Question

A not-for-profit organization receives a restricted gift. When and in which type of fund should it recognize the revenue? When and in which type of fund should it recognize the related expense? What is the reason for the apparent inconsistencies between the fund types in which the revenue and expenses are reported?

Answer 1

ANSWER:

The gift would be recognized at the time it was received and the type of fund would depend on the reasons why it was restricted. Gifts with purpose or designated time span will be recognize as temporarily restricted fund until the time of restriction has been fulfilled.

Restricted gift received by Not for profit organization is to be recognize as restricted fund.The underlying concept of SFAS No. 116 is that receipt of restricted contributions does not amount to incurring a liability, but merely accepting limits on the future use of the contributions. The concept is based on the belief that adequate disclosure of donor-imposed restrictions and properly stated liabilities is more important than matching revenue and expenses.

under SFAS No. 116, contributions with donor-imposed restrictions are reported as restricted revenue, which increase either permanently restricted or temporarily restricted net assets. As restrictions are fulfilled or the stipulated time period for the restriction has expired, the amount should be reclassified to unrestricted net assets.

All expenses should be reported as decreases in the unrestricted class of net assets. This is a significant change from current practice, in which many organizations report expenses that fulfill donor restrictions as decreases in the appropriate restricted fund.

Under the new guidance, expiration of restrictions on temporarily restricted net assets will be reported as reclassification, which simultaneously increase the unrestricted class of net assets. These reclassification in effect reimburse the unrestricted class of net assets for expenses that

(a) are charged against the unrestricted class of net assets, and

(b) fulfill donor-imposed restrictions and thus should decrease temporarily restricted net assets.

An organization must provide, either in the statement of activities or in the notes to the financial statements, information about expenses reported by their functional classification, such as major classes of program services or supporting activities. Organizations are encouraged, but not required, to provide information about expenses by their natural classifications as well.

Only voluntary health and welfare organizations are required to report both functional and natural classifications of expense information in a matrix format in a separate statement of functional expenses.