Restricted Revenue (avoiding management letter comments, part 2)

April 9, 2012

Recording restricted contributions can be a confusing topic, so it shows up often as a management letter comment.  Depending on the extent of the matter this could range from a significant deficiency to a material weakness. Below are some suggestions on how identify and record restricted contributions and avoid getting a management letter comment from your auditors.

First, what is a restricted contribution and what isn’t?

  • When a pledge is received and will be paid in future year(s), it is temporarily restricted for time. If it is for a specific program it may also be purpose restricted. These would be recognized as temporarily restricted revenue in the year pledged.
  • A contribution received in the current year that is intended for specific purposes is temporarily restricted. If it is for core or general operations, it is unrestricted.
  • Payments received relating to future memberships or conference revenue are not temporarily restricted as they are not contributions. These would be deferred revenue.
  • Payments received for contract services not yet rendered would be deferred revenue, not temporarily restricted.
  • Advances on exchange transactions when the expenses have not yet been incurred, are deferred revenues.

An important concept to note is that you can’t defer a receivable and vice versa. Deferring is a way of not recognizing the revenue yet. You defer things received but not yet earned. A receivable is revenue you’ve earned and rightly recognized, but not yet received. A temporary restriction is to identify funds received and recognized as revenue, but not yet expended in accordance with donor intent. It’s easy to forget all of that in the face of a confusing revenue event.

Examples of time restricted revenue

  • Pledges
  • Bequests

Examples of purpose restricted revenue

  • Grants (that do not qualify as exchange transactions)
  • Funds raised for a specific purpose (i.e. purchase of special equipment or to fund a special program)

When to release restrictions

  • Release time restricted revenue when the funds are received (unless they are also purpose restricted)
  • Release purpose restrictions when the funding is spent in its intended purpose. This is normally done by releasing out of your temporarily restricted balance into your unrestricted revenue an amount equal to the expense incurred for that program.

How to report this on the net asset roll-forward

Start with prior year’s ending balance in restricted net assets, add in any new restricted revenue, subtract any releases.

The ending balance will be shown on your financial statement.

These are just suggestions, if you feel you have a unique setup and need help deciding how to record your revenue, please feel free to contact us.  Part of our job is to help you help yourself.

This is part 2 of a continuing series on common management letter comments.  To see part 1 click here.

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