During our August nonprofit workshop, our nonprofit team shared the latest in accounting and tax updates, as well as insights from AICPA's recently revised Audit & Accounting Guide for Not-for-Profit Entities. We posed various questions during our workshop and over the next few blog postings, we will share the answers to those questions.

Q. Why is distinguishing contributions from other types of transactions so important?

A. Contributions are unique to nonprofit organizations. So is the corresponding revenue recognition, both in terms of the timing of recognition and the classification of revenue.

A contribution is defined as an unconditional, voluntary transfer of cash or other assets or a settlement or cancellation of liabilities.

With a contribution, there is no quid pro quo. Any benefit returned to the donor is incidental to the potential public benefit created. The inclusion of ‘unconditional’ and ‘voluntary’ in the definition means that the beloved accounting concept of ‘matching’ does not apply to contributions. Note too that any payments made by courts or individuals to nonprofit organizations to settle legal disputes or pay fines are not contributions, since they are not voluntary.

Q. What about cy pres awards?

A. Cy pres is a doctrine that permits a court to award any unallocated, unclaimed, or undeliverable funds from a class action settlement or judgment to a nonprofit organization. Since no donor is involved, and the award is not voluntary, cy pres awards are not contributions, although they do represent revenue to a nonprofit organization. And the same goes for court-mandated community service hours – if the services are not voluntary, then they are not contributions.

Q. What is the appropriate classification of government grants? As a contribution or an exchange transaction?

A. Check out our next ‘Exploring the World of Contributions’ blog posting for the answer…

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Donella Wilson

Donella Wilson, CPA, leads GHJ’s Nonprofit Practice and is also President and Chief Philanthropy Officer of GHJ Foundation, GHJ’s vehicle for purposeful and proactive giving to the community. A leader in both the nonprofit and accounting communities, Donella was named a finalist in the 2021 Los…Learn More