Exchange and Non-Exchange Revenue (Part 2) – When to recognise it

Blog image - Exchange or non-exchange (part 2)

Posted on 15 March 2017

If all dibs are dobs, but only some dobs are slobs, how many slobs are dibs? I swear that’s what I just read in IPSAS 23: Revenue from Non-exchange transactions. Actually, I made that up, but what I did read was something a little bit confusing about stipulations, restrictions and conditions. I’m going to try and translate it for you now, but first, let me explain why it’s important.

Prior to the introduction of the PBE IPSAS standards for Tiers 1 & 2, many charities  recognised (recorded/booked) their revenue using what was known as the “matching principle”. This meant for example that if, at the end of your financial year you received a grant from a funder for salaries for a calendar year, you could record only the revenue that related to the current financial year, and record the rest as a liability (income in advance/deferred revenue) until it was spent in the following year. This allowed the matching of the revenue to the associated expenditure which helped to smooth results from year to year.

Now, under the new standards, for items that are deemed to be non-exchange transactions (see my previous blog), you can only defer the revenue (record it as a liability) if certain conditions are met (as discussed below). If, on the other hand, the revenue is deemed to be exchange revenue, then these rules don’t apply, because exchange revenue is assumed to be under a contractual basis which means that the revenue is recognised when the sale of the goods or services is made. If exchange revenue is received in advance of this point, it can be recorded as a liability according to normal accounting concepts.

So, what are the rules for non-exchange revenue?

The standard makes reference to the fact that many non-exchange transactions may be subject to stipulations. Stipulations may be in the form of conditions or restrictions. Conditions and restrictions may require that the recipient does something in particular with the money or asset they receive. This is called a “performance obligation”. Some conditions might state that if the recipient does not meet the performance obligation, then they must return the money or asset. This is known as a “return obligation”. In order for revenue to be deferred, the terms of the agreement must have a legally enforceable return obligation. Performance obligations (or moral obligations) in themselves are not sufficient to allow the deferral of revenue.

What this boils down to is that if a grant agreement or contract specifies that you need to spend the money in a particular way, this alone is not enough to defer the revenue. It’s a high legal threshold and the agreement or contract must specify in no uncertain terms that if the grant is not spent on what it was intended for, there is a contractual obligation to return the funds. For example, the Department of Internal Affairs Community Organisation Grants Scheme (COGS) agreement states “If the grant is not used for the agreed purpose, the Department of Internal Affairs will recover the grant in part or in full on behalf of the Crown, and may advise other government agencies and funders of this issue.” In this case the “agreed purpose” would need to specifically defined in the contract in order for grant recipient to defer the revenue. A clause like “The entity is required to use the funds for the day-to-day operating of the charity, or return the funds to the funder” is probably too broad, as there is no actual performance obligation because there is no performance measure for this kind of stipulation.

To recap: Agreements or contracts may have stipulations which are either conditions or restrictions. A condition may allow a charity to defer revenue, but only where there is a legally enforceable obligation to return the money or grant if it is not spent in a particular way. A restriction does not allow the deferral of revenue. See what I mean about dibs and dobs?

Just to complicate things further, the test for whether a stipulation is a condition giving rise to a return obligation or merely a restriction is actually “substance over form”. For example, a charity has received the same grant for the last three years from a funder.  The grant agreement or contract contains a clause that the money must be spent as stipulated, or returned. However, the recipient has always varied the terms of the grant without having to return it. In this case it is likely that the funder will not enforce the terms of the agreement, and therefore the charity cannot defer the revenue.

If the charity has no previous experience with the funder then it should assume that the funder will enforce the contract. Also, if the contract does not have a use or return clause, but experience shows that the funder will request the money back if it is not spent in line with conditions, then a liability should be recognised.

An easy way to think about this all is “Will I have to pay this money back if I decided to use it for another purpose?”

How do I value my non-exchange revenue?

In terms of the value you assign to non-exchange revenue, it should be recorded at fair value. For monetary grants, this is easy, it simply means the cash received. For other types of non-exchange revenue, such as the gift of an asset, then a reasonable fair value may have to be arrived at. This could be with reference to the market value of the asset or the value of the services provided. The standard does not require services-in-kind to be recorded due to the complexities of valuing them, but it does encourage disclosure of them in the notes as it gives a fuller picture of the entity.

This was the second blog in a three part series about exchange and non-exchange revenue. To make sure you don’t miss any posts, sign up to our mailing list on the Blog page of our website. I realise these aren’t the most straightforward of concepts so hopefully I’ve managed to convey the general principles that underpin the standards. As always, if you want to talk through any of the issues in this blog then please get in touch with us at

The final post in this three-part series will detail the required disclosures that need to be made about exchange and non-exchange revenue.

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