Donors can impose two different types of stipulations on contributions provided to nonprofits, restrictions and conditions. While donor-imposed restrictions specify the use and are usually easier to identify, as they limit what you spend the contributed funds on, donor-imposed conditions are more restrictive and often limit how you spend the contribution. Donor-imposed conditions should be considered first as they determine when the contribution is recognized as revenue. Let’s take a deeper dive into donor-imposed conditions.
FASB ASC 958-605, defines a donor-imposed condition as:
“A donor stipulation that represents a barrier that must be overcome before the recipient is entitled to the assets transferred or promised. Failure to overcome the barrier gives the contributor a right of return of the assets it has transferred or gives the promisor a right of release from its obligation to transfer its assets.”
Remember that donor-imposed conditions come from and are communicated from the donor. They are determined from the agreement, or a document referenced in the agreement. They are not self-imposed. For a contribution to be conditional there must be:
- One or more barriers that must be overcome before a recipient is entitled to the assets transferred or promised, AND,
- A right of return to the contributor for assets transferred, the reduction, settlement, or cancellation of liabilities, or a right of release of the promisor to transfer assets.
A barrier is something that must be overcome for the nonprofit to be entitled to the contribution. If the barrier isn’t overcome, the nonprofit is not entitled to the funding and the contribution is not recorded. The barrier is intended to release the funder from the obligation or force the nonprofit to return the advanced funding if the nonprofit doesn’t meet the barrier.
FASB ASC 958-605 provides the following indicators of a barrier:
- Measurable Performance-Related Barrier or Other Measurable Barrier
- Limited Discretion by the Recipient on the Conduct of an Activity
- Stipulations That Are Related to the Purpose of the Agreement
An example of a Measurable Performance-Related Barrier is a nonprofit focusing on feeding families in need could receive a contribution that specifies that 100 families need to be fed before the organization is entitled to the funds. An example of Limited Discretion by the Recipient is a federal cost reimbursable grant, where qualified expenses need to be incurred before the organization is entitled to the funding and receive reimbursement. One important thing to note is that requirements that are only administrative, such as submitting a quarterly or annual report, are not considered to be true barriers. Also, the requirement to follow the proposed budget only, is typically not a donor-imposed barrier.
A right of return or right of release should be fairly easy to determine from reading the agreement, but remember that there also must be a barrier.
In cases where donor stipulations are ambiguous and the agreement is clearly not an unconditional transfer or promise to give, according to ASC 958-605-25-5E, the contribution shall be presumed conditional.
We recommend the following be performed for each agreement received:
- Gather all related documents. (1) agreement, (2) proposal, (3) budget, and (4) any other communications or correspondence with the donor.
- Read the agreement and all related documents and look for (1) any barrier that the donor is imposing for you to be entitled to the funding and (2) a right or return or right of release
- Document whether the agreement has donor-imposed restrictions and/or conditions, what are the restrictions and/or conditions, and all other applicable accounting information (e.g. amount, payment terms, funding period, etc..) on a coversheet.
This documentation should clearly support your conclusion regarding when your organization in entitled to the funding and how it is accounted for.
If you have questions regarding the recognition of a contribution, or for more information, please contact Mark Robins.