Even donors to nonprofit organizations are looking for a return on their investments. The return is in the form of the contribution being used for a specified purpose within the organization’s scope of activities. A donor may require that the contribution not be used until a project has reached a predetermined goal or threshold. These donor restrictions require nonprofits to segregate these contributions as temporarily restricted assets until the specified conditions have been met. When the restrictions are met in the same year as the donation, the revenue is recorded as unrestricted support. When a donor restriction expires, that is, when a stipulated time restriction ends or purpose restriction is accomplished, temporarily restricted net assets are reclassified to unrestricted net assets and reported in the statement of activities as net assets released from restrictions.
If material, the components of temporarily restricted net assets and the amounts released are disclosed in the footnotes of the financial statements.
Authored by Tishia Jordan
Categories: Financial Reporting, Gov't/United Way Agencies, Private Schools and Universities, Religious OrganizationsTags: Contributions, SFAS 116
Subscribe by RSS
I am still confused as to when restricted donations are recognized as revenue. Is it at the time the NPO is informed of the restricted donation from the donor or when the restriction has been complied with.
What journal entry is made when the NPO receives written confirmation of the restrictd donation from the donor and what is the entry when the NPO has satisfied the restriction. Is deferred revenue credited upon notification and then debited and a revenue account credited when the restriction is complied with.
Sam your question is common and some organizations still report these restricted contributions as “deferred revenue”. Deferred revenue (liability account) is used when funds have been collected or billed, but not earned yet. Contributions (revenue) are recognized when the unconditional promise to give has been received from the donor – basically there isn’t an “earnings process” for contributions, but a “classification” process.
The journal entry to record the receipt of restricted donation:
DR – Unconditional Promise to Give (Contributions receivable – asset)
CR – Temporarily restricted contributions (revenue)
As the receivable is collected the entry is:
DR – Cash (possibly restricted until restriction has been satisfied by the org)
CR – Unconditional promises to give (contributions receivable)
As the donor restriction has been met (either by “time” or by “event”), the following journal entry is made:
DR – Net assets released from restriction (Temporarily restricted net asset account)
CR – Net assets released from restriction (Unrestricted net asset account)
This reclassification entry allows the movement of funds for financial reporting, between temporarily restricted funds and unrestricted funds.
I have a question regarding temporarily restricted contributions. If a NPO receives a $3,000 contribution which is temporarily restricted, how is the net asset side recorded? The restriction has not been met at year end. I know the following entry would be posted when the contribution is received:
DR – Cash
CR – Temporarily restricted contribution (revenue)
Would anything be posted to the temporarily restricted net asset account? Right now, my balance sheet is out by the $3,000 which tells me something should be posted to the net asset account but I’m not sure what entry should be made.
If a donor gives us a contribution that covers more than one year, for example a contribution received for an ongoing program for November 2010 – October 2011. We go by a calendar year. Should any of this be in temporarily restricted in 2010?
becky daVee your answer to Sam’s question really help me indeed at the point of time when iam trying to compile annual account as i have almost the same confusion as that of sam.
Thanks
Hey Becky,
Very helpful. Two questions though.
(1). Is that last journal entry in your comment above reflected under revenue on the statement of activities?
(2). What if the restrictions are not met in the same year as the contribution? What journal entries do you make in that case?
Any advice would be great.
Best,
Nate
This is perfect info! My question is when you pay out an expense from the restricted funds, how is the journal entry made?
Hi Kim,
As with most situations, “it depends.” It depends upon how you track your restrictions. A lot of organizations track their restricted contributions on a spreadsheet. So if this is your method, then you just need to process the transaction as normal recording it in whatever would be the usual expense account. If you are trying to track this in your accounting software, it can be more tricky, and it depends on how you have your accounts set up. For example, do you have expense accounts closing to general equity/net asset accounts or do you have temporarily restricted net asset accounts. Because I have no familiarity with your system, I wouldn’t be able to specifically guide you on this.
Nate, the restricted contributions can be a little convoluted. The last journal entry in Becky’s response would be in net assets. Once the restriction has been satisfied, then you are “reclassifying” the expense from restricted net assets to unrestricted net assets. To answer your next question: You may not have to do anything in the year the contribution was received, but you need to make sure that the gift is reflected as temporarily restricted net assets at the end of the year. This could be accomplished by having that revenue account close to a temporarily restricted net asset account. However, a more simplified method to achieve this is to track the restrictions on a spreadsheet, which would include the gifts and the related expenses. Then at the end of the year, (after reviewing your spreadsheet for accuracy), you would post a journal entry to adjust temporarily restricted net assets to agree with the spreadsheet, with the offsetting account being unrestricted net assets. This treatments avoids having to set up numerous income and expense accounts that would specifically close to a temporarily restricted net asset account.
Good question! Most likely the answer is yes. The easiest way to illustrate this is by an example. Let’s say that a donor gives you a $30,000 contribution in 2012, and it is to be used for the next 3 years ($10,000 in each year). If it is for a specific program, then you will need to determine if you have expenses for that program that equal at least $10,000. If so, then at the end of the first year, you would have $20,000 remaining in temporarily restricted. If you have only spent $8,000, then you would have $22,000 remaining in temporarily restricted. If the donor has not specified how much should apply to each year, then you could assume equal amount in each year. If you are in doubt, it is always a good idea to verify this information with the donor. They will appreciate your diligence in fulfilling their request.
Jessica, you need to post a journal entry to credit your temporarily restricted net asset account and debit your unrestricted net asset account. This should get your temporarily restricted net asset to the correct balance.