enforceable and measurable).
Conditional contributions
A conditional contribution means there’s a condition, or barrier, the non-profit must overcome, and a right of return, i.e., if your organization doesn’t meet the condition, the funds must be returned (or, if the funds haven’t been received yet, a release from the obligation for the contribution). In this scenario, you can’t recognize the revenue until you meet the goal.
Here’s an example: federal grant funding reimburses eligible expenses. If the funds are restricted to certain allowable costs and your organization won’t receive reimbursement for unallowable expenses, the contribution is conditional, and you can only recognize revenue as eligible expenses are incurred.
What if you receive funds from a conditional contribution upfront?
Great question, because that happens a lot. If funds are received before the barriers are met — and a right of return exists — your non-profit does NOT recognize the revenue immediately.
Instead, you record the funds as a liability on the balance sheet, typically called a refundable advance. As your organization meets the conditions (for example, by incurring allowable expenses), the liability is reduced and you recognize the revenue.
Note – a right of return doesn’t always mean paying the money back. It might just mean that if you don’t meet the conditions, there’s no reimbursement.
Is it a pledge or an intention to give? Details matter.
The wording matters – how you account for pledges versus intentions to give is different. A pledge is a promise to give, so when you receive an enforceable pledge (note the word “enforceable” is important), you record a pledge receivable and recognize the revenue at the same time.
An intention to give is not enforceable, and so different rules apply. You don’t record a receivable, and you recognize the revenue only when the donation is received.
It may seem subtle, but, like we said, the wording is important.
How does my non-profit account for bequests?
Bequests are an amazing way for donors to leave a legacy for a cause they care about. When your organization is named in someone’s will, you don’t recognize the revenue while they’re still living. Wills can change, and estate values fluctuate. Only recognize the revenue when the gift becomes legally enforceable and the amount can be reasonably estimated.
Can a transaction be both exchange and contribution?
Yes. Some transactions are bifurcated, meaning part is treated as an exchange transaction and part as a contribution. Let’s think about an annual fundraising event ticket. If a $100 ticket includes $50 worth of meals and entertainment:
- $50 is recorded as exchange revenue
- $50 is recorded as contribution revenue
Making sure you’ve got this covered correctly is key to accurate financial reporting.
Want to know more?
Our non-profit accounting pros are here to help. Contact us today for a free consultation and start building greater peace of mind – and a better, brighter future for your organization and the better world you’re helping create every day.
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