7.3 Not-for-Profit Special Accounting

Not-for-Profit Special Accounting (ASC 958-605 & ASC 958-720)

Specialized accounting transactions for not-for-profit (NFP) organizations involve unique standards for contribution recognition, volunteer services, agency transactions, and cost allocation. These areas require careful application of FASB ASC 958 rules to distinguish between contributions, exchange transactions, and agency arrangements.

Accounting for Contributions

Under ASC 958-605, a contribution is defined as an unconditional, non-reciprocal transfer of cash or other assets to an NFP. To record a contribution, it must be distinguished from:

• Exchange Transactions: Reciprocal agreements where the resource provider receives direct commensurate value in return (e.g., student tuition, member dues, or government contracts that operate on a fee-for-service basis). Exchange transactions follow ASC 606 revenue recognition guidelines and are reported as increases in Net Assets Without Donor Restrictions.
• Conditional Promises to Give: Promises that contain both a barrier that must be overcome and a right of return/release to the donor. Conditional promises are not recognized as revenue or receivables until the barrier is substantially met.

Conditional vs. Unconditional Contributions

If cash is received before a donor-imposed condition is met, the NFP cannot recognize revenue. Instead, it must record a liability:

Debit: Cash                                      $50,000
   Credit: Refundable Advance (Liability)               $50,000

Once the condition is satisfied (e.g., matching funds are raised or a program milestone is met), the liability is cleared and revenue is recognized:

Debit: Refundable Advance                         $50,000
   Credit: Contribution Revenue—With Donor Restrictions $50,000

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Contributed Services

Not-for-profits frequently rely on volunteer services. Under ASC 958-605, the value of contributed services is recognized in the financial statements only if the services meet one of the following criteria (often remembered using the SOME mnemonic):

1. Specialized skills are required;
2. Otherwise needed by the organization (meaning the NFP would have had to purchase the services if they were not volunteered);
3. Measured easily (fair value is readily determinable); and
4. Enhances or creates a non-financial asset (such as a building, inventory, or equipment).

Specifically, standard volunteer services are recognized if they:

• Create or enhance a non-financial asset: If volunteers help build a new community center clinic, the value of their labor is capitalized as part of the asset and recognized as contribution revenue, regardless of whether the volunteers are professionals.
• Require specialized skills: If the services require specialized skills (e.g., CPAs, attorneys, doctors, nurses, licensed carpenters), are provided by individuals possessing those skills, and would typically need to be purchased, they are recognized as both an expense and contribution revenue:

  Debit: Professional Fees (Expense)               $10,000
     Credit: Contributed Services Revenue                 $10,000
  

  If a volunteer does not possess the specialized skill or if the service does not meet these criteria (e.g., a volunteer answering phones or ushering at a concert), no entry is made, though the volunteer hours can be disclosed in the notes.

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Transfers of Assets to an NFP that Holds or Raises Contributions for Others

When an NFP (the "recipient") receives assets from a donor and agrees to transfer them to a specified beneficiary, the accounting depends on whether the recipient has variance power or is financially interrelated with the beneficiary:

1. Agency Transactions (Recipient is an Agent): If the recipient has no variance power and is not financially interrelated with the beneficiary, it acts as an agent. It records a liability to the beneficiary rather than revenue:

   Debit: Cash / Asset                               $20,000
      Credit: Due to Beneficiary (Liability)                $20,000
   

   The beneficiary recognizes the transaction as contribution revenue and an asset (beneficial interest):

   Debit: Beneficial Interest                        $20,000
      Credit: Contribution Revenue—With Donor Restrictions $20,000
   

2. Variance Power: Variance power is the unilateral authority granted by the donor to the recipient NFP to redirect the use of the assets to another beneficiary without donor approval. If the recipient NFP has variance power, it recognizes the asset and contribution revenue, and the beneficiary records nothing until a distribution is made:

   Debit: Cash / Asset                               $20,000
      Credit: Contribution Revenue—Without Donor Restrictions $20,000
   

3. Financially Interrelated Organizations: Organizations are financially interrelated if one has the ability to influence the operating and financial decisions of the other, and one has an ongoing economic interest in the net assets of the other (e.g., an NFP university and its fundraising foundation). In this case, the recipient NFP recognizes contribution revenue, and the beneficiary NFP recognizes its interest in the net assets of the recipient.

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Allocation of Joint Costs

Under ASC 958-720, NFPs often conduct activities that combine program functions (such as education) with fundraising. A common example is a direct-mail campaign that contains both an educational brochure about healthy habits and a pledge card.

To allocate any of these joint costs to program services, the NFP must satisfy three strict criteria:

• Purpose: The activity must help accomplish a program function or management goal.
• Audience: The audience must not be selected based primarily on their likelihood to contribute.
• Action: The activity must motivate the audience to take a specific action that helps achieve the organization's mission, other than making a donation.

If all three criteria are met, the joint costs are allocated between program and fundraising based on a systematic and rational method. If any of the three criteria are not met, the entire cost of the joint activity must be recognized as fundraising expense.