The 501 S(c)ene

The latest view on not-for-profit accounting issues

Exchange transaction or contribution?

exchange transaction, contribution, nonprofit, accountingWhen your organization receives a grant, determining if it is a contribution or an exchange transaction can be very difficult. Even after reading the rules, it may still require some judgement. Deciding between the two will determine how the grant will be recorded and when the revenue will be recognized. If the wrong one is chosen, this could lead to revenue being overstated or understated because of the potential differences in the timing of revenue recognition. There may also be a difference in the classification of revenue between a contribution and an exchange transaction. Contributions may increase unrestricted, temporarily restricted or permanently restricted net assets. Exchange transactions are always going to be recognized as increases in unrestricted net assets. Here are a few points that can help make this determination a bit easier:

  • If the agreement contains terms such as “contribution” and “restricted,” then this will lean more towards a contribution. If there are terms like “subcontractor,” “vendor” or “fees,” then this hints more at an exchange transaction.
  • A contribution will most likely give a total amount to be paid where an exchange transaction will deal more with price per unit.
  • Will the current beneficiaries of your program be the primary beneficiaries of this arrangement with the grantor? If so, this may indicate that it’s a contribution. The funding source of an exchange transaction may ask you to provide a service either for them or for a specified population.
  • With a contribution, the grantor will give you a broader goal or purpose for the grant (if they even give a goal or purpose at all), allowing you to decide how the services and activities are to be provided. In an exchange transaction, the grantor can be more specific on how to perform the services and activities funded by the grant.
  • If reporting is required under a contribution grant, it will probably be only to explain the general accounting of how the funds were used or to require a brief summary of the activities performed. A more detailed report may be required under an exchange transaction which could include metrics like number of units delivered, the number of people served, etc.

The above points may make it easier to determine if a grant your organization received is a contribution or an exchange transaction, but some judgement may still be required since some grant agreements appear to be a perfect mix of the two. You can also access our helpful tool for making this determination.

Brandon Keeto