Nonprofit Contributions: Donor-imposed Conditions vs. Donor-imposed Restrictions

Revenue recognition for nonprofits can be a tricky area to navigate as it typically involves making various judgments while following a lengthy decision tree. Despite the challenges, there is a relatively linear thought process to follow, and it is important to start from “the top” before beginning to consider where there are any potential donor-imposed conditions or donor-imposed restrictions. Prior to contemplating the questions below, one must have already determined a grant or other contract is a Contribution transaction that follows the not-for-profit industry-specific revenue recognition guidance under Financial Accounting Standards Board (FASB) Accounting Standards Codification (ASC) Topic 958-605: Revenue Recognition, as opposed to being an Exchange transaction which follows ASC Topic 606: Revenue from Contracts with Customers. Contributions are also commonly referred to as nonexchange or nonreciprocal transactions.

Let’s assume the funding has been deemed to be a contribution.

Now, are there any donor-imposed conditions?

A contribution contains a donor-imposed condition if the agreement contains both of the following:

1. A barrier that must be overcome before the organization is entitled to the assets transferred or promised, and
2. Either a right of return of the assets transferred or right of release of promisor’s obligation to transfer assets if the organization fails to overcome the barrier.

Barriers often place specific requirements on an organization about the use of the transferred assets or funds in order to be entitled to them. Examples of barriers include measurable performance-related metrics or other measurable barriers which must be met often within a specific time frame (i.e. number of meals served to a community, or a matching requirement), limited discretion available to the organization regarding the conduct of an activity (i.e. a requirement to follow specific guidelines about qualifying expenses, a requirement to hire specific individuals, or the inclusion of specific protocols that must be adhered to), and stipulations related to the purpose of the agreement (i.e. a shelter to expand its facility to accommodate a specific number of additional animals). However, it is important to note administrative tasks or trivial stipulations, such as a requirement to provide an annual report or performance summary, are not indicative of a barrier.

For a donor-imposed condition to exist, it must be determinable from the agreement, or a document referenced in the agreement, that the organization is only entitled to the assets or a future transfer of assets if it has overcome the barrier.

If a funding agreement is deemed a contribution transaction and meets both criteria above to be considered a conditional contribution, then any funds received prior to the donor-imposed conditions being met would be recorded as a refundable advance (liability). It would then be recognized as contribution revenue when or as the conditions are substantially met. Refundable advances represent a true liability in nature and should not be confused or reported with deferred revenue, which is reserved for exchange transactions.

Now, let’s assume the contribution was either unconditional to begin with (i.e. had no donor-imposed conditions) or the donor-imposed conditions have been met.

Now, are there any donor-imposed restrictions?

Once it has been determined that the language in a grant or contract does not contain a donor-imposed condition, then it is considered an unconditional contribution. A contribution can also be deemed to be conditional and once the conditions are met, then it may be subject to donor-imposed restrictions on the funds. After a contribution has been deemed unconditional or the donor-imposed conditions have been met on a conditional contribution, then we must consider whether the contribution contains donor-imposed restrictions.

Donor-imposed restrictions limit the use of the contribution to a specific activity or time, but do not generally place limitations on how the activity is performed. Some donor restrictions are temporary in nature (i.e. resources to be used for particular programs or services or after a specific date), while others may be perpetual. Donor restrictions do not affect whether the recipient is entitled to the contribution and therefore, do not impact the timing of revenue recognition. They only impact whether the revenue recognized is classified as flowing through net assets with donor restrictions or net assets without donor restrictions. The accounting standards do allow for simplification to simply present the donor restricted revenue under net assets without donor restrictions, but only when said restricted revenue is both recognized and the restriction is met within the same reporting period.

Summary

With the endless variability in agreement language, it is often challenging for nonprofit organizations to accurately assess and differentiate between donor-imposed conditions versus donor-imposed restrictions. However, with some education and practice, the “muddy waters” will hopefully become a little more clear. Don’t hesitate to reach out to your Jones & Roth Nonprofit Team member for additional guidance when needed.