For some nonprofit organizations, contributions are a significant source of revenue. Proper accounting treatment for those contributions is key, which include tracking and monitoring restricted funds.
Contribution revenue is required to be classified based on the existence or absence of a donor-imposed restriction. Under the new Accounting Standards Update (ASU 2016-14), the reporting model for nonprofit organizations will change, and temporarily restricted net assets will be shown in a single class with permanently restricted net assets labeled “with donor restrictions.” This guidance will be effective for years beginning after December 31, 2017. However, required footnote disclosures will still require details regarding the nature of the restrictions and obviously the organization must continue to track and monitor these gifts to ensure compliance with the donors’ intent.
When contributions are received, the nonprofit organization should identify whether there is a donor imposed restriction that would deem the contribution to be temporarily or permanently restricted. Absent any donor imposed restriction, the contribution would be unrestricted. After the restriction is determined, the organization should then determine an appropriate tracking method based on the organizational size and capabilities. Some viable options for the organization are to code general ledger accounts or groups as restricted funds and track the use of funds accordingly; while for other organizations, a spreadsheet tracking of the amount and restriction may suffice.
Here our focus will pertain to temporarily restricted contributions. A donor imposed restriction limits the use of the contribution and intends the contribution to be used for a specific purpose or in a specific time period rather than the broad spectrum use of the organization. For example, a donor may impose that the contribution be used in a certain fiscal year, or the contribution be used for purchasing new playground equipment for a children’s summer camp. The organization may raise funds for an important building renovation. The donor’s intent is for the funds to specifically be used for the building renovation and is therefore restricted. Another example of temporarily restricted contributions is long-term pledges. The long-term portion of pledges by their very nature is temporarily restricted due to the future payments supporting future organizational activities, therefore, implying a time restriction. It is important for the organization to identify what the donor’s intent was at the time the donation was given in order to determine if a restriction exists.
Once the restriction is satisfied, either through passage of time or purpose fulfillment, then the restriction is released into unrestricted net assets whereby temporarily restricted net assets decrease and unrestricted net assets increase. Under ASC 958, the guidance does allow for donor restricted contributions whose restrictions are met in the same reporting period to be reported as unrestricted support. This treatment is only allowed if the organization reports consistently from period to period and discloses it in their accounting policies.
One common misconception is that board designated funds are temporarily restricted assets. From time to time, the board of directors of an organization may designate funds for a specific program, building project, investments etc. However, a board can only designate unrestricted funds; a donor is the only one who can place a restriction on a contribution.
The content above is a brief summary of the basics of temporarily restricted contributions.
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