An accounting issue that commonly plagues not-for-profit organizations is the proper recording of revenue that is received for a specific purpose. There are two ways to record this type of revenue, either as deferred or temporarily restricted, but the decision can cause much confusion.
While there are many factors that go into determining which is the appropriate method, the most important factor is to determine the type of revenue source. Is the revenue received in an exchange transaction, where there is a transfer of economic benefit between the source of the revenue and the organization receiving the revenue, i.e., a two-sided benefit? In this type of transaction, the entity providing the funds receives goods or services in exchange for the payment made. Or, alternatively, does only one side benefit from the transaction? In such a case, the revenue received is a contribution.
If there is a reciprocal transfer of economic benefit between two parties (an exchange transaction), the revenue should be recorded as deferred if the funds relate to goods or services to be received in the future, and recognized as the goods or services are provided. Deferred revenue can occur with the collection of dues, receipt of fees for services or the sale of tickets for events to be held in the future. Many not-for-profit organizations also obtain revenue by selling items that were purchased, produced or donated for sale, such as the sale of advertising space, publications, used clothing or periodical subscriptions. When the payments are for items or advertising the revenue source has not yet received, these examples should also be recorded as deferred income until the revenue is earned and recognized.
Temporarily restricted revenues, on the other hand, are generally a result of contributions that have only a one-sided economic benefit and are restricted to a specific period of time or set of conditions. For example, when a not-for-profit receives a cash donation that can only be used for a certain program or property that can only be used for a specific purpose, the revenue is recorded as temporarily restricted. A temporarily restricted contribution is recognized when it is received. Based on the policy the not-for-profit has elected for restricted contributions, the contribution may be either:
- Recorded as temporarily restricted upon receipt and reclassifiedfrom temporarily restricted net assets to unrestricted net assets when the donor’s restriction is satisfied or the pre-determined time has elapsed.
- Recorded as unrestricted if the restrictions are satisfied during the same fiscal year that the contribution was received.
Because identifying whether or not a transaction should be recorded as deferred or temporarily restricted revenue can be perplexing, each organization should evaluate its revenue sources on an individual basis to determine the appropriate revenue treatment. The not-for-profit should then be consistent with the recording method from one fiscal year to the next.