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
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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.