To clarify and ensure compliance in the future, here’s a detailed breakdown of how deferred revenue and temporarily restricted revenue should be treated in nonprofit accounting.
Deferred Revenue vs. Temporarily Restricted Revenue
A key accounting principle, the matching principle, dictates that revenues and their related expenses should be recognized in the same period. While this principle is central to for-profit accounting, the rules for nonprofit organizations differ when it comes to contributions and grants.
Deferred Revenue: This refers to funds received for services or goods not yet delivered. Examples include prepaid membership fees or advance payments for a future event. These funds are recorded as a liability until the service or product is provided, at which point they are recognized as revenue.
Temporarily Restricted Revenue: Nonprofits often receive contributions or grants with specific restrictions, such as a requirement to use the funds for a particular purpose or during a specified timeframe. According to ASC 958-605-25, these funds are recognized as revenue in the period they are received but reported as temporarily restricted revenue until the conditions are met.
Key Accounting Scenarios
Here’s a common situation that illustrates how to distinguish between the two revenue types:
- Grant Example: Suppose you receive a $10,000 grant intended to cover operational expenses for the following year. While it may seem intuitive to defer this income until the intended period, the correct treatment under ASC 958 is to recognize it as temporarily restricted revenue in the year it is received. The restriction on its use ensures transparency and aligns with accounting standards.
- Earned Income: If your organization charges fees for services to be provided later, such as an event paid for in advance, this income qualifies as deferred revenue. It remains a liability on your books until the event occurs, aligning revenue recognition with service delivery.
Practical Guidance for Nonprofit Leaders
Understand Your Restrictions: Always review the terms associated with grants or contributions. Is the restriction based on time, purpose, or both? This determines how you record the income.
Consult with Professionals: Accounting for nonprofit organizations requires attention to detail and adherence to specific standards. When in doubt, consult your auditors or accounting partners for guidance.
Streamline Reporting: Clear financial reporting builds donor trust and ensures compliance with regulatory standards. Misclassifying funds can lead to inaccuracies that might impact funding or grant renewal decisions.
Why This Matters
Nonprofit stakeholders, including donors and grantors, prioritize understanding how much revenue was received and for what purposes. Accurately reporting temporarily restricted revenue showcases accountability and compliance, while proper handling of deferred revenue ensures alignment with service delivery timelines.
If you have additional questions or need support with your organization’s financial reporting, don’t hesitate to reach out. We’re here to help you navigate the complexities of nonprofit accounting.
