CPA Exam - FAR (Financial Accounting and Reporting)State and Local GovernmentsHard
A not-for-profit organization received a $500,000 cash contribution. The donor specified that the funds must be used for a specific research project, but only if the organization first secures matching funds from other donors within the next six months. If the matching funds are not secured, the $500,000 must be returned. How should the $500,000 be recognized by the organization upon receipt?
- ARevenue with donor restrictions
- BRefundable advance
- CTemporarily restricted net assets
- DRevenue without donor restrictions
Show answer & explanationAnswer & explanation
Correct answer: B. Refundable advance
This scenario describes a conditional contribution. A conditional contribution depends on the occurrence of a specified future event (securing matching funds) before the recipient is entitled to the assets. Until the condition is substantially met, the contribution is not recognized as revenue but as a 'Refundable Advance' (or a liability).
Why the other options are wrong
- A. This is a condition, not merely a restriction. The organization is not yet entitled to the funds.
- C. Temporarily restricted net assets would be used for contributions with time or purpose restrictions, not conditions that affect entitlement.
- D. The donor has imposed a significant barrier to entitlement.
Conditional Contribution (NFP)
A contribution that depends on the occurrence of a specified future and uncertain event to establish entitlement to the assets. It is recognized as a 'Refundable Advance' (liability) until the condition is substantially met.
- Barrier to entitlement exists.
- Right of return to donor if condition not met.
- Recognized as Refundable Advance (liability) until condition met.
Memory trick: Is it a gift, or a 'MAYBE' gift? Conditions make it a 'MAYBE'.