Exchange or Non-Exchange (Part 1) – Which is it?

Blog image - Exchange or Non-Exchange?

Posted on 27 February 2017

When looking for some guidance on whether your revenue under Tiers 1 or 2 is classed as “Exchange” or “Non-exchange” you might notice the tumble weeds rolling across the screen. The truth is there isn’t a great deal out there at the moment, especially in the New Zealand context. This Blog is the first in a series of three, which respectively cover the classification of revenue as either exchange or non-exchange, when to recognise the revenue, and what disclosures need to be made.

General Principle

The general idea in very simple terms is that exchange transactions are ones where one entity receives something in approximately equal value to something that they give. For example, a charity has a range of sunblock that they sell to the public to raise funds. The member of the public is receiving a good for approximately equal value to what they have paid in money.

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Non-exchange transactions on the other hand are ones where an entity receives something from another entity without giving something of approximately equal value in return. A simple example would be a donation as the donor does not receive anything in return for their gift.

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Those are the easy examples. It starts getting very complicated very quickly in practice. The area that we have found most charities are getting stuck with is funding administered by government departments. Funding comes in many forms. A common example is the Lotteries Fund which is administered by the Department of Internal Affairs. There are also funding contracts where Ministries such as The Ministry of Health or the Ministry of Social Development pay charities to carry out services on their behalf.

In almost every case, Lotteries grants are going to be non-exchange revenue as they are usually funding for projects carried out by charities for which the administering Department receives nothing in return.

Similarly, a lot of Government contracts where the charity is paid to carry out services are also non-exchange contracts. This can be a tricky concept to get your head around as at first glance, it would appear that the Ministry is receiving a service in exchange for its payment. However, the actual recipient of the service is the consumer, not the Ministry.

Some real examples that we have seen may help to illustrate this:

Healthcare Sector

Charity A provides counselling services to clients. A contract with the Ministry of Health pays for the salary of a professional psychologist to provide these services. The counselling services are provided to the clients, not the Ministry of Health and therefore, the charity considers this to be a non-exchange revenue contract.

Charity B provides advocacy and support for people affected by a particular disease. The Ministry of Health has a contract with the charity to provide it with an advertising campaign to educate people on how to prevent the spread of the disease. The services are provided to the Ministry of Health, and therefore the charity considers this to be an exchange contract.

Arts Sector

A charity puts on an arts festival every year. They receive the majority of their funding in the form of a grant from the local city council. They also receive sponsorship from local businesses. In return the businesses are provided with advertising in the programmes and tickets to events which they can give to their employees and clients.

The charity considers that the funding from the local council would be non-exchange revenue as the council is not receiving the arts festival itself. They consider the sponsorship, however to be exchange revenue (assuming the value of the advertising and tickets approximates the value of the money received). If it was significantly less, however, it could be considered to be non-exchange. It depends on the facts and circumstances of each transaction.

Education Sector

A charity has a contract with the government to deliver digital inclusion programmes that build New Zealanders’ computer and online skills and get more computers into homes. The main funding comes from the Ministry of Education and the charity classifies it as non-exchange revenue as it is the consumer that is receiving the services, not the Ministry.

As part of the programme, recipients of computers have to contribute some money towards the trainings costs and internet connections. At first glance, this would appear to be an exchange transaction. However, this contribution is well below the market rate for these types of services and so in this case, the charity has determined that this is also a non-exchange contribution because the charity is not receiving payment of equal value to the service it has given.

Mixed Transactions

Sometimes, revenue may have an exchange and a non-exchange component. If the two components are significant, and it is practicable to do so, then these elements should be separated. For example:

A charity has a Christmas cracker appeal where it sells crackers for $2 each to raise funds. On purchasing the cracker, as well as getting the use of the cracker including a novelty toy inside, the purchase also gives the customer the chance to win a prize, a bit like a raffle. If a customer was to buy a similar cracker from a retail store, the cost would be approximately 50 cents per cracker. This amount would be the exchange portion. The remaining $1.50 could be considered to be non-exchange as the customer is only buying a chance to win. They may or may not win and therefore this couldn’t be classed as an equal exchange of value.

The distinctions can be quite subtle and definitely involve judgement. In some cases there may not be one “right” answer so it is important to read the standards and work through your rationale making sure to document your reasoning and conclusions for future reference. It’s also important to be consistent year on year.

Provide sufficient detail in the notes to the financial statements so that the reader can understand your reasoning for particular classifications. In the third post in this series we will discuss the disclosure requirements and give some examples of the types of information you could include in your notes and policies. The next blog post will discuss the issue of revenue recognition (when you can “book” the revenue) in terms of non-exchange revenue as there are some particular conditions you need to look out for.

Hopefully the examples above have helped to clarify your understanding of the concept of exchange and non-exchange revenue. The next post will focus on when to recognise exchange and non-exchange revenue. To make sure you get to see all three posts in the series, sign up to our Blog mailing list from the Blog page on our website.

Whilst Charities Services is unable to give accounting advice, we are happy to discuss these matters with you, please contact us at If you want an opinion on your particular accounting policy, we suggest you obtain the services of an accounting professional.

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