Non-profit organizations (NPOs) may receive contributions and other revenues from a variety of sources; however, there are two main classifications of revenue transactions that NPO accountants and managers should keep in mind when recording them in the books and thinking about where they receive their funding. These are: exchange transactions and non-exchange transactions.
The primary difference in determining the difference between these revenue types is whether the Organization provides substantial value in exchange for the goods or cash received. Exchange transactions are defined by one party to the transaction who receives a store of value in exchange for surrendering a store of value or taking on liabilities to acquire a good or service. For example, this type of transaction fits what are called program service fees in the NPO world. These types of revenue sources are characterized by services provided to customers or beneficiaries in exchange for payment. NPOs will set fees for these services, similarly to a private enterprise or for-profit business and it could include: tuition, admission fees, or counseling services, among others.
In contrast, non-exchange transactions, or contributions, are unconditional transfers of stores of value without receiving anything of similar value in return. Examples of these transactions include voluntary donations of cash and other noncash assets to an NPO without receiving anything of substantial value in return.
It is important to keep in mind that some transactions may have elements of both types of transactions, and the organization must be able to identify and properly classify the amounts of each type found within a transaction. An example of this would be tickets for an annual dinner event banquet. The organization may charge a fee for this banquet that exceeds the actual value of the benefit to the participant. If so, the excess benefit over the value is treated as a non-exchange voluntary contribution, while the other portion is treated as an exchange transaction fee for service.
The importance of understanding the differences in these transactions is important for nonprofit managers because different requirements for recognition of revenue may apply to exchange transactions that may not apply to non-exchange transactions. Also, when planning sources of program funding, it may be helpful to consider a mix of non-exchange and exchange revenues which can provide extra resources for operations. Finally, it is important to segregate non-exchange and exchange revenues in the accounting system because they must be reported separately in the financial statements and on the form 990.
Written by Michael Klein, CPA, CMA, EA, Partner