How do NFP entities account for donor/grantor stipulations on how income should be spent?

It is common for there to be restrictions on the use of income received by charities. Often donors will place legal restrictions on the purpose that the resource can be used for, or income is received on trust for a specific purpose.

The methods of classifying and reporting on income of this nature. There is also a range of terminology used to denote non-exchange income with donor/grantor stipulations which differs dependent on the nature and type of the restrictions.

The section focuses on:

  • The different categories of non-exchange income with donor stipulations; and

  • Accounting and reporting of exchange income with donor stipulations, covering:

    • Initial recognition;
    • Disclosure of additional information; and
    • Accounting entries.

Whilst the section focuses on accounting for donor/grantor stipulations, it does not cover the specific accounting or reporting guidance for: accounting endowment income; transfers between funds; restrictions/conditions on exchange income; or designating or ‘earmarking’ unrestricted or general funds.


Language

The section attempts to use the same language and terms as the accounting and reporting standards themselves. This is done to show the different terms which are used to describe which donor stipulations are recognised (or not recognised) by NFPs in their financial statements.

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Australia

What term is used to define non-exchange income with donor stipulations on how it should be spent?

Restricted donation income


What criteria is used to determine which stipulations are reported in the financial statements?

Entities may disclose information on those funds which have external restrictions or conditions which limit or direct the purpose for which the income can be used and where the entity does not have discretion to direct the use of the donations.


Are there different categories of non-exchange income with donor stipulations?

There are no additional categories of restricted donation income.

However where the donor’s stipulations on how the income should be spent are sufficiently specific and enforceable to fall within the scope of AASB 15 Revenue from Contracts with Customers (IFAS15), then the revenue shall be accounted for as exchange revenue.

Where the income is received to enable the entity to acquire or construct a non-financial asset which will be controlled by the entity, then the revenue shall be accounted for in accordance with AASB 9 Financial Instruments.


Accounting and reporting of exchange income with donor stipulations:

INITIAL RECOGNITION

Entities are encouraged to provide information about restricted and unrestricted income, including:

  • components of equity (retained profit) divided into restricted and unrestricted amounts
  • total comprehensive income divided into restricted and unrestricted amounts – either on the face of the statement of profit or loss and other comprehensive income or in the notes
  • assets to be used for specified purposes.


DISCLOSURE OF ADDITIONAL INFORMATION

Entities are encouraged to disclose information about externally imposed restrictions, including an explanation of the judgements used in determining whether funds are restricted.


ACCOUNTING ENTRIES

On recognition:

DR Bank

CR Income (Donation Income - Restricted)


RELEVANT SECTION OF ACCOUNTING STANDARDS/GUIDANCE

AASB 1058 Income of Not-for-Profit Entities, Paragraph 37


ILLUSTRATIVE EXAMPLE

AASB 1058 Income of Not-for-Profit Entities, IE5 (Example 7)

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Canada

Private Sector NFPOs

What term is used to define non-exchange income with donor stipulations on how it should be spent?

Restricted contributions


What criteria is used to determine which stipulations are reported in the financial statements?

Entities provide information on those contributions which have restrictions imposed on them. A restriction on a contribution is a stipulation imposed that specifies how the resources must be used and is imposed from outside the entity, usually by the contributor of the resource.


Are there different categories of non-exchange income with donor stipulations?

Restricted contributions can either be ‘restricted contributions’ or ‘endowment contributions’.

A restricted contribution is subject to externally imposed stipulations that specify the purpose for which the contributed asset is to be used.

An endowment contribution is a type of restricted contribution subject to externally imposed stipulations specifying that the resources contributions be maintained permanently, although the consistent assets may change from time to time.


Accounting and reporting of exchange income with donor stipulations:

INITIAL RECOGNITION

Recongition depends on the method of accounting adopted by the entity. Entities can choose to account for restricted contributions under either the deferral method or restricted fund method.

Under the ‘deferral method’, restricted contributions related to expenses of future periods are deferred and recognised as revenue in the period in which the related expenses are incurred. Endowment contributions are reported as direct increases in net assets. All other contributions are reported as revenue of the current period

Under the ‘restricted fund method’ the details of financial statement elements are reported by fund and therefore segregated on the basis of the restrictions on the contribution. Each fund is a self-balancing set of accounts, and each fund records the receipt and use of resources that are subject to restrictions. Restricted contributions for which a corresponding restricted fund is presented must recognised the contribution as revenue of that fund in the current period. Similarly, endowment contributions must be recognised as revenue of the endowment fund in the current period. Restricted contributions received for which there is no corresponding restricted fund present should recognise this contribution in the general fund in accordance with the ‘deferral method’.


DISCLOSURE OF ADDITIONAL INFORMATION

Under the ‘deferral method’, an entity is required to disclose the nature and amount of changes in deferred contributions balances for the period. It is suggested that entities present these changes as a separate statement.

Under the ‘restricted fund method’, any deferred contribution balances of restricted contributions received which are recognised in the general fund in accordance with the deferral method should be presented in the statement of financial position (balance sheet) outside net assets. An entity is required to disclosure the nature and amount of changes in the deferred contribution balances for those restricted funds recognised in the general fund. It is suggested that entities present these changes as a separate statement.


ACCOUNTING ENTRIES

For restricted contributions:

Using the 'deferral method':

On recognition:

DR Bank
CR Deferred Contributions

As the conditions are satisfied:

DR Deferred Contributions

CR Income (Revenue)


Using the 'restricted fund method':

On recognition:

DR Bank
CR Income (Revenue)


RELEVANT SECTION OF ACCOUNTING STANDARDS/GUIDANCE

CPA Canada Handbook – Accounting (Part III), Section 4410 contributions — revenue recognition


ILLUSTRATIVE EXAMPLE

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Colombia

What term is used to define non-exchange income with donor stipulations on how it should be spent?

Restricted support


What criteria is used to determine which stipulations are reported in the financial statements?

Entities provide information on revenue or gains from contributions which donors have placed restrictions on. A restriction is a donor stipulation that specifies that the revenue or gains from contributions which is more specific than broad limits results from the following:

  • The nature of the entity.
  • The environment in which it operates.
  • The purposes specified in its articles of incorporate or bylaws or comparative documents for an unincorporated association.

A restriction results either from a donor’s explicit stipulation or from circumstances surrounding the receipt of the contribution that makes clear the donor’s implicit restriction on use.


Are there different categories of non-exchange income with donor stipulations?

Restricted support can either have restrictions which are:

  • Temporary in nature, for example a time or purpose restriction; or
  • Permanent/perpetual in nature, for example stipulating that resources be maintained in perpetuity.


Accounting and reporting of exchange income with donor stipulations:

INITIAL RECOGNITION

Contributions received with donor-imposed restrictions must be reported as restricted support that increases net assets with donor restrictions. These restricted net assets will either be temporarily or permanently restricted, depending on the restriction placed on the contribution received.

For contributions received with temporary restrictions, when the purpose has been satisfied or time passed, there is reclassification from temporarily to unrestricted net assets (being a decrease in temporarily restricted net assets and increase in net assets without donor restrictions). An entity recognises the expiration of donor-imposed restrictions on contributions in the period in which the restriction expires.

An entity must recognise contributions received without donor-imposed restrictions as unrestricted support that increases net assets without donor restrictions (unrestricted net assets).


DISCLOSURE OF ADDITIONAL INFORMATION

Entities must classify and report contributions received in order to distinguish between those that increase:

  • Permanently restricted net assets;
  • Temporary restricted net assets; and
  • Unrestricted net assets.

When donor-imposed restrictions on contributions expire, the reclassification of net assets as unrestricted net assets is reported separately from other transactions within the Statement of activities and Balance Sheet.


ACCOUNTING ENTRIES

For contributions with temporary donor-imposed restrictions:

On recognition:

DR Bank
CR Income (Contributions – with Donor Restrictions)

As the donor-imposed restrictions expire:

DR Income (Contributions – with Donor Restrictions)

CR Income (Net assets released from Restrictions)


For contributions with permanent donor-imposed restrictions:

On recognition:

DR Bank
CR Income (Contributions – with Donor Restrictions)


RELEVANT SECTION OF ACCOUNTING STANDARDS/GUIDANCE

Financial Accounting Standards Board, Statement of Financial Accounting Standards No. 116, Accounting for Contributions Received and Contributions Made, Paragraphs 5-8 and 14-17


ILLUSTRATIVE EXAMPLE

See the illustrative example covering accounting for donated assets.

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New Zealand

Tier 1 and Tier 2 PBE Standards

What term is used to define non-exchange income with donor stipulations on how it should be spent?

Transferred assets with stipulations


What criteria is used to determine which stipulations are reported in the financial statements?

Entities provide information on those assets with stipulations. Stipulations are terms in laws or regulations, or a binding arrangement, imposed upon the use of the income by entities which are external to the recipient. They are required to be enforceable through legal or administrative processes.


Are there different categories of non-exchange income with donor stipulations?

Stipulations on transferred assets can either be ‘restrictions’ or ‘conditions’.

Restrictions are stipulations that limit or direct the purposes for which a transferred asset may be used, but do not specify that future economic benefits or service potential is required to be returned to the transferor if the asset is not deployed as specified.

Conditions are stipulations that specify that the future economic benefits or service potential embodied in the asset require to be either consumed by the recipient as specified, or the future economic benefits or service potential must be returned to the transferor.


Accounting and reporting of exchange income with donor stipulations:

INITIAL RECOGNITION

The recognition of a transfer of assets with stipulations depends on whether the stipulation is a ‘restriction’ or ‘condition’.

A condition imposes a present obligation on the entity to transfer future economic benefits or services potential to third parties.  Therefore, when an entity receives an asset subject to a condition, the entity also incurs a liability. When the conditions are satisfied the liability is subsequently recognised as non-exchange revenue.

A restriction does not imposes such a requirement on the entity to return the asset if it is not deployed as specified. Therefore, no present obligation exists and no liability is recognised, and the transfer is immediately recognised as non-exchange revenue.


DISCLOSURE OF ADDITIONAL INFORMATION

Entities must provide information on:

  • the amount of liabilities recognised in respect of transferred assets subject to conditions; and
  • the amount of assets recognised that are subject to restrictions and the nature of those restrictions

Entities are encouraged to disaggregate by class the amount of liabilities recognised in respect of transferred assets subject to conditions.


ACCOUNTING ENTRIES

For income received with conditions:

On recognition:

DR Bank
CR Non-exchange liability

As the conditions are satisfied:

DR Non-exchange liability

CR Income (Non-exchange revenue)


For income received with restrictions:

On recognition:

DR Bank
CR Income (Non-exchange revenue)


RELEVANT SECTION OF ACCOUNTING STANDARDS/GUIDANCE

PBE IPSAS 23 Revenue from Non-Exchange Transactions, Paragraphs 14-25 and 106-111


ILLUSTRATIVE EXAMPLE

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Tier 3 Simple Format Reporting Standard – Accrual (NFP)

What term is used to define non-exchange income with donor stipulations on how it should be spent?

Revenue with conditions


What criteria is used to determine which stipulations are reported in the financial statements?

Entities are required to provide information on revenue received which has to be used as specified by the donor, or is legally required to be returned to them.


Are there different categories of non-exchange income with donor stipulations?

Conditions on revenue will either be general conditions or ‘use or return’ conditions.

Revenue which has general conditions attached may have to be used for a specific purpose, however the entity is not legally required to return the money if it is not used for that purpose

Revenue which is received on a ‘use or return’ basis has to be used as specified by the donor, or is legally required to be returned to them.


Accounting and reporting of exchange income with donor stipulations:

INITIAL RECOGNITION

Recognition of  depends on whether the revenue has ‘use or return’ conditions attached.

Revenue that has a ‘use or return’ condition shall initially be recorded as a liability until the condition has been met, at which point the revenue shall then be recorded.

Revenue which has conditions attached, but which are not ‘use or return’ conditions, shall be recorded when the cash is received. Entities may elect to keep track of these unconditional but ‘tagged’ donations or grants by establishing a designated reserve within accumulated funds to keep track of the unspent balance.


DISCLOSURE OF ADDITIONAL INFORMATION

Where an entity has:

  • received a significant grant or donation with conditions attached which have not been fulfilled at balance date, and
  • the significant grant or donations was recorded as revenue because the conditions were not ‘use or return’ conditions that resulted in the recording of a liability,

Then the entity must disclose in the notes to the performance report:

  • the amount of the grant or donation and the amount for which the conditions have not been fulfilled;
  • A description of the purpose and nature of the conditions of the grant or donation.

Entities must aggregate liabilities and present these balances in separately categories, which includes ‘unused donations and grants with conditions’.


ACCOUNTING ENTRIES

For income received with ‘use or return’ conditions:

On recognition:

DR Bank
CR Non-exchange liability

As the conditions are satisfied:

DR Non-exchange liability

CR Income (Non-exchange revenue)


For income received with no ‘use or return’ conditions:

On recognition:

DR Bank
CR Income (Non-exchange revenue)


RELEVANT SECTION OF ACCOUNTING STANDARDS/GUIDANCE

Public Benefit Entity Simple Format Reporting – Accrual (Not-for-profit), Paragraphs A62-67, A119 and A188


ILLUSTRATIVE EXAMPLE

Public Benefit Entity Simple Format Reporting – Accrual (Not-for-profit), Section 10: Illustrative Examples, No. 2

United Kingdom

What term is used to define non-exchange income with donor stipulations on how it should be spent?

Restricted funds


What criteria is used to determine which stipulations are reported in the financial statements?

Entities must provide information on those funds which donors have placed restrictions on. Restrictions specify the purpose that the charity can use the income and are made by the grant-maker or donor. A restriction may result from a special appeal by the charity, or from the decisions of the grant-maker or donor to support a specific purpose of the charity, rather than making funds available for the charity’s general use.

Restrictions imposed by donors on funds and the duties and powers of entities to use these funds is covered by UK Charity Law.


Are there different categories of non-exchange income with donor stipulations?

Restricted funds can either be ‘restricted income funds’ or ‘endowment funds’.

Restricted income funds are to be spent or applied within a reasonable period from their receipt to further a specific purpose of the entities, which is to further one or more but not all of the entity’s charitable purposes.

Endowment funds are invested or retained by the charity, rather than being spent or applied as income.


Accounting and reporting of exchange income with donor stipulations:

INITIAL RECOGNITION

Entities must separately identify each restricted fund and the income received and expenditure made from each.

Items recorded in the income statement must be analysed between unrestricted and restricted income funds and endowment funds.

The charity’s funds (the assets and liability administered by the charity) recorded in the balance sheet must be analysed between unrestricted and restricted income funds and endowment funds.


DISCLOSURE OF ADDITIONAL INFORMATION

Entities must provide information on:

  • material individual fund balances;
  • movements in the reporting period; and
  • the purposes for which the funds are held.


ACCOUNTING ENTRIES

On recognition:

DR Bank

CR Income (Restricted Fund)


RELEVANT SECTION OF ACCOUNTING STANDARDS/GUIDANCE

Charities SORP (FRS 102), Paragraphs 2.8-2.15 and 2.27-2.30


ILLUSTRATIVE EXAMPLE

Model Trustees’ Annual Report and Accounts: Arts Theatre Trust (FRS 102 version), Page 19, Note 1(h) and Page 32, Note 25

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USA

What term is used to define non-exchange income with donor stipulations on how it should be spent?

Restricted support


What criteria is used to determine which stipulations are reported in the financial statements?

Entities provide information on revenue or gains from contributions which donors have placed restrictions on. A restriction is a donor stipulation that specifies that the revenue or gains from contributions which is more specific than broad limits results from the following:

  • The nature of the entity
  • The environment in which it operates
  • The purposes specified in its articles of incorporate or bylaws or comparative documents for an unincorporated association.

A restriction results either from a donor’s explicit stipulation or from circumstances surrounding the receipt of the contribution that makes clear the donor’s implicit restriction on use.


Are there different categories of non-exchange income with donor stipulations?

Restricted support can either have restrictions which are:

  • Temporary in nature, for example a time or purpose restriction; or
  • Permanent/perpetual in nature, for example stipulating that resources be maintained in perpetuity.


Accounting and reporting of exchange income with donor stipulations:

INITIAL RECOGNITION

Contributions received with donor-imposed restrictions must be reported as restricted support that increases net assets with donor restrictions. These restricted net assets will either be temporarily or permanently restricted, depending on the restriction placed on the contribution received.

For contributions received with temporary restrictions, when the purpose has been satisfied or time passed, there is reclassification from temporarily to unrestricted net assets (being a decrease in temporarily restricted net assets and increase in net assets without donor restrictions). An entity recognises the expiration of donor-imposed restrictions on contributions in the period in which the restriction expires.

An entity must recognised contributions received without donor-imposed restrictions as unrestricted support that increases net assets without donor restrictions.


DISCLOSURE OF ADDITIONAL INFORMATION

Entities must classify and report net assets in two groups:

  • net assets with donor restrictions; and
  • net assets without donor restrictions.

Information about the nature and amounts of different types of donor imposed restrictions must be provided either by reporting their amounts on the face of the statement of financial position or by including relevant details in notes to the financial statements.

Entities must aggregate items of revenues, expenses, gains and losses into responsible homogeneous groups and classify and report them as increases or decreases in net assets with donor restrictions and net assets without donor restrictions. Entities are also able to provide disaggregated information by fund group.

When donor-imposed restrictions on contributions expire, the reclassification of net assets as unrestricted net assets is reported separately from other transactions within the Statement of activities and Balance Sheet.


ACCOUNTING ENTRIES

For contributions with temporary donor-imposed restrictions:

On recognition:

DR Bank
CR Income (Contributions –Restricted support)

As the donor-imposed restrictions expire:

DR Income (Contributions – Restricted support)

CR Income (Net assets released from Restrictions)


For contributions with permanent donor-imposed restrictions:

On recognition:

DR Bank
CR Income (Contributions – Restricted support)


RELEVANT SECTION OF ACCOUNTING STANDARDS/GUIDANCE

FASB Accounting Standards Codification, ASC 958-205-20, ASC 958-205-45-2 and ASC 958-205-45-9

FASB Accounting Standards Codification, ASC 958-210-45-9

FASB Accounting Standards Codification, ASC 958-225-45-6 and ASC 958-225-45-7

FASB Accounting Standards Codification, ASC 958-605-45-3


ILLUSTRATIVE EXAMPLE

FASB Accounting Standards Codification, ASC 958-205-45-10, ASC 958-205-55 (Example 1, Paragraphs 2-5) and ASC 958-205-55-10 (Page 32, Note 25)

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