F6 M3 Not-for-Profit Revenue Recognition

exchange transaction

occurs when the organization earns resources in exchange for services performed or goods provided equal to the value in return; revenues from this transaction are classified as increases to net assets without donor restrictions and are recognized when realized or realizable and earned

revenues from exchange transactions

some examples include student tuition & fees earned by educational institutions, patient service revenue earned by healthcare organizations, and membership fees earned by membership organizations

contribution

is an unconditional (collection of cash is certain) transfer of cash, assets, or services to a not-for-profit organization that is voluntary, nonreciprocal which means the donor does not receive an equivalent benefit in return, and is transferred to a new owner (ownership or title passes to the not-for-profit)

recognition of unconditional contributions

is recognized immediately when the not-for-profit receives the contribution or when the donor makes an unconditional promise to give; are reported as revenues or gains and as either an increases in net assets without donor restrictions or with restrictions in the period received and as assets, decreases of liabilities, or expenses, depending on the form of the benefits received

revenue for an unconditional contribution

the contribution is classified as this if it is part of the ongoing major or central activities of the not-for-profit

gain for an unconditional promise

the contribution is classified as this if the transaction is incidental to the purpose of the not-for-profit

conditional contributions

is a contribution that depends on the not-for-profit satisfying an obligation before it is entitled to keep the resources given by a donor; the donor has the right to demand the resources back if the barrier is not met; these are not recognized, but if cash is received in advance before obligation is satisfied, record a refund liability, or a liability

barriers that indicate a conditional contribution

specified levels or service, such as providing 1,000 meals as a requirement; specific outcomes or outputs, such as completing a specified number of research studies; matching requirements, such as raising $50,000 from other donors; an outside event, such as receiving regulatory approval

cash contributions

should be recognized as revenues or gains and reported as contributions that increase net assets without donor restrictions or with donor restrictions in the period in which they are received, and they should be measured at FV at the date of the gift

unconditional promise (or pledge)

is a donor’s commitment to give cash or other assets in the future when the promise has no remaining condition that must be met; recorded at FV when the promise is made and it may be written or verbal (verbal commitments need to be documented by the not-for-profit internally and may be harder to collect)

conditional promise (or pledge)

is a donor’s promise that depends on a future, uncertain event; recognition does not occur until the obligations are substantially met or when chances of meeting condition is remote and the promise becomes unconditional; considered a good faith deposit and are accounts for as a refund liability, a debit to cash and a credit to refund liability (effects statement of financial position)

multiyear pledges

are unconditional promises to contribute over multiple years and are initially recorded at the present value of future cash flows with a debit to contributions receivable and a credit to contribution revenue; future collections are considered donor-restricted revenues and net assets (time-restricted)

contribution revenue for a multiyear pledge

when the first payment (or future payments) is received for a multiyear pledge it is a debit to cash, a credit to contributions receivable, and a credit to contribution revenue

*cash collected (each annual payment) - pledge receivable reductions (PV portion of each annual payment) = additional contribution revenue (not interest income)

placed-in service approach

is a not-for-profit accounting method for contributions of long-lived assets when the donor does not impose specific restrictions for items such as a building or equipment; when this occurs, the not-for-profit recognizes the entire contribution as without donor restrictions when asset is placed into service

placed-in service approach with restrictions

this method treats the restrictions as expiring when the asset is placed into service; a debit to net assets with donor restrictions and a credit to net assets without donor restrictions for the depreciation amount (a yearly occurring journal entry)

allowance for uncollectible pledges

should be recorded in accordance with commercial accounting principles for accounts receivable in order to present the pledge as it net realizable value (except there is not credit loss expense recorded); this transaction reduces both the receivable and the contribution revenue

split-interest agreements

is a donor arrangement in which the not-for-profit and at least one other beneficiary share the benefits of the donated asset; some examples include charitable lead trust, perpetual trust held by a third-party, charitable gift annuity, etc.

recognition of split-interest agreements

is recorded at the donated asset’s FV at the date of acquisition, estimated based on the PV of estimated future distributions, and displayed as donor-restricted; a liability should be recorded for the PV of distributions owed to other beneficiary and the difference between this amount and the FV should be recorded as contribution revenue (restricted); assets and liabilities should be disclosed separately from other assts and liabilities in statement of financial position

changes in split-interest agreement

these alterations should be recognized for amortization of discounts and revaluations and should be disclosed as a separate line items in statement of activities (or related notes)

donated services

are services provided to a not-for-profit organization without charge or for less than the FV; are generally not recorded by a not-for-profit because their value may be difficult to measure (and the absence of control over them)

recognition of donated services

only record as a contribution and expense at FV if the services create or enhance a nonfinancial asset (ex: land, building, etc.) or if they require specialized skills that the provider possesses and would otherwise have been purchased by the not-for-profit (ex: attorney, roof builder, etc.)

SOME services that do not enhance an asset

specialized skills are required and possessed by the donor, the service is otherwise needed by the organization, it is measurable, and easily measurable at FV'; these services that qualify as this are displayed as nonoperating and is a debit to expense or asset and a credit to contributions-without donor restrictions

examples of SOME qualifications

an attorney provides legal services that the not-for-profit would otherwise purchase (recognize service at its FV0, a doctor provides required medical services to a clinic for free or at a reduced rate (recognize the FV as contribution revenue or professional services expense), etc.

volunteer recruitment

means soliciting or finding people to provide volunteer services; costs of recruiting volunteers are classified as fundraising expense and are considered this regardless of whether services meet SOME recognition criteria (are not donated-service revenue)

donated collection items

are contributed works of art or historical treasures such as paintings, sculptures, or artifacts; are not required to be reported by the not-for-profit if the item is part of a collection which is held for public viewing, exhibition, education, or research (not investment), collection is cared for, preserved, & protected, and not-for-profit’s policy requires any proceeds from the sale of these items to be reinvest in other collections or use for care for existing collections

recognize donated collection items

only when the preceding requirements are not met and therefore the donation must be recorded as revenue and capitalized as an asset (depreciated over its estimated useful life); this policy may not be selectively applied and must be used for all assets

extraordinary long-lived items

are works of art or historical treasures with an extremely long useful life, such as priceless paintings (ex: Mona Lisa), sculptures, or artifacts; does not have to be depreciated if the asset has cultural, aesthetic, or historical value that is worth preserving perpetually and these is verifiable evidence that the owner has the ability and intent to protect and preserve the asset’s service potential essentially undiminished

donated materials

are noncash items given to a not-for-profit, such as supplies, food, clothing, or building materials; sometimes these items merely pass through the organization to an ultimate beneficiary, such as used clothing, should not be recorded, unless involved amounts are substantial; when these items are sold at greater than FV, the amount received in excess of FV is considered an additional contribution

donated materials on date received

a debit to asset and a credit to contribution-support for the materials donated at their FV (when FV can be objectively determined)

donated materials when they are used

a debit to expense (supplies) and a credit to contributions-supplies for the amount of materials used for this activity

gifts-in-kind

are noncash contributions donated to a not-for-profit such as land, buildings, supplies, food, intangible assets, use of facilities, etc.; are generally recognized at FV on the date donated; a debit to asset, expense, or other applicable account and a credit to contribution revenue

gifts-in-kind for a fundraising appeal

these items are recorded at FV when received, revalued when sold, and any amount above the original FV is recorded as additional contribution revenue

presentation and disclosure of nonfinancial assets

these items are displayed as a separate line item on the statement of activities, apart from contributions of cash or other financial assets; the notes should disclose, by category the amount recognized, whether the assets will be sold or monetized, any donor-imposed restrictions, and how the assets were valued (such as using FV at the donation date)

pledge payable in the future

are reported as an unconditional promise to contribute in the future and are considered donor-restricted support (implied time restriction); are measured at the PV of the estimated future cash flows using a discount rate appropriating with the risks involved; if expected to be collected or paid in less than one year, they may be presented at net realizable value since that amount is a reasonable estimate of FV

implied time restriction on date promised

a debit to pledge receivable-with donor restrictions, a credit to allowance for doubtful accounts, and a credit to contributions-with donor restrictions

implied time restriction on date collected

a debit to cash-with donor restriction, a credit to pledge receivable-with donor restriction, a debit to satisfaction of time restriction-with donor restriction, and a credit to cash-with donor restriction

implied time restriction transition (used contribution)

this represents the reclassification and is a debit to cash-without donor restriction and a credit to satisfaction of time restriction-without donor restriction

net pledges receivable

*without donor restrictions + donor-restricted support = gross pledges receivable
*gross pledges receivable x % uncollectible = allowance for uncollectible
*gross pledges receivable - allowance for uncollectible = net pledges receivable

increases to net assets with donor restrictions

a debit to pledge receivable-with donor restrictions, a credit to allowance for doubtful accounts, and a credit to donor-restricted support

receivable is collected and money is used on restricted purpose

this will reduce net assets with donor restrictions by a debit to reclassification-satisfaction of donor restrictions and a credit to cash-with donor restrictions

increase/decrease in net assets without donor restrictions

a debit to cash-without donor restrictions, a credit to reclassification-satisfaction of donor restrictions, a debit to operating expense, and a credit to cash-without donor restrictions

fundraising premiums

it is classified as a fundraising expense and is an item, such as coffee mugs, pens, calendars, etc., a not-for-profit offers to donors as part of a fundraising campaign

*total contribution revenue - FV of premiums = contribution revenue