Nonprofits often receive funding from a variety of sources, including grants, contracts, memberships, donations, and program fees. Determining which accounting guidance applies is critical for accurate financial reporting. Two main models under generally accepted accounting principles in the United States (GAAP) are ASC 606, Revenue from Contracts with Customers, and ASC 958-605, Accounting for Contributions.
ASC 606 applies when a nonprofit enters into an exchange transaction, when the organization provides goods or services to a customer and receives commensurate value in return. The core principle of ASC 606 is that revenue is recognized as the nonprofit satisfies specific performance obligations under a contract. For example, a nonprofit collects membership dues. Since members receive benefits in return for their payment, the dues represent an exchange transaction subject to ASC 606.
In contrast, contributions are nonreciprocal transactions because the donor does not receive commensurate value in return for the transfer of assets. Contributions, both conditional contributions and unconditional, are governed under ASC 958-605. Conditional contributions include both 1) a barrier to entitlement (such as incurring qualifying costs or raising matching funds) and 2) a right of return or release. For conditional contributions, revenue is recognized only when the condition has been met. On the other hand, unconditional contributions are recognized immediately. If an unconditional contribution includes a time or purpose restriction, the funds are reported in the nonprofit’s net assets with donor restrictions until the restriction is fulfilled.
Because the distinction between exchange transactions and contributions can be tricky, nonprofits can use a decision matrix to guide revenue recognition:
| Step | Question | If YES | If NO |
| 1 | Does the donor receive goods or services of commensurate value in return? | Exchange transaction → Apply ASC 606 (Revenue from Contracts with Customers). Proceed to Step 2. | Likely a contribution → Apply ASC 958-605. Proceed to Step 3. |
| 2 | Is there a contract with enforceable rights and obligations, and identifiable performance obligations? | Recognize revenue as performance obligations are satisfied (over time or at a point in time) under ASC 606. | If no contract exists, the arrangement may not meet ASC 606 scope — reassess as possible contribution. |
| 3 | For a contribution, is there a donor-imposed condition? (Barrier to entitlement and right of return/release) | Conditional contribution → Recognize revenue only when the condition is met. | Unconditional contribution → Recognize revenue immediately. Proceed to Step 4. |
| 4 | For an unconditional contribution, is there a donor restriction (purpose or time)? | Record as net assets with donor restrictions until restriction is met, then reclassify. | Record as net assets without donor restrictions. |
Why does the distinction matter?
It is important to carefully review each grant and contract so that revenue is recognized appropriately in accordance with GAAP. It is not always clear how to record revenue, and additional clarification may be required from the funder.
Recording revenue correctly ensures revenue is recorded in the correct period, keeps the nonprofit in compliance with grant and reporting requirements, and ensures that governing boards, donors, and regulators have a clear picture of where funding is coming from and how it supports the mission.
Want to learn more?
If you need further guidance or have any questions on this topic, our nonprofit experts are here to help you navigate the rules and ensure the nonprofit organization’s revenue is reported accurately and clearly. Please do not hesitate to reach out to discuss your specific situation.
This material has been prepared for general, informational purposes only and is not intended to provide, and should not be relied on for, tax, legal or accounting advice. Should you require any such advice, please contact us directly. The information contained herein does not create, and your review or use of the information does not constitute, an accountant-client relationship.
