Most nonprofit organizations are familiar with recording standard monetary transactions—cash received for donations, grants, or program revenue, and cash paid for expenses such as payroll, rent, and supplies. However, not all transactions involve the exchange of cash or financial instruments. Some exchanges involve nonmonetary assets or liabilities, such as donated goods, services, or property. For nonprofit leaders and finance professionals, understanding how to account for these nonmonetary transactions is crucial for transparency, compliance, and accurate financial reporting.
What Are Nonmonetary Transactions?
A nonmonetary transaction is an exchange that does not involve cash or its equivalents. Examples in the nonprofit sector include:
- A building donated to a nonprofit
- An exchange of program equipment between two organizations
- Volunteer services provided by a skilled professional
- Receiving artwork in exchange for publicity or acknowledgment
These transactions can have significant value, even though no money changes hands.
How to Account for Nonmonetary Transactions
The key principle in accounting for nonmonetary transactions is to record them at fair value, just as you would with monetary transactions.
- When a nonprofit receives a nonmonetary asset, such as donated equipment or property, the organization should recognize it on the books at the fair value of the asset received.
- If the organization gives up a nonmonetary asset, such as transferring a vehicle to another nonprofit, it should record the transaction based on the fair value of the asset given up—unless the fair value of the asset received is more readily determinable.
- In either case, if there is a difference between the book value and the fair value, the organization should recognize a gain or loss.
Recognizing Gains or Losses
When nonmonetary assets are exchanged, nonprofits should recognize any gain or loss resulting from the difference between the book value and the fair value of the asset given up. This is especially important for transparency in financial reporting and compliance with audit standards.
For example, if a nonprofit’s records show office furniture with a book value of $1,200 is traded for equipment worth $2,000, the organization should recognize an $800 gain in its financial statements.
Why It Matters for Nonprofits
Properly recording nonmonetary transactions:
- Ensures compliance with GAAP and IRS reporting standards
- Provides transparency for donors, grantors, and stakeholders
- Accurately reflects the true resources and activities of the organization
- Impacts financial ratios and statements used for audits, funding, and strategic planning
Special Consideration: Donated Services
For nonprofits, contributed services can also be considered nonmonetary transactions. However, these are only recognized in financial statements if:
- The services create or enhance a nonfinancial asset (e.g., constructing a building), or
- The services require specialized skills (e.g., legal, medical, accounting) and would otherwise need to be purchased.
These services must be recorded at their fair value at the time they are received.
Conclusion
Nonmonetary transactions are common in the nonprofit world, from donated goods and services to exchanges of physical assets. Just because no cash is involved doesn’t mean these transactions are less significant. Recognizing and measuring these transactions at fair value helps nonprofits present a true picture of their financial position and activities—critical for maintaining trust and compliance. If your nonprofit is unsure how to handle such transactions, consulting a CPA with nonprofit experience is a wise step.