CPA Exam - FAR (Financial Accounting and Reporting)Not-for-Profit EntitiesMedium
A not-for-profit (NFP) organization received a cash donation of $75,000 to be used for the construction of a new wing of its facility. The donor specified that the funds should not be spent until the NFP raises an additional $150,000 from other sources for the same project. As of the end of the fiscal year, the NFP had raised $100,000 towards the additional amount. How should the $75,000 donation be reported in the financial statements?
- AAs revenue from contributions without donor restrictions.
- BAs an increase in permanently restricted net assets.
- CAs revenue from contributions with donor restrictions.
- DAs a refundable advance or liability.
Show answer & explanationAnswer & explanation
Correct answer: D. As a refundable advance or liability.
This donation is conditional because the NFP must meet a barrier (raising additional funds) before it has an unconditional right to the asset. Conditional contributions are recognized as liabilities (refundable advances) until the conditions are substantially met.
Why the other options are wrong
- A. This is incorrect because the contribution has a donor-imposed condition, making it not without donor restrictions.
- B. This is incorrect; permanent restrictions relate to endowments or assets to be held in perpetuity, not conditional construction funds.
- C. This is incorrect because the contribution is conditional and has not yet been earned.
Conditional Contribution Recognition
A conditional contribution depends on the occurrence of a specified future event or action by the recipient, or on overcoming a barrier, and a right of return to the donor or a right of release of the donor from an obligation. It is not recognized as revenue until the conditions are substantially met.
- Depends on future event/action or overcoming a barrier.
- Includes a right of return or release.
- Initially recorded as a refundable advance (liability).
- Recognized as revenue when conditions are met.
Memory trick: Conditions mean caution; revenue waits for fulfillment.