CPA Exam - FAR (Financial Accounting and Reporting)Not-for-Profit EntitiesMedium
A not-for-profit organization received a grant of $100,000 from a private foundation. The grant agreement states that the NFP must achieve specific program outcomes related to literacy education within the next fiscal year to receive the funds. If the NFP fails to meet these outcomes, the funds must be returned. How should this grant be recognized by the NFP?
- AAs an increase in net assets with donor restrictions for $100,000 upon receipt.
- BAs an increase in net assets without donor restrictions for $100,000 upon receipt.
- CAs a refundable advance (liability) until the program outcomes are substantially met.
- DAs an increase in net assets with donor restrictions, and a corresponding expense for the program.
Show answer & explanationAnswer & explanation
Correct answer: C. As a refundable advance (liability) until the program outcomes are substantially met.
This grant is a conditional contribution because the NFP's right to the assets is contingent upon achieving specific program outcomes. Until these conditions are substantially met, the contribution should not be recognized as revenue but rather as a refundable advance (liability).
Why the other options are wrong
- A. Incorrect. This implies an unconditional contribution with a purpose restriction, but the condition for receipt has not yet been met.
- B. Incorrect. This implies an unconditional, unrestricted contribution, which is not the case.
- D. Incorrect. Revenue is not recognized until the conditions are met, and an expense is not directly tied to the initial recognition of a grant.
Conditional Contribution Recognition (NFP)
A conditional contribution's recognition as revenue is deferred until the conditions specified by the donor are substantially met. Until then, it is recorded as a refundable advance (liability).
- Donor specifies conditions for receipt (e.g., performance, specific outcomes).
- Not recognized as revenue until conditions are met.
- Recorded as a refundable advance (liability) until conditions are satisfied.
Memory trick: A 'Conditional' grant is like a promise, held as 'liability' until conditions are met.