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
- is a specialized type of fund accounting which involves the reporting of
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:
- fair value can be reasonably estimated; and
- 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