Accounting for Contributions - Not-for-Profit Organizations (Deferral vs Restricted Fund Method)

Overview

• Not-for-profit organizations (NPOs) have two allowable methods to account for contributions: the deferral method and the restricted fund method.
• A policy choice is required for accounting treatment of contributions; once chosen, the method should be used consistently. A change in method is treated as a change in accounting policy.
• Contributions are non-reciprocal transfers of cash, shares, other assets, or non-reciprocal settlements of liabilities to an NPO. Contributions are measured at fair value on the date of contribution.
• Contributions are categorized into three types:
  • Unrestricted contributions
  • Restricted contributions
  • Endowment contributions
• The material distinction between the two methods is how revenue is recognized and how funds are reported in the financial statements (general fund vs restricted funds, including capital and endowment funds).

67.3 Contributions and restrictions (core concepts)

• Policy choice: either the deferral method or the restricted fund method.
• Consistency: once selected, apply the method consistently. A change in method is a policy change.
• Fund accounting is optional with the deferral method; with the restricted fund method, fund accounting is a core feature and the financial statements show a general fund, one or more restricted funds, and an endowment fund if applicable.
• If the restricted fund method is used but a separate restricted fund for a specific purpose is not disclosed, the organization applies the deferral method in the general fund.

67.3.1 Contributions (definitions and types)

• A contribution is a non-reciprocal transfer to an NPO of cash, shares, other assets, or a non-reciprocal settlement of liabilities.
• Measured at fair value on the date of contribution.
• Three types of contributions:
  • Unrestricted contributions
  • Restricted contributions
  • Endowment contributions

67.3.1.1 Unrestricted contributions

• Characteristics: can be used for any purpose; no external restrictions on use.
• Revenue recognition (unrestricted): recognize when criteria are met, i.e.,
  • The amount to be received can be reasonably estimated, and
  • Ultimate collection is reasonably assured.
• Journal entry when unrestricted contribution is received (no restriction):
  • ext{DR} ext{Cash} \ ext{CR} ext{Contribution revenue}
• Example: If an NPO receives 100000 cash for discretionary use (unrestricted) under the deferral method, revenue is recognized immediately. If fund accounting is used with the deferral method, the entry in the general fund is the same as above (no separate fund needed for unrestricted contributions).

67.3.1.2 Restricted contributions

• Definition: externally imposed stipulations specify the contributed asset’s use (e.g., for a capital asset or a specified program).
• Recognition under deferral method: restricted contributions are deferred and recognized as revenue when the related expense is incurred.
• If the related expense occurs in the same period, revenue equals the expense funded by the restricted contribution.
• If the related expense has not occurred, restricted contributions are recorded as a liability (deferred contributions).
• Journal entries when a restricted contribution is received (no immediate expense):
  • ext{DR} ext{Cash} \ ext{CR} ext{Deferred contributions}
• When the specific expenditure is incurred:
  • ext{DR} ext{Expense (type)} \ ext{CR} ext{Cash/Accounts payable}
  • ext{DR} ext{Deferred contributions} \ ext{CR} ext{Contribution revenue}
• If fund accounting is used (and a restricted fund is set up), similar entries occur within the restricted fund.

67.3.1.3 Endowment contributions

• Endowment contributions are gifts where the principal must be maintained permanently (or for an extended period).
• Investment income from endowments can be unrestricted, restricted, or endowment-related depending on donor stipulations.
• Relationships between principal, investment income, and restrictions affect where revenue is recognized.
• Endowment principal contributions are generally recorded as an increase in net assets restricted for endowment; investment income may be categorized per donor restrictions.
• Important note: endowment investment income treatment depends on donor restrictions:
  • If unrestricted, investment income is recorded as revenue when earned.
  • If restricted, investment income is handled as a restricted contribution or in net assets depending on the restriction.
  • If the donor specifies endowment restrictions, the income may be restricted or allocated to an endowment fund accordingly.

67.3.2 Deferral method

• Under the deferral method, the contribution is recorded as revenue only when the related expenses are recognized (reverse matching).
• Revenue recognition can occur in the events of contractually linked expenditures; the contribution is recorded as a liability (deferred revenue) until the related expenses are incurred.
• Fund accounting is optional with the deferral method; however, contributions are recognized under the deferral method regardless of whether fund accounting is used.

67.3.2.1 Unrestricted contributions (deferral method)

• Recognition: unrestricted contributions are recorded as revenue when they meet the general criteria for unrestricted contributions (reasonable assurance of collection and estimated amount).
• Since unrestricted contributions fund operations at the NPO’s discretion and do not fund a specific expense, they are reported as revenue in the current period and are not deferred.
• Journal entry when unrestricted contribution is received (deferral method):
  • ext{DR} ext{Cash} \ ext{CR} ext{Contribution revenue}

67.3a Example (deferral method, unrestricted)

• Scenario: An NPO receives 100000 cash to use at its discretion (unrestricted).
• With no fund accounting, initial entry: ext{DR Cash} \ ext{CR} ext{Contribution revenue} (amounts: 100000).
• With fund accounting, the same entries occur within the general fund (if there is a fund for operations).

67.3.2.2 Restricted contributions (deferral method)

• Restricted contributions are deferred until the related expense is incurred; when the related expense is incurred, revenue equals the funded expense.
• If the related expense has occurred by period end, revenue and expense will match for the funded portion; if not, revenue is deferred as a liability.
• When a restricted contribution is received:
  • ext{DR} ext{Cash} \ ext{CR} ext{Deferred contributions}
• When the related expense is incurred:
  • ext{DR} ext{Expense (type)} \ ext{CR} ext{Cash or accounts payable}
  • ext{DR} ext{Deferred contributions} \ ext{CR} ext{Contribution revenue}

67.3b Example (deferral method, restricted)

• Example: A restricted contribution of 5000 is donated for gymnastics program travel, spent in the same year.
• No fund accounting: initial entry: ext{DR Cash} \ ext{CR} ext{Deferred contribution}
• When travel expenses are incurred:
  • Recognize travel expenses and reduce cash; recognize revenue to match the associated expense by debiting Deferred contributions and crediting Contribution revenue.
• If fund accounting exists (gymnastics fund), these entries occur within the gymnastics program fund; otherwise, they occur in the general fund.

67.3c Restricted contributions (deferral method, expenses in a later period)

• Example: A $5,000 restricted contribution for gymnastics program travel not spent in the current period.
• Initial entry (no fund accounting):
  • ext{DR Cash} \ ext{CR} ext{Deferred contribution}
• Year 2: when travel expenses occur, revenue is recognized then; the corresponding liability is removed.
• With fund accounting: entries occur within the gymnastics fund; if no fund exists, use the general fund.

67.3.2.3 Contributions of capital assets (deferral method)

• For capital assets (or cash restricted to purchase a capital asset): contributions are technically restricted.
• If the asset is amortized over time, the expense is amortization expense and revenue is recognized on the same basis as amortization; the contribution is deferred as a liability.
• When a capital asset is contributed:
  • ext{DR Capital asset (type)} \ ext{CR Deferred contribution}
• If cash is contributed for the asset:
  • ext{DR Cash} \ ext{CR Deferred contribution}
• If the asset is amortized:
  • ext{DR Amortization expense} \ ext{CR Accumulated amortization}
• For non-amortized assets (e.g., land): contributions are recorded as a direct increase in net assets (not revenue):
  • ext{DR Capital asset (type)} \ ext{CR Net assets}

67.3d 67.3.2.3 – Capital assets (deferral method) example

• Example: Donation of 10000 cash on Jan 1 to buy equipment; equipment purchased Jan 2; use over 5 years with no residual value; contribution is restricted for the asset and amortized over time.
• No fund accounting: initial entry: ext{DR Cash} \ ext{CR Deferred contribution} for 10000; purchase equipment: ext{DR Equipment} \ ext{CR Cash};
• Year-end entries: amortization expense = rac{10000}{5} = 2000; record as amortization expense and offset contribution revenue by the same amount: ext{DR Amortization expense} \ ext{CR Accumulated amortization}, and ext{DR Deferred contribution} \ ext{CR Contribution revenue} for 2000.
• Net effect: revenue recognized equals amortization expense each year, so net surplus/deficit is neutral over the asset life.
• Fund accounting: if a capital fund exists, entries occur within that fund.

67.3e Restricted for capital asset not amortized (deferral method)

• If land is purchased with a restricted contribution and land is not amortized, no operating expense is recognized; thus, restricted contributions restricted for land purchase are recognized as a direct increase in net assets (not revenue).
• Initial entry: ext{DR Cash} \ ext{CR Net assets}
• Land purchase: ext{DR Land} \ ext{CR Cash}
• Fund accounting: entries occur within the capital fund if disclosed; otherwise, in the general fund.

67.3.2.4 Endowment contributions (deferral method)

• Endowment principal is recorded as an increase in net assets restricted for endowment; endowment contributions are not recognized as revenue in the statement of operations under the deferral method.
• When an endowment is contributed:
  • ext{DR Cash} \ ext{CR Net assets}
• When cash is invested:
  • ext{DR Investment} \ ext{CR Cash}
• Investment income treatment depends on donor restrictions: if unrestricted, investment income is credited to revenue when earned; if restricted, it is treated according to the restriction (deferred contributions or net assets) as described earlier.

67.3f Endowment contribution example (deferral method)

• Example: An individual donates 200000 cash to an NPO as an endowment; no restriction on 500 interest income by year-end; contributions are under the deferral method, and endowment revenue is recognized immediately in the endowment fund; unrestricted investment income is recorded as revenue when earned.
• Initial entries:
  • ext{DR Cash-endowment fund} \ ext{CR Contribution revenue-endowment fund}
  • ext{DR Investment} \ ext{CR Cash}
• Year-end entry for unrestricted interest: ext{DR Cash (or interest receivable)} \ ext{CR Interest revenue}
• If fund accounting exists (endowment fund): the investment income may be recognized in the general fund if unrestricted; otherwise, within the appropriate restricted fund.

67.3.3 Restricted fund method

• The restricted fund method is a specialized use of fund accounting where a separate restricted fund is reported to reflect governing restrictions on the contribution.
• The organization reports total general funds, one or more restricted funds, and an endowment fund if applicable.
• Revenue recognition under the restricted fund method is not deferred if a separate restricted fund is disclosed for the contribution; otherwise, the deferral method applies in the general fund.
• A contribution that can only be used for construction of new premises would be revenue when received if a building (capital assets) fund is reported on the SFP.
• Under deferral, the restricted contribution would be deferred and recognized over the life of the asset.
• To determine the available restricted balance under the restricted fund method, review the fund balance for the restricted fund.
• Presentation: fund balances appear in the SFP by fund (general, restricted, endowment).

67.3.3.1 Unrestricted contributions (restricted fund method)

• Recognition: unrestricted contributions are recognized in revenue when criteria are met, regardless of fund spending.
• Journal: ext{DR Cash general fund} \ ext{CR Contribution revenue general fund}
• Example: If a donor gives 100000 cash to use at NPO’s discretion under the restricted fund method, revenue is recognized immediately in the general fund.

67.3.3.2 Restricted contributions (restricted fund method)

• Two subcases:
  • Separate fund is set up: revenue recognized immediately in that fund.
  • No separate fund: contribution is recognized in the general fund but not as revenue until related expense occurs (deferral in general fund).
• If a separate fund is not set up, journal when restricted contribution is received:
  • ext{DR Cash (general fund)} \ ext{CR Deferred contribution-general fund}
• When the related expense is incurred:
  • ext{DR Expense (type)-general fund} \ ext{CR Cash or accounts payable}
  • ext{DR Deferred contribution-general fund} \ ext{CR Contribution revenue general fund}

67.3h Restricted fund method example (gymnastics program)

• Example: A restricted donation of 5000 for gymnastics program; fund exists for gymnastics.
• Initial entry (restricted fund):
  • ext{DR Cash-gymnastics fund} \ ext{CR Contribution revenue-gymnastics fund}
• When travel occurs:
  • ext{DR Travel expenses-gymnastics fund} \ ext{CR Cash-gymnastics fund}

67.3i Restricted fund method example (expense timing)

• Case: Donation of 5000 restricted for gymnastics; fund exists for gymnastics; funds not spent in the year.
• If there is a fund for gymnastics (capital asset fund): as above, entries occur in the gymnastics fund.
• If there is no gymnastic fund, the initial entry is in the general fund:
  • ext{DR Cash general fund} \ ext{CR Deferred contribution-general fund}
• In the following year, when travel occurs:
  • ext{DR Travel expenses-general fund} \ ext{CR Cash general fund}
  • ext{DR Deferred contribution-general fund} \ ext{CR Contribution revenue general fund}

67.3.3.3 Contributions of capital assets (restricted fund method)

• When a capital asset is contributed under the restricted fund method, revenue is recognized immediately in the capital asset fund:
  • ext{DR Capital asset-capital asset fund} \ ext{CR Contribution revenue-capital asset fund}
• If cash is contributed for a capital asset:
  • ext{DR Cash-capital asset fund} \ ext{CR Contribution revenue-capital asset fund}
• Assets in the capital asset fund are still amortized; a parallel amortization expense is recorded in the capital asset fund.

67.3j Restricted fund method example (capital asset fund)

• Example: An NPO with a capital asset fund receives 10000 cash for equipment; equipment is purchased the next day; equipment is used for 5 years.
• Initial entry: ext{DR Cash-capital asset fund} \ ext{CR Contribution revenue-capital asset fund}
• Purchase: ext{DR Equipment-capital asset fund} \ ext{CR Cash-capital asset fund}
• Year-end amortization: ext{DR Amortization expense-capital asset fund} \ ext{CR Accumulated amortization-capital asset fund}
• The entire 10000 contribution is recognized as revenue in the capital asset fund in the period received; it is not deferred to match amortization expense, unlike the deferral method.

67.3k Endowment contributions (restricted fund method)

• Endowment contributions under the restricted fund method are recognized in the endowment fund as revenue when received.
• Endowment investment income is recorded in accordance with its restriction: unrestricted investment income may be recognized as revenue when earned or remains restricted as per donor restrictions.
• Example: An endowment donation of 20000 with 500 interest income; endowment contribution revenue is recognized in the endowment fund; investment income is recognized in the appropriate fund depending on restrictions.
• Initial entries:
  • ext{DR Cash-endowment fund} \ ext{CR Contribution revenue-endowment fund}
• Investment: ext{DR Investment-endowment fund} \ ext{CR Cash-endowment fund}
• Year-end entry (unrestricted interest): ext{DR Cash general fund} \ ext{CR Contribution revenue general fund}
• Amounts: 20000, 500 as described (endowment revenue in endowment fund; interest in the general fund if unrestricted).

67.31a–67.31b: Summary points across methods

• Endowment treatment can differ by whether the fund is reported as part of the endowment fund or the general fund, depending on restrictions and whether the investment income is restricted or unrestricted.
• For restricted fund method, endowment revenues are recognized in the endowment fund; investment income may be restricted or unrestricted depending on donor terms.
• For restricted fund method, capital assets contributions are recognized in the capital asset fund; depreciation/amortization is recorded in the same fund.

Key differences between deferral and restricted fund methods (comparison)

• Revenue recognition timing:
  • Deferral method: recognize revenue to match related expenses (reverse matching).
  • Restricted fund method: recognize revenue when received if a separate restricted fund is disclosed for the contribution.
• Fund presentation:
  • Deferral method: focus on liabilities (deferred contributions) in the general fund; optional fund accounting.
  • Restricted fund method: explicit presentation of general fund, restricted funds, and possibly an endowment fund.
• Treatment of restricted contributions:
  • Deferral method: revenue recognized when expenses occur; restricted contributions deferred until then.
  • Restricted fund method: restricted contributions recognized in their respective restricted fund(s) when received, provided a fund is set up; otherwise, follow deferral in the general fund.
• Capital assets and endowment assets:
  • Deferral method: capital asset contributions create deferred contributions; revenue recognized over asset amortization; endowment income follows donor restrictions.
  • Restricted fund method: capital asset contributions recognized immediately in the capital asset fund; endowment contributions recognized in the endowment fund; investment income allocated based on restrictions.

Quick-reference formulas and entries (LaTeX)

• Unrestricted cash contribution (deferral method, immediate revenue):
  • ext{DR} ext{Cash} \ ext{CR} ext{Contribution revenue}
• Restricted contribution received (deferral method):
  • ext{DR} ext{Cash} \ ext{CR} ext{Deferred contributions}
• Recognize related expense and reduce liability:
  • ext{DR} ext{Expense (type)} \ ext{CR} ext{Cash or accounts payable}
  • ext{DR} ext{Deferred contributions} \ ext{CR} ext{Contribution revenue}
• Amortization-based recognition (deferral method, capital asset):
  • Amortization expense: ext{DR} ext{Amortization expense} \ ext{CR} ext{Accumulated amortization}
  • Revenue recognition to match amortization: ext{DR} ext{Deferred contribution} \ ext{CR} ext{Contribution revenue}
• Endowment investment income (unrestricted):
  • ext{DR} ext{Cash (or interest receivable)} \ ext{CR} ext{Interest revenue}
• Endowment principal recognition (endowment fund, restricted):
  • ext{DR} ext{Cash-endowment fund} \ ext{CR} ext{Contribution revenue-endowment fund}
• Capital asset contributions (restricted fund method):
  • ext{DR} ext{Capital asset-capital asset fund} \ ext{CR} ext{Contribution revenue-capital asset fund}
• For land (non-amortized capital asset):
  • ext{DR} ext{Land-capital asset fund} \ ext{CR} ext{Cash-capital asset fund}

Final notes and implications

• The choice between deferral and restricted fund method affects when revenue is recognized, how funds are presented, and how donor restrictions are tracked.
• Understanding the nature of each contribution (unrestricted, restricted, endowment) and the asset type (cash, capital asset, land) is essential for proper journal entries and for accurate financial statement presentation.
• Ethical and practical implications include ensuring donor restrictions are respected, maintaining transparency about fund balances by fund type, and ensuring consistency to avoid misstatements or policy misinterpretations.