A Closer Look at Donor-Restricted Contributions
A contribution is an unconditional transfer of assets or settlement of liabilities in a voluntary, nonreciprocal transfer. Contributions are recognized at fair value when the contribution is made/promised. Revenue from unconditional contributions is recognized by the nonprofit in the period received/promised even if the revenue includes a donor imposed restriction. If a contribution is conditional, the revenue is not recognized until the condition is substantially met.
Donor-restricted contributions are contributions for which the donor imposes a purpose or time restriction on the use of the funds. These funds are considered net assets with donor restrictions until the funds have been used for the donor’s intended purpose or by the passage of time at which time the net assets are then reported as net assets released from restriction. It is imperative for accurate financial reporting, that nonprofit organizations closely track donor restricted contributions and when restrictions are met.
When a nonprofit organization accepts a contribution, it has a fiduciary responsibility to use the funds as the donor intended and systems should be in place to ensure donor imposed restrictions are properly captured and that donor-restricted contributions are used for the intended purpose. Tracking donor imposed restrictions can be onerous, so many nonprofits focus fundraising efforts on soliciting unrestricted donations when possible. To ensure donations will be considered without donor restriction (unrestricted), nonprofit organizations must be careful in their solicitation language. If the language in the solicitation describes only one of the organization’s programs, it may be implied that any contributions will be restricted for that purpose. Therefore, if the goal is to receive unrestricted contributions, solicitations should clearly state that the donations will be used for any existing or future programs.