Not-for-Profit Organizations (“NPOs”) can face complex accounting situations. This article discusses one such situation.
An NPO receives funds from another organization to support a defined purpose, for example staff training. The money is deposited into a separate bank account and available to use until the funds have been disbursed. When a staff member of the NPO incurs an eligible expense, they submit a request for reimbursement from these funds. An appropriate NPO staff member will review the request, and if it fits the defined purpose of the funds, they reimburse the staff member for the expense incurred. The NPO is not currently recording the money received for this fund and the related revenue and expenses in their financial statements.
Does this meet the definition of a contribution?
When an NPO receives funds from any source, the NPO must assess these funds to determine if they meet the definition of a contribution per ASNPO Section 4410 Contributions - Revenue Recognition. Paragraph 2(b) defines a contribution as “a non-reciprocal transfer to a not-for-profit organization of cash or other assets or a non-reciprocal settlement or cancellation of its liabilities”.
In this situation, it would appear that the funds would meet the definition of a contribution as the Donor provided the funds to the NPO to support staff training, and the Donor is not receiving or requiring anything in return, making this a non-reciprocal transfer. However, it is important to remember that when making this assessment, members should review and consider any contracts and written, verbal or implied representations relating to the funds received. If the Donor has received anything in return for the contributed funds, this would change the assessment.
The next step is to identify what type of contribution this would be. There are three types of contributions as defined in ASNPO Section 4410.02(b)):
- A restricted contribution is a contribution subject to externally imposed stipulations that specify the purpose for which the contributed asset is to be used. A contribution restricted for the purchase of a capital asset or a contribution of the capital asset itself is a type of restricted contribution.
- An endowment contribution is a type of restricted contribution subject to externally imposed stipulations specifying that the resources contributed be maintained permanently, although the constituent assets may change from time to time.
- An unrestricted contribution is a contribution that is neither a restricted contribution nor an endowment contribution.
The contribution described above would be a restricted contribution given that the Donor stipulated the specific purpose for the use of the funds. Again, in making this assessment members should review all documentation related to the contribution, including any verbal or implied stipulations. For example, if an NPO is raising funds for a specific purpose, such as building a playground, then any donations collected for that purpose are restricted for that purpose, even if the donors did not specifically stipulated such use in writing. Once these funds are received, the NPO has an obligation to respect the restrictions and use the monies in accordance with the donors’ wishes.
Once the contributions have been assessed, they are then recognized using either the deferral method or the restricted fund method of accounting for contributions, depending on the accounting policy used by the NPO.
More on the deferral method and restricted fund method can be found in this article.
KBASE COLLECTION – Not-for-Profit Organizations