A private not-for-profit environmental advocacy group received a grant of $1,000,000 from a foundation. The grant agreement states that the funds must be used over the next five years to support a specific river cleanup initiative, and the NFP must achieve certain measurable milestones each year to receive subsequent installments. How should this grant be recognized by the NFP?
- ARecognize $200,000 ($1,000,000 / 5 years) as revenue from contributions with donor restrictions each year.
- BRecognize $1,000,000 as a refundable advance (liability) and recognize revenue as milestones are met.
- CRecognize $1,000,000 as revenue from contributions without donor restrictions immediately.
- DRecognize $1,000,000 as revenue from contributions with donor restrictions immediately.
Show answer & explanationAnswer & explanation
Correct answer: B. Recognize $1,000,000 as a refundable advance (liability) and recognize revenue as milestones are met.
The grant is conditional because the NFP must achieve 'certain measurable milestones each year to receive subsequent installments'. This conditionality means the NFP has a 'barrier' to overcome and a 'right of return' exists for the grantor if the milestones are not met. Therefore, the grant is recognized as a refundable advance (liability) initially, and revenue is recognized only as the conditions (milestones) are met.
Why the other options are wrong
- A. This is incorrect. Revenue recognition is tied to meeting conditions, not simply the passage of time or an arbitrary annual allocation.
- C. This is incorrect; the grant has both a purpose restriction (river cleanup) and a significant condition (milestones).
- D. This is incorrect because the grant has a condition (milestones) that must be met, preventing immediate revenue recognition.
Conditional Contribution
A contribution that depends on the occurrence of a specified future and uncertain event, typically involving a barrier that must be overcome and a right of return to the donor if the condition is not met.
- Not recognized as revenue until the condition is substantially met.
- Initially recorded as a refundable advance (liability).
- Often includes measurable milestones or performance requirements.
Memory trick: Conditions are barriers; if they exist, it's a liability first.