Industry Insights

Contribution Versus Exchange Transaction

October 2012
Author:  Mary Hoffman

Mary Hoffman



Not-for-Profit & Government
Construction & Real Estate

10001 Reunion Place, Suite 400
San Antonio, Texas 78216-4137

San Antonio

All not-for-profit organizations fortunate enough to receive government and private grants must read, interpret and comply with those grant agreements. One of the key issues to address at the inception of a grant is whether the grant represents a contribution or an exchange transaction; the accounting could vary significantly based upon the classification.

Accounting Standards Codification (ASC) 958-605-55 provides guidance to distinguish contributions from exchange transactions. In general, the accounting and reporting of grants is determined by the underlying substance of the transaction. The term “grant” is used broadly and can refer not only to contributions, but to assets transferred in an exchange transaction. Each grant agreement should be carefully reviewed in making this determination, as it may be entirely a contribution, entirely an exchange transaction or a combination of the two.

Distinguishing Contributions from Exchange Transactions

The following are indicators a transfer of assets is a contribution rather than an exchange transaction. Some indicators can be more significant than others, depending on the individual facts and circumstances.

  1. The resource provider receives no value in exchange for the assets transferred, or the value received is incidental to the potential public benefit from using the asset. An example of incidental value might be publicity about the contribution on the not-for-profit’s (NPO) website or in its newsletter, listing the name and logo of the resource provider.
  2. The activity specified by the grant is to be planned and carried out by the NPO, and the NPO retains the right to the benefits of carrying out the activity. In general, the NPO has discretion in determining the time and place of delivery of the activity to its third-party recipients.
  3. The activity or assets to be delivered by the NPO are delivered to individuals or organizations other than the resource provider. For example, a private foundation gives a grant to an NPO to provide afterschool care to children between the ages of four and 12. The activity or assets are delivered to individuals, not the resource provider.
  4. If the NPO fails to make timely delivery of the assets, the NPO is not penalized for nonperformance. The NPO could be liable to return the unspent portion of the grant, but no other economic penalties exist.
  5. The resource provider communicates to the NPO that it is making a donation to support the NPO’s programs. The resource provider may refer to the award as a “contribution,”  “donation” or “sponsorship” in the grant agreement.
  6. The NPO asserts it is soliciting the funds as a contribution. This often is documented in the grant proposal requesting the funds.

In general, most grants received from private foundations and other donors are considered contributions, while government grants are exchange transactions. However, in some cases, private grants can be exchange transactions or a combination of both. 

An example of an exchange transaction that involves a private resource provider would be a corporate entity that sponsors research and development at a research university. The grant agreement includes the corporate entity’s right to retain the propriety rights to the exclusive knowledge gained from the research, including patents, copyrights or other privileges. The value retained by the corporate entity is more than incidental and, therefore, would qualify as an exchange transaction.

An example of a transaction considered to be in part a contribution and an exchange would be a transfer of land to an NPO at a price significantly lower than its fair market value with no unstated right or privileges accruing to the donor. The difference between the fair market value and amount paid would be a contribution, and the amount paid would be considered an exchange transaction.

Financial Statement Effect

The effect of misclassifying contributions as exchange transactions can result in improper revenue recognition. Contributions received, including promises to give, are recognized as revenue in the period received and could be temporarily or permanently restricted by the donor. Resources received in exchange transactions are recognized as unrestricted revenue when the qualified expenditures under the agreement are incurred.


Classification of resources provided to not-for-profit organizations requires careful review and exercise of judgment. The transactions should be assessed from both the resource provider's and the recipient’s perspectives. The assessment should be done on a grant-by-grant basis and at the inception of the grant. The ASC offers more detailed guidance. For more information, contact your BKD advisor.

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