Nonprofit organizations need more timely, insightful financial reporting to make data-driven decisions to drive their mission forward. Effective revenue recognition plays a crucial role in providing those insights by helping to ensure transparency and demonstrate accountability to donors and other stakeholders.

Nonprofit revenue recognition can be complicated by a variety of factors. These complications can result in inaccurate financial reporting, delays in recognizing revenue, misallocation of funds and, ultimately, the loss of donor trust. Armed with the right knowledge and tools, nonprofits can implement robust revenue recognition standards and processes that allow them to make informed decisions that sustain and support their mission.

Does revenue recognition apply to nonprofit organizations?

Revenue recognition is an accounting principle that dictates when and how a company records its earnings. Typically, it requires that revenue is recognized when realized and earned, not when cash is received.

Revenue recognition is important for all organizations but can be particularly complex for nonprofits. Nonprofits rely on income from a variety of sources, such as grants, gifts, membership subscriptions and more, which often come with different restrictions and conditions. It’s important to ensure that these transactions are recorded appropriately to maintain compliance with accounting regulations, accurately assess financial health, and build trust with donors and stakeholders. Additionally, proper nonprofit revenue recognition enables organizations to effectively allocate resources, plan for future initiatives and fulfill their performance obligations and mission-driven objectives.

All contributions must be recorded according to GAAP principles laid out by the Financial Accounting Standards Board (FASB).

Contributions and exchange transactions

A contribution is a nonreciprocal transaction when the donor does not receive anything of value in return. Contributions can take the form of money, goods and services. A nonreciprocal transaction is recognized as revenue when the donation is promised, made or fulfilled, or when conditions are met.

An exchange transaction, on the other hand, is when a donor receives goods or services of commensurate value. For example, paid training sessions given by a nonprofit business group or tickets to a concert held by a nonprofit cultural association would generally be considered exchange transactions. Revenue from exchange transactions is recognized when the goods are delivered, or services rendered. In the case of the concert, for example, tickets might be bought months in advance, but the revenue won’t be recorded until the concert is held.

Common mistakes in nonprofit revenue recognition

Timing of revenue recognition

Mistakes regarding the timing of nonprofit revenue recognition can impact financial reporting accuracy and transparency, which can affect budgeting, planning and stakeholder trust.

A common error is prematurely recognizing revenue before it is earned or before the conditions for recognition are met. This can be due to a lack of understanding and identifying conditions that may exist within a grant agreement.

Another mistake is delaying recognition of revenue, which can occur due to misunderstandings around when a condition has been fulfilled.

Confusion between cash and accrual accounting

Not understanding the difference between cash and accrual accounting can lead to inaccurate financial reporting, challenges in financial management, and potential non-compliance with regulatory and grant requirements.

Cash accounting records transactions only when money is received. While straightforward, cash accounting may provide a limited view of financial health and performance. Accrual accounting, on the other hand, records income when earned and expenses when incurred. This gives a more comprehensive view of an organization’s financial status and provides a better understanding of future cash flow by recognizing revenue and expenses when they are earned or incurred.

For small nonprofit organizations with less than $100,000 in revenue and no staff, cash accounting may be appropriate. Larger or more complex nonprofits typically prefer accrual accounting to meet Generally Accepted Accounting Principles (GAAP) requirements and satisfy grantor and auditor expectations.

Maintaining documentation

Maintaining documentation helps in recognizing revenue. When documentation is kept outside of the accounting system, however, users will have to update it manually. This can result in errors and multiple versions of spreadsheets. To avoid these mistakes, nonprofits should implement best practices such as maintaining detailed records of donations and grants, regularly reviewing accounting procedures to ensure compliance and investing in a robust accounting system. Sage Intacct, for example, automates the process of recognizing revenue as transactions are entered, helping nonprofits effectively manage documentation and uphold financial accountability.

Challenges in nonprofit recognizing revenue

Contributions vs. exchange transactions

As mentioned above, contributions typically involve donations or grants given without the expectation of receiving something of equal value in return, while exchange transactions provide goods or services in exchange for payment.

Not all transactions fall neatly into one category or the other. Take, for instance, a membership of a nonprofit that includes benefits such as exclusive event access, a grant with restrictions tied to certain deliverables or sponsorships where companies offer financial support in exchange for promotional opportunities. These examples blur the line between contributions and exchanges. In such cases, revenue may be divided, with a portion considered a contribution and another portion treated as an exchange. Misclassification can lead to inaccuracies in financial reporting, affecting stakeholders’ perceptions of the organization’s financial health and potentially leading to compliance issues. Nonprofits should carefully analyze the terms and conditions of transactions and seek professional guidance when necessary.

Conditional vs. unconditional contributions

Differentiating between conditional and unconditional contributions is also important to nonprofit revenue recognition. Conditional contributions are donations or grants with specific conditions attached, requiring the nonprofit to fulfill certain performance obligations or achieve predetermined outcomes before the funds can be recognized as revenue. Accounting Standards Update (ASU) 2018-08 explicitly states that a donor-imposed condition must have both of the following:

• One or more barriers that must be overcome before a recipient is entitled to the assets transferred or promised.
• A right of return to the contributor for assets transferred (or for a reduction, settlement or cancellation of liabilities). Or a right of release of the promisor from its obligation to transfer assets (or reduce, settle or cancel liabilities).

For instance, a foundation may provide a grant to a nonprofit organization to build a community center on the condition that the center must be completed within a specified timeframe.

On the other hand, unconditional contributions have no such conditions, allowing the nonprofit to fully recognize the contribution. An example of an unconditional contribution would be a general donation made to a nonprofit’s annual fundraising campaign with no strings attached.

Since conditional and unconditional contributions require different accounting treatments, accurately distinguishing between them is crucial for proper revenue recognition and financial reporting. Misclassifying contributions can lead to errors in financial statements and reputational damage for the nonprofit.

Adhering to FASB and GAAP guidelines

These standards provide guidelines for recognizing revenue from various sources, including contributions, grants and program service fees. For example, under GAAP, nonprofits must adhere to specific criteria for recognizing revenue from conditional contributions, ensuring that funds are not recorded until conditions are met. Similarly, revenue from exchange transactions, such as program service fees, must be recognized when goods are delivered, or services are rendered.

Failure to comply with FASB and GAAP standards can result in inaccurate financial reporting, non-compliance with regulatory requirements and potential legal implications for an organization. Robust accounting systems and employee training help ensure compliance with these guidelines.

Recognizing revenue in multi-year grants

Multi-year grants provide ongoing stability for many organizations; however, they can also present unique nonprofit revenue recognition accounting challenges. Closing out a year in a multi-year grant requires precise tracking and reporting of grant expenditures and remaining funds, and it’s rare that a nonprofit’s fiscal year exactly matches a grant’s reporting period.

Navigating conditional contributions adds another layer of complexity, as nonprofits must ensure compliance with donor-imposed restrictions while adhering to FASB and guidelines. Determining when revenue should be recognized involves careful documentation and tracking of grant conditions and milestones. This is further complicated if the grant includes both conditional and unconditional components. For example, a multi-year grant made to a nonprofit environmental organization to support conservation efforts might provide unconditional funding and require the organization to host 10 recycling events in the local community. While the funding itself is not contingent on achieving specific outcomes, the funding to the organization is contingent upon performing the 10 recycling events.

Common pitfalls in adhering to FASB and GAAP guidelines include misclassifying revenue, failing to properly document grant conditions and inaccurately recognizing revenue before conditions are met.

How BPM + Sage Intacct can improve the accuracy and efficiency of your nonprofit revenue recognition

BPM, in partnership with Sage Intacct, offers a streamlined solution for nonprofit revenue recognition. The only financial management and accounting software endorsed by the American Institute of Certified Public Accountants (AICPA), Sage Intacct is a highly flexible, powerful financial management solution that provides advanced integration and automation capabilities.

Sage Intacct simplifies nonprofit revenue recognition by consolidating conditional grants and contributions into a centralized system. It automates the revenue recognition process through customizable templates tailored to match donor conditions, milestones and timelines. This saves time, reduces errors and provides insight into revenue and condition tracking. Sage Intacct offers the only revenue recognition solution to streamline ASU 2018-08 and ASC 606 compliance for nonprofits.

Over the last 30 years, BPM has worked with more than 500 nonprofits, ranging from small family foundations to multi-million-dollar organizations. Our Nonprofit Industry Group offers a full suite of accounting and administrative services, including implementation, training and support for Sage Intacct.

Learn more about Sage Intacct and how it can streamline your nonprofit’s revenue recognition process or contact our Sage Intacct Implementation specialists for a demonstration.