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by Catherine Miller and Patrick Chan
February 11, 2021

Restricted Contributions and Forgivable Loans

In this post, our NPO experts take a look at nonprofit restricted contributions and forgivable loans.

Nonprofit Restricted Contributions

Sometimes, not-for-profit associations and charities (“NPO’s”) receive contributions from the government, donors, and other organizations (the “funder”) to incur expenses for specific programs or for the purchase of capital assets. Those contributions have externally imposed restrictions specified by the funder on how the resources must be spent.

As a result, there are some specific accounting rules to apply to those contributions.

Deferral Method of Recognizing Restricted Contributions

a) If a funder makes a contribution towards a specific expense, the NPO will recognize the revenue into income in the same period when the expense is incurred. If the expense has not been incurred by the end of the fiscal year, the contribution will be deferred to next year and recognized in the year when the expense is made.

b) A contribution received specifically for the purchase of capital assets will be recognized as a deferred contribution related to capital assets on the statement of financial position and amortized at the same rate as the corresponding capital asset. The amortization related to the deferred contribution will be recognized as revenue and the corresponding amortization on the capital asset will be recognized as an expense.

 c) Nonprofit restricted contributions received for the purchase of a non-depreciable asset like land is not amortized and is not recognized in income, but is recognized as a direct increase to net assets.

Example – Restricted Capital Contribution

An NPO received $1,000,000 of restricted contributions funding during the 2020 fiscal year for the purchase of a building. During the 2021 fiscal year, the NPO purchases a building for $2,000,000 with an estimated life of 40 years. The land is valued at $1,100,000 and the building at $900,000. The contribution of $1,000,000 will be allocated to the purchase pro-rata or $550,000 to the land and $450,000 to the building.

At fiscal year-end 2020, the $1,000,000 in funds received will be deferred as a liability on the statement of financial position. In subsequent years starting in fiscal 2021 on an annual basis, $22,500 ($900,000/40 years) will be recognized as amortization expense for the building and $11,250 as amortization revenue on the deferred contribution ($450,000/40 years). The contribution received for the land of $550,000 will be recognized directly to the statement of net assets and will not affect revenue.

Nonprofit Forgivable Loans

Forgivable loans for nonprofits are loans received from a funder that will be forgiven over a period of years if the NPO fulfills certain requirements set by the funder. If the conditions are not met, the forgivable loan becomes a regular loan and will need to be repaid usually with interest.

Forgivable loans are a type of government assistance drawn up in the form of a loan that is forgiven on condition that the borrower, i.e., the NPO, continues to meet certain requirements specified at the time it was granted.” Usually, an NPO will receive a forgivable loan from a government agency for the purchase or the improvement of capital assets.

The accounting for forgivable loans for nonprofits is complex and professional advice should be sought.

We Are Here to Help

Manning Elliott is here to help. Visit our blog to stay up to date on the most recent NPO topics. If you still have questions about nonprofit restricted contributions or forgivable loans, or to submit an inquiry, please contact a member of our NPO team.

The above content is believed to be accurate as of the date of posting. Tax laws are complex and are subject to frequent changes. Professional advice should be sought before implementing any tax planning. Manning Elliott LLP cannot accept any liability for the tax consequences that may result from acting based on the information contained therein.