In this video, we walk through 5 FAR practice questions about nonprofit contribution revenue recognition. These questions are from FAR content area 3 on the AICPA CPA exam blueprints: Select Transactions.
The best way to use this video is to pause each time we get to a new question in the video, and then make your own attempt at the question before watching us go through it.
Also be sure to watch one of our free webinars on the 6 “key ingredients” to an extremely effective & efficient CPA study process here…
Nonprofit Contribution Revenue Recognition
Contributions are a cornerstone of funding for nongovernmental, not-for-profit organizations, and proper accounting for these contributions is essential. Here’s a detailed guide on how to calculate the amount to be recognized as contribution revenue, covering financial assets (e.g., cash) and nonfinancial assets (e.g., equipment, land).
Unconditional Contributions
Definition:
Unconditional contributions are those where the donor imposes no conditions that must be met before the donation can be used or to keep the donation.
Recognition:
- Recognized as revenue immediately upon receipt.
- Classified as either with donor restriction or without donor restriction based on the donor’s intent.
Examples:
- A cash donation of $50,000 with no restrictions is recognized as revenue without donor restriction.
- Equipment valued at $30,000, donated for use in a new program, is recognized as revenue with donor restriction.
Key Point:
Unconditional contributions are always recognized as contribution revenue, regardless of any donor-imposed restrictions.
Conditional Contributions
Definition:
Conditional contributions are those that require the recipient organization to fulfill specific conditions or actions before the contribution becomes available.
Recognition:
- Not recognized as revenue until the conditions are substantially met.
- If funds are received before meeting the conditions, they are recorded as a refundable advance liability.
Examples:
- A $250,000 grant contingent on raising $500,000 in matching funds is not recognized until the matching funds are secured.
- A $100,000 contribution requiring the organization to open a new facility is deferred until the facility is opened.
Key Point:
Conditions must be clearly fulfilled for recognition to occur. Until then, conditional contributions are excluded from contribution revenue.
Conditional Promises to Give
Definition:
Promises to give that depend on the occurrence of a specific future event or action.
Recognition:
- Not recognized in the financial statements until the conditions are met.
- No journal entry is made for a conditional promise until it becomes unconditional.
Example:
- A $400,000 pledge contingent upon hosting a new event is not recorded until the event occurs.
Key Point:
Conditional promises are not recorded as revenue or receivables until the condition is substantially met.
Unconditional Promises to Give
Definition:
Promises to give where the donor imposes no conditions for receipt.
Recognition:
- Recognized as contribution revenue in the period the promise is made.
- Classified as either with donor restriction until the money is actually received (you can’t use this money yet because you haven’t actually received it!)
Examples:
- A $200,000 pledge to be paid over four years for general operations is recognized as revenue with donor restriction.
- A $50,000 pledge to fund scholarships is recognized as revenue with donor restriction.
Key Point:
Unconditional promises to give are recorded in full as revenue when the promise is made, even if payments are to be received in future periods.
Donations Given in Exchange for Something
Definition:
When a donor receives goods or services in return for their contribution, the revenue is split into two components: sales revenue and contribution revenue.
Recognition:
- The fair market value (FMV) of the goods or services received is recognized as sales revenue.
- The excess of the donation amount over the FMV is recognized as contribution revenue.
Example:
- A donor contributes $500 and receives a gear package valued at $150.
- Sales revenue: $150
- Contribution revenue: $350
Key Point:
Separate the FMV of goods/services from the remaining donation to properly classify revenue.
Summary
To calculate the amount to recognize for contributions, it is essential to:
- Distinguish between unconditional and conditional contributions.
- Recognize unconditional contributions and promises to give as revenue immediately, classifying them based on donor restrictions.
- Record conditional contributions and promises only when conditions are met.
- Allocate donations given in exchange for goods or services between sales revenue (FMV of goods) and contribution revenue (excess).
