August 14, 2020
NPO Revenue Recognition for Contributions
Within Part III of the Handbook – Accounting Standards for Not-For-Profit Organizations, Section 4410 provides guidance on revenue recognition for contributions which are non-reciprocal transfers to an NPO, the most common example being government funding.
Contributions Are Classified Into Three Different Types
i) Restricted Contributions
Externally imposed stipulations that specify how the resources or assets must be used.
ii) Endowment Contributions
Externally imposed stipulations that specify the resources must be maintained permanently; the NPO only has access to use the income generated from the endowment.
iii) Unrestricted Contributions
Neither a restricted nor endowment contribution. An NPO can make an accounting policy choice to recognize contributions revenue using either the deferral, or restricted fund method.
Deferral Method
Under the deferral method, unspent restricted funding accumulates as a liability and is presented as deferred contributions on the statement of financial position.
Endowment contributions are recognized as direct increases in net assets.
Restricted contributions are deferred and recognized as revenue in the same fiscal periods as the related expenses are incurred.
Restricted contributions for the purchase of capital assets are deferred and amortized into revenue on the same basis as the acquired capital asset. Funding received for capital assets that won’t be amortized is recognized as direct increases in net assets.
Unrestricted contributions are recognized as revenue immediately upon receipt of funds.
Restricted Fund Method
Under the restricted fund method, an NPO presents a general fund and one or more restricted funds in their financial statements. Revenues reported in a restricted fund must be externally restricted by a third party.
Endowment contributions are recognized as revenue of the endowment fund.
Restricted contributions are recognized as revenue in the corresponding restricted fund. If no corresponding restricted fund exists, the restricted contributions are recognized in the general fund in accordance with the deferral method.
Unrestricted contributions are recognized as revenue of the general fund.
Example
An NPO received $100,000 of restricted contributions funding during the fiscal year, $60,000 has been spent and $40,000 remains unspent at year end.
The table below illustrates the impact to the financial statements when using the deferral or restricted fund method under this example. The restricted fund example assumes a corresponding restricted fund exists.
Deferral Method
Restricted Fund Method
Cash
$40,000
$40,000
Deferred contributions
$40,000
$Nil
Net assets
$Nil
$40,000
Statement of Operations
Deferral Method
Restricted Fund Method
Revenue
$60,000
$100,000
Expenses
$60,000
$60,000
Excess of revenues over expenses
$Nil
$40,000
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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.