CPA Exam - FAR (Financial Accounting and Reporting)Not-for-Profit EntitiesHard
A not-for-profit (NFP) organization received a grant of $200,000 from a private foundation. The grant agreement states that the NFP must achieve specific measurable outcomes related to its educational programs before the funds can be released. If the NFP fails to meet these outcomes, the funds must be returned. As of year-end, the NFP has not yet met the outcomes. How should the NFP recognize this grant at year-end?
- AAs permanently restricted revenue.
- BAs temporarily restricted revenue.
- CAs a refundable advance (liability).
- DAs unrestricted revenue.
Show answer & explanationAnswer & explanation
Correct answer: C. As a refundable advance (liability).
This grant is a conditional contribution because the NFP must overcome a barrier (achieve specific outcomes) to earn the right to the assets, and the donor retains a right of return. Conditional contributions are recognized as revenue only when the conditions are substantially met. Until then, they are recorded as a refundable advance (a liability).
Why the other options are wrong
- A. Permanently restricted revenue is for contributions whose principal must be maintained indefinitely.
- B. Temporarily restricted revenue is recognized when there are donor-imposed purpose or time restrictions, but no conditions that prevent recognition.
- D. Unrestricted revenue is recognized when there are no donor conditions or restrictions.
Conditional Contribution
A contribution that depends on the occurrence of a specified future and uncertain event (a barrier) to become an unconditional right to the asset, and includes a right of return to the donor.
- Not recognized as revenue until the conditions are substantially met.
- Initially recorded as a refundable advance (liability) if cash is received.
- Must have both a barrier and a right of return to be considered conditional.
Memory trick: Condition's a barrier, refund's the threat, liability's the net.