USCPA (FAR) – (30) Not-for-Profit Revenue Recognition

I would like to record about the key points of the US CPA exam content.

<Create and note the points based on mainly Becker’s workbook>

Unconditional Donations vs Conditional Donations

• Unconditional Donations: These are donations that non-profit organizations receive without any attached conditions, meaning there is no requirement to meet specific criteria to use the funds. These donations are recognized as revenue immediately upon receipt. After being recognized as revenue, they are classified based on whether they have donor-imposed restrictions or not. “With donor restrictions” refers to donations that the donor has specified to be used for particular purposes, and “without donor restrictions” refers to donations that can be used at the organization’s discretion. Even if there are clauses for return rights or release from obligations, if there are no specific and measurable conditions, the resources are considered unconditional. (DR) Pledge receivable 100 (CR) Allowance for doubtful accounts 10, Contribution revenue 90
• Cash contributions and unconditional pledges are recognized as contribution revenue in the year in which the cash or pledge is received.
• In nonprofit accounting standards, an unconditional promise of donation is recognized as “Pledge Receivable” at the time the promise is made, and “Contribution Revenue” is recorded based on the amount expected to be collected. This means that revenue is recognized not when cash is actually received, but when the promise is made. Therefore, even if a portion is received in the previous fiscal year, revenue recognition is based on the total amount of the donation promised.
• Conditional Donations: These donations require the fulfillment of specific conditions. Until these conditions are met, such donations are treated as refundable advances rather than revenue. Conditional promises or pledges do not receive accounting treatment until the conditions are met, meaning they are only recognized as revenue once the specified conditions have been satisfied. The likelihood of the conditions does not affect revenue recognition; it depends solely on whether the conditions have been met.
• The contribution will be recorded as revenue in Year 1, and it will be classified as contributions with donor restrictions and an increase in net assets with donor restrictions until the time period for the restriction has passed.
• Entitlement to assets, contingent upon the achievement of producing specific outputs or measurable outcomes, could be a measurable performance-related barrier that could indicate the existence of a condition attached to a promise to give or resource received. Measurable performance-related barriers include specific outputs or outcomes, specified levels of service, matching requirements, or outside events or contingencies.
• The $400,000 incurred as eligible expenses is recognized as revenue with donor restrictions because it is still expected to be used for specific purposes. Therefore, it is not typically recorded as unrestricted revenue immediately. On the other hand, in nonprofit accounting standards, expenses are commonly classified as without donor restrictions. This is because donor-imposed restrictions are rarely directly linked to the expenditure of funds, and expenses are generally related to the organization’s overall operational activities.
• When a nonprofit organization receives grants with donor-imposed restrictions, it recognizes them as contributions with restrictions, according to the grant’s limitations. However, the inclusion of clauses such as the right of return or the right of release from obligation in the agreement does not constitute a condition if no measurable barriers are established. Such resources are considered unconditional, and revenues are recognized immediately.”
• No revenue would be recognized for conditional promises to give. The challenge grant described represents a conditional obligation. The challenge is subject to a measurable performance-related barrier (funds must be raised) and the challenge grant can be rescinded if fundraising targets are not met within a specified period. The likelihood of success is not relevant.
• Community Services would recognize $400,000 of revenues with donor restrictions in an amount equal to the satisfied condition of $400,000 in eligible expenses. Federal grant funding, subject to conditions associated with eligible cost principles, would not be recognized as revenue until conditions are satisfied. Revenues would be recognized as with donor restrictions consistent with the program funding. All expenses of not-for-profit organizations are classified as without donor restrictions.

Exchange Transactions

• Exchange transactions occur when a non-profit organization receives resources in exchange for providing specific benefits or services to the provider. In this case, the received resources are recognized as revenue equivalent to the value of the services provided.
• In such transactions, the services or outcomes provided by the non-profit have commercial value, and the provider compensates the non-profit for these services. Examples include providing research results or carrying out specific projects.
• These types of transactions ensure that non-profit organizations accurately reflect the financial contributions and resources they receive, tailored to the nature of the income and the expectations of the providers.
• This is an exchange transaction, which increases net assets without donor restrictions. The results of the clinical trials performed by Altruistic University have a commercial value to Experimental Pharmaceuticals Corporation. Resources have been provided in exchange for research results and do not constitute a contribution.

Initial Recognition of Pledges

• Pledge Receivable: This is the total amount Pica expects to receive based on the promises made.
• Contribution Revenue: Normally, the promised amount would be recognized as revenue. However, since 10% is expected to be uncollectible, the recognized revenue needs to be adjusted as allowance for doubtful accounts.
• Unconditional pledges that will be collected over more than one year should be reported as pledges receivable, valued at their present value.
• (DR) Cash-with doner restrictions 100 / (CR) Pledge receivable-with doner restrictions

Donated services

• The value of volunteer services is not considered in accounting treatment. This is because many volunteer services are provided for free, and it is difficult to accurately measure their value.
• Donated services should be recorded as contribution revenue and expense at fair value if the services meet the following criteria: Hey create or enhance a nonfinancial asset. and They require specialized skills that the provider possesses and would otherwise have been purchased by the organization.
• Contributed services are, therefore, only recognized SOME of the time: when the service is Specialized, Otherwise needed, and Measured Easily.
• If these criteria are not met, the service is not recognized as an expense and is not reflected in the financial statements. Because the company would not hire staff to handle the general duties of the volunteers; the tasks would simply be absorbed by current staff. 
• Charity care, those health care services provided but never expected to result in cash flows to the hospital, are not recorded as receivable or as revenue. Charity care is not recognized on the face of the financial statements but is disclosed.
• Providing companionship does not require specialized skills, and if not provided by volunteers, the organization had no plan to offer these services for a fee. Therefore, it is not recognized as revenue or expense in accounting.
• The value of donated services should be recorded as both a contribution and an expense if the services performed are a normal part of the program or supporting services and would otherwise be performed by salaried personnel.

Patient Service Revenues

• Room and board fees from patients, as well as recovery room fees, are classified as patient service revenues. These are part of the health care services provided by the hospital and constitute an important part of the hospital’s revenues.
• The revenues of a hospital are classified into three categories: patient service revenues, other operating revenues (such as educational program), and nonoperating revenues (such as unrestricted donations).
• The three most generally used revenue classifications for a hospital are patient services revenues, other operating revenues, and nonoperating revenues. Other operating revenues are those generated by operations other than patient services. Revenues from educational programs would be classified as other operating revenues. Nonoperating revenues represent incidental earnings not related to the ongoing and central operations of the hospital. Gifts without donor restrictions would be classified as nonoperating revenues.

Revenue from tuition and fee

•  Revenues from tuition and fees are reported at the gross amount. Only refunds are netted against the revenue. Scholarships and tuition remissions are shown separately as expenditures.

Recording of Constuction Expense

• (DR) Satisfaction of use restriction 100 / (CR) Cash – with donor restrictions 100
• (DR) Cash without doner restrictions 100 / (CR) Satisfaction of use restriction 100
• (DR) Constuction in progress 100 / (CR) Cash without doner restrictions 100

Debt security endowment received

• “Debt security endowment received” means that a specific organization (such as a university or non-profit organization) has received an endowment in the form of debt securities. This indicates that the organization can use the interest or income generated from these debt securities as funding for future activities.
• Contributions – with donor restrictions is equal to the FV of the gift at the time of the contribution.
• Investment income represents a combination of both interest earned as well as changes in market value.

Classification of a nonprofit organization expense

• Administrative Expenses: Expenses related to the operation and management of the organization. Examples: salaries of administrative staff, interest expenses.
• Fund-raising Expenses: Expenses related to fundraising activities. Examples: costs of hosting fundraising events, advertising expenses.
• Program Expenses: Expenses directly related to achieving the organization’s mission. Examples: costs of educational program materials, medical service expenses.

Example of without doner restrictions

• Contributions received to be used at management’s discretion for the mission of the organization are without donor restrictions.
• Contributions without donor restriction maintain their classification as without donor restrictions regardless of the designation of the governing board.

Example of with donor restrictions

• A contribution designated by a donor for a building can be satisfied by the organization (by building the building). The contribution is classified as with donor restrictions.
• A permanent endowment would be classified on the financial statements as with donor restrictions. The corpus (principal) cannot be touched. Although the Accounting Standards Codification refers to this arrangement as an endowment fund for accounting purposes, the reporting classification on the financial statements would be with donor restrictions.
• A multi-year pledge is, by definition, with donor restrictions, since the contribution has yet to be collected. There is an implied time restriction on receivables.

Example of a split-interest arrangement

• A charitable remainder trust is an example of a split-interest arrangement. Split- interest agreements represent donor contributions of trusts or other arrangements under which the not-for-profit organization receives benefits that are shared with other beneficiaries.