CPA Exam - FAR (Financial Accounting and Reporting)State and Local GovernmentsEasy
A local historical society, a not-for-profit organization, received a $75,000 grant from a private foundation. The grant agreement states that the funds must be used to restore the society's historic building within the next two years. What is the appropriate classification for this grant upon receipt by the historical society?
- ARevenue with donor restrictions
- BRevenue without donor restrictions
- CRefundable advance
- DDeferred revenue
Show answer & explanationAnswer & explanation
Correct answer: A. Revenue with donor restrictions
When a not-for-profit organization receives a contribution with a donor-imposed purpose or time restriction, it is recognized as 'Revenue with donor restrictions' upon receipt. The restriction will be released when the funds are used for the specified purpose or the time restriction expires.
Why the other options are wrong
- B. Revenue without donor restrictions implies no specific purpose or time limits imposed by the donor.
- C. A refundable advance would be for a conditional contribution, where the condition has not yet been met. This grant has a restriction, not a condition that makes it refundable.
- D. Deferred revenue is typically used for exchange transactions where revenue has not yet been earned. For contributions, restrictions lead to 'with donor restrictions' classification, not deferral of revenue.
Contributions with Donor Restrictions (NFP)
Contributions received by a not-for-profit organization that are subject to donor-imposed stipulations as to purpose or time are classified as revenues with donor restrictions.
- Donor-imposed purpose or time restrictions.
- Recognized as revenue upon receipt.
- Reclassified to without donor restrictions when restriction is met.
Memory trick: NFP contributions are either 'RESTRICTED' by the giver or 'FREE' to use.