In this video, we walk through 5 FAR practice questions about how to determine the amount of revenue recognized by NFPs for contributed services. These questions are from FAR content area 3 on the AICPA CPA exam blueprints: Select Transactions.
The best way to use this video is to pause each time we get to a new question in the video, and then make your own attempt at the question before watching us go through it.
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Recognizing Revenue from Contributed Services in Nongovernmental, Not-for-Profit Entities
Contributed services play a critical role in supporting many nongovernmental, not-for-profit organizations (NFPs). Understanding the rules for recognizing these services as revenue is essential for accurate financial reporting. This guide explains the conditions under which contributed services are recognized as revenue, how they are measured, and how to record them through journal entries.
When Are Contributed Services Recognized as Revenue?
Under U.S. GAAP, contributed services are recognized as revenue if they meet one of the following criteria:
- Specialized Skills:
The services require specialized skills, are provided by individuals possessing those skills, and the NFP would normally pay for the services if not donated. Examples include legal, accounting, medical, or plumbing services. - Enhancing Nonfinancial Assets:
The services create or enhance a nonfinancial asset owned by the organization, such as property, equipment, or other tangible assets. This applies even if the services do not require specialized skills.
Fair Value Measurement
When services meet the criteria for recognition, they are recorded at their fair value. This is often based on the provider’s standard billing rate or market rates for similar services.
Classification of Revenue
Revenue Without Donor Restrictions:
Contributed services are classified as revenue without donor restriction because the services are used immediately to support the organization’s operations.
Journal Entries for Contributed Services
For services that meet the recognition criteria, the NFP records the following journal entry:
- Services That Benefit Operations:
Dr. [Expense Account] $X
Cr. Contributions – Revenue Without Donor Restrictions $X - Services That Enhance Nonfinancial Assets:
Dr. [Asset Account] $X
Cr. Contributions – Revenue Without Donor Restrictions $X
Examples
Example 1: Recognized Contributed Services (Specialized Skills)
A licensed plumber donates 10 hours of labor to repair an NFP’s building, which is essential to its operations. The plumber’s hourly rate is $100.
Journal Entry:
Dr. Building Maintenance Expense $1,000
Cr. Contributions – Revenue Without Donor Restrictions $1,000
Example 2: Recognized Contributed Services (Enhancing Nonfinancial Assets)
A volunteer repaints an NFP’s office building. The value of the labor provided is $2,500. Although the volunteer is not a professional painter, the work enhances the building, which is a nonfinancial asset.
Journal Entry:
Dr. Building Improvements $2,500
Cr. Contributions – Revenue Without Donor Restrictions $2,500
Example 3: Non-Recognized Services
A certified architect volunteers 20 hours to answer phones at an NFP. Even though the architect has specialized skills, they are not being used in this scenario, and the NFP would not typically pay for such general administrative work. No revenue is recognized.
No journal entry is required.
Example 4: Contributions with Restrictions and Services
An NFP receives the following contributions:
- $10,000 cash restricted to purchasing new computers.
- $5,000 cash without restrictions.
- 5 hours of donated accounting services valued at $200 per hour.
Revenue Breakdown:
- Revenue without donor restrictions: $5,000 (unrestricted cash) + $1,000 (accounting services) = $6,000
- Revenue with donor restrictions: $10,000
Journal Entries:
For the unrestricted contributions:
Dr. Cash $5,000
Dr. Accounting Services Expense $1,000
Cr. Contributions – Revenue Without Donor Restrictions $6,000
For the restricted contribution:
Dr. Cash $10,000
Cr. Contributions – Revenue With Donor Restrictions $10,000
Key Takeaways
- Recognition Criteria: Contributed services must involve specialized skills or enhance nonfinancial assets.
- Classification: Service revenue is always considered revenue without donor restriction.
- Fair Value: Recognized services are recorded at their fair value based on market rates.
- Journal Entries: Proper journal entries ensure services are accurately reflected in financial statements.
By following these rules, NFPs can ensure they correctly account for the value of donated services, providing transparency and compliance with U.S. GAAP.
