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Revenue Recognition For Contributions NPO

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by | Aug 3, 2020 | Blog | 0 comments

This blog was originally posted on the Manning Elliott website, and written by Patrick Chan and Brandon Kelley.


Within Part III of the Handbook – Accounting Standards for Not-for-Profit Organizations, Section 4410 provides guidance on revenue recognition for contributions which are non-reciprocal transfers to an NPO, the most common example being government funding.

Contributions are Classified Into Three Different Types

i) Restricted Contributions

Externally imposed stipulations that specify how the resources or assets must be used.

ii) Endowment Contributions

Externally imposed stipulations that specify the resources must be maintained permanently; the NPO only has access to use the income generated from the endowment.

iii) Unrestricted Contributions

Neither a restricted nor endowment contribution. An NPO can make an accounting policy choice to recognize contributions revenue using either the deferral, or restricted fund method.

Deferral Method

Under the deferral method, unspent restricted funding accumulates as a liability and is presented as deferred contributions on the statement of financial position.

  • Endowment contributions are recognized as direct increases in net assets.
  • Restricted contributions are deferred and recognized as revenue in the same fiscal periods as the related expenses are incurred.
  • Restricted contributions for the purchase of capital assets are deferred and amortized into revenue on the same basis as the acquired capital asset. Funding received for capital assets that won’t be amortized is recognized as direct increases in net assets.
  • Unrestricted contributions are recognized as revenue immediately upon receipt of funds.

Restricted Fund Method

Under the restricted fund method, an NPO presents a general fund and one or more restricted funds in their financial statements. Revenues reported in a restricted fund must be externally restricted by a third party.

  • Endowment contributions are recognized as revenue of the endowment fund.
  • Restricted contributions are recognized as revenue in the corresponding restricted fund. If no corresponding restricted fund exists, the restricted contributions are recognized in the general fund in accordance with the deferral method.
  • Unrestricted contributions are recognized as revenue of the general fund.

Example

An NPO received $100,000 of restricted contributions funding during the fiscal year, $60,000 has been spent and $40,000 remains unspent at year end.

The table below illustrates the impact to the financial statements when using the deferral or restricted fund method under this example. The restricted fund example assumes a corresponding restricted fund exists.

Statement of Financial Position

Deferral MethodRestricted Fund Method
Cash$40,000$40,000
Deferred contributions$40,000$Nil
Net assets$Nil$40,000

Statement of Operations

Deferral MethodRestricted Fund Method
Revenue$60,000$100,000
Expenses$60,000$60,000
Excess of revenues over expenses$Nil$40,000

 

We Are Here to Help

 

Manning Elliott is here to help. Visit our blog to stay up to date on the most recent NPO topics. To learn more about revenue recognition for contributions or to submit an inquiry, please contact a member of our NPO.


The above content is believed to be accurate as of the date of posting. Tax laws are complex and are subject to frequent changes. Professional advice should be sought before implementing any tax planning. Manning Elliott LLP cannot accept any liability for the tax consequences that may result from acting based on the information contained therein.

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Manning Elliott

Manning Elliott is a CPA firm with offices located in Vancouver, Burnaby, Surrey, and Abbotsford British Columbia, Canada. We provide personalized accounting and business advisory services to companies operating within a wide range of industries in seven major practice areas: Tax, Private Company…

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