Contributions — Revenue Recognition

ASNPO 4410

Contributions — Revenue Recognition

ASNPO 4410

Definition
  • Fund accounting
    • Fund accounting is when an NPO establishes a fund, whereby each fund has a collection of assets, liabilities, net assets, revenues, and expenses that self-balance
    • For example, a separate fund may be set up for different activities (i.e. fundraising, food bank, homeless shelter, etc…)
    • Fund accounting is optional
  • Endowment contribution = a contribution where the principal is to be invested and only the income it generates can be spent
  • Restricted contributions = is a contribution subject to externally imposed stipulations (not by management) that specify the purpose for which the contributed asset is to be used
    • The restrictions can be implicit and explicit
Deferral fund method vs. Restricted Fund Method
  • A NPO makes a policy choice of (1) Restricted Fund Method or (2) Deferral Method to account for contributions
  • Once a method is chosen, you need to use it for all contributions
Restricted Fund Method
  • The restricted fund method of accounting for contributions
    • is a specialized type of fund accounting which involves the reporting of
      • total general funds,
      • one or more restricted funds, and
      • an endowment fund, if applicable
    • Endowment contribution – recognize as revenue in the endowment fund
    • Restricted contribution
      • If restricted fund set up – recognize revenue in the restricted fund
      • If no restricted fund set up – use deferral method and put it through the general fund
    • Unrestricted contribution – recognize as revenue in the general fund
    • Reporting of financial statement elements segregated on a basis other than that of use restrictions (i.e. by program or geographic location) does not constitute the restricted fund method
Deferral Method
  • Under the deferral method of accounting for contributions
    • Endowment contribution – increase net assets
    • Restricted contribution
      • For current period expenses – recognize as revenue
      • For future period expense defer and recognize revenue on the same basis as expenses
      • For purchase of PPE – defer and amortize over the useful life of PPE
      • For repayment of debt – defer and recognize on the same basis as the purpose for debt
        • Debt for future expense/PPE – defer
        • Debt for Land – increase NA
        • Debt for current expense – recognize revenue
Who uses the deferral method?
  • NPO’s that do not use fund accounting
  • NPO’s that use fund accounting in their financial statements without following the restricted fund method would account for contributions under the deferral method
Contributed materials and services
  • A NPO may choose to recognize contributions of materials and services
    • This is done, because it record-keeping may become impossible
    • Imagine a food bank tracking all the non-perishable food it receives
  • If an NPO chooses to recognize contributed materials and services, the following must be met:
    1. fair value can be reasonably estimated; and
    2. when the materials and services are used in the normal course of the organization’s operations and would otherwise have been purchased
  • contributions should be measured at the fair value

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