A local historical society, a not-for-profit organization, receives a $50,000 grant from a private foundation to fund a specific educational program for the next two years. The grant agreement states that the funds must be spent on program expenses and any unspent funds must be returned. How should this grant be recognized and presented in the society's financial statements for the year received?
- AAs revenue with donor restrictions, and released from restrictions as the program expenses are incurred.
- BAs revenue without donor restrictions, as it will eventually be spent on a program.
- CAs an increase in permanently restricted net assets, as it is for a specific purpose.
- DAs a liability (refundable advance) until the funds are expended on the program.
Show answer & explanationAnswer & explanation
Correct answer: A. As revenue with donor restrictions, and released from restrictions as the program expenses are incurred.
When a not-for-profit organization receives a grant that is conditional (e.g., 'any unspent funds must be returned') and contains a barrier to entitlement (e.g., requiring specific program expenditures), it is initially recognized as a refundable advance (liability). However, if the question implies the NFP has met the conditions or has a high probability of meeting them (as often implied by 'to fund a program'), and the primary condition is a purpose restriction, it is recognized as revenue with donor restrictions. The key phrase 'funds must be spent on program expenses' indicates a purpose restriction. The 'unspent funds must be returned' clause reinforces the conditional nature, but for most grants for specific programs, the NFP is expected to incur the expenses. The most appropriate treatment for a program-specific grant is revenue with donor restrictions, released as expenses are incurred. If a grant is truly conditional and a barrier to entitlement has not been overcome, it would be a refundable advance. Given the phrasing, a purpose-restricted revenue is more likely.
Why the other options are wrong
- B. The grant has specific conditions for use and return of unspent funds, indicating it is not without donor restrictions.
- C. This is a temporary purpose restriction, not a permanent restriction on the principal.
- D. While conditional grants can initially be recorded as refundable advances, the intent here is for the NFP to earn the grant through expenditures. Once the NFP has overcome the barrier to entitlement (e.g., by incurring qualifying expenses or having a high probability of doing so), it recognizes the revenue. The 'unspent funds returned' clause is a condition that, if not met, would result in repayment, but the initial recognition is as restricted revenue when the barrier is expected to be met.
Conditional vs. Restricted Contributions (NFP)
A conditional contribution depends on the occurrence of a specified future event (a barrier to entitlement) and/or the right of return of assets. It is not recognized as revenue until the conditions are substantially met. A restricted contribution has donor-imposed stipulations on its use but is not conditional.
- Conditional grants are initially recorded as a liability (refundable advance).
- Restricted grants are recorded as 'revenue with donor restrictions'.
- A grant can be both conditional and restricted; revenue is recognized only after conditions are met.
Memory trick: Grants: Conditional (Liability) or Restricted (Revenue with Strings).