How do NFP entities account for income to fund activities that will take place across future accounting periods?

NFPs often receive non-exchange income in one period for use in another. The donor/grantor may place stipulations on the activities that the income may be used for that may result in the funding being only available to be spent in a future accounting period.

Difficulties exist in determining when the income should be recognised. There can be large swings in the income statement from year-to-year depending on the approach to cut-off taken by the NFP. The approach to communicating or overcoming and avoiding these large surpluses/deficits can differ.

The section focuses on the recognition of income which will fund activities in future accounting periods recognised.

It does not cover the recognition of income received in exchange for the supply of goods and services across multiple accounting periods (i.e. exchange revenue). It also does not cover the specific situation where non-exchange revue is received for the purchase or construction of a capital asset in future periods.


Language

The term ‘liability’ is used within the journal entry where income is deferred and included as a liability in the statement of financial position.

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Australia

How is income which will fund activities in future accounting periods recognised?

Recognition is dependent on whether the donor’s stipulations on how the revenue should be spent are:

  • enforceable; and
  • contain performance obligations to transfers services to another party that are sufficiently specific to know when the services have been transferred and the obligations satisfied.

If so, the income will be accounted for as a contract in accordance with AASB 15 Revenue from Contracts with Customers. The revenue will be recognised when the performance obligations are fulfilled/satisfied.

Restricting the spending of funds to a specific future period is not sufficiently specific to create a performance obligation to transfer services to another party so that it can be identified when the obligation is satisfied. Therefore, where there are stipulations of this nature alone, these funds would not be accounted for as contract income.

Where the stipulations do not represent an enforceable performance obligation and the transaction is not a contract, the income will be recognised immediately in profit or loss.

The entity may determine the transactions includes external restrictions or conditions which limit or direct the purpose for which the income can be used and the entity does not have discretion to direct the use of the donations. In these situations, the entity may choose to separately disclose the income as restricted donation income.


ACCOUNTING ENTRIES

For income received where the donor’s stipulations give rise to a contract:

On initial receipt:

DR Bank
CR Contract liability


As the conditions are satisfied:

DR Contract liability
CR Income (Exchange Revenue)


For income received where the donor’s stipulations do not give rise to a contract:

On initial receipt:

DR Bank
CR Income (Donation Income - Restricted)


DISCLOSURE OF ADDITIONAL INFORMATION

Where the donor’s stipulations give rise to a contract, an entity is required to disclose:

  • its contract with customers (including the disaggregation of revenue recognised from contracts);
  • the significant judgements, and changes in the judgements, made in applying AASB 15 to those contracts; and
  • any assets recognised from the costs to obtain or fulfil a contract with a customer.

Where the donor’s stipulations do not give rise to a contract, but represent restricted donation income, entities are encouraged to disclosure:

  • 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


RELEVANT SECTION OF ACCOUNTING STANDARDS/GUIDANCE

AASB 1058 Income of Not-for-Profit Entities, Paragraphs, 9, 10 and B1

AASB 15 Revenue from Contracts with Customers, Paragraphs 110 to 129


ILLUSTRATIVE EXAMPLE

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ACCOUNTING ENTRIES

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ACCOUNTING ENTRIES

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ACCOUNTING ENTRIES

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Canada

Private Sector NFPOs

How is income which will fund activities in future accounting periods recognised?

Recognition differs depending on whether the entity follows either the ‘deferral method’ or the ‘restricted fund method’ of accounting for contributions.

Deferral method

Restricted contributions related to expenses of future periods are deferred and recognised as revenue in the same period or periods in which the related expenses are incurred. Therefore the deferred contribution balances reported on the statement of financial position represent the amount of restricted contributions that are related to expenses for future periods.

Where a contribution is restricted as it cannot be spent until a particular future period, the total amount of the contribution would be recognised as revenue in that future period, whether or not it has been spent.

Restricted fund method

The recognition of contributions is dependent on the externally imposed restrictions which have been stated by the contributor and the separate funds established by the entity.

Contributions which relate to expenses of future periods will either be:

  • immediately recognised as revenue of a restricted fund in the current period; or
  • recognised using the deferral method (as explained above) in the general fund.

The treatment will depend on whether the entity has established a separate fund for the stipulated purpose of the restricted contribution. If so, the contribution will be recognised immediately in this fund. Where an appropriate restricted fund does not exist, the contribution would be recognised in the general fund using the deferral method. In such instances, the contribution would be deferred and recognised as revenue in the same period or periods in which the related expenses are incurred.

Where the contribution is government funding received in advance of the period that is being funded, this is treated as a restricted contribution related to expenses of the future period being funded. These contributions would be recognised in a restricted fund as revenue of the current period.


ACCOUNTING ENTRIES

Deferral method

On receipt:

DR Bank

CR Deferred contributions (Liability)

In the period in which the related expenses are incurred:

DR Deferred contributions (Liability)

CR Income (Revenue)

Restricted fund method

On receipt where a separate fund for the stipulated purpose is established:

DR Bank

CR Income (Revenue - Restricted Fund)

On receipt where no separate fund exists:

DR Bank

CR Deferred contributions (Liability)

In the period in which the related expenses are incurred:

DR Deferred contributions (Liability)

CR Income (Revenue - General Fund)


DISCLOSURE OF ADDITIONAL INFORMATION

Deferral method

An entity must present deferred contribution balances in the statement of financial position outside net assets. They must disclosure the nature and amount of changes in deferred contributions balances for the period. Entities are also recommended to present the changes in deferred contributions in a separate statement.

Restricted fund method

When restricted contributions are recognised in the general fund using the deferral method, an entity must present any deferred contributions balances in the statement of financial position outside net assets. They must disclose the nature and amount of changes in deferred contributions balances for the period.


RELEVANT SECTION OF ACCOUNTING STANDARDS/GUIDANCE

CPA Canada Handbook – Accounting (Part III), Section 4410 contributions — revenue recognition, Paragraphs 28-67


ILLUSTRATIVE EXAMPLE

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ACCOUNTING ENTRIES

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Colombia

How is income which will fund activities in future accounting periods recognised?

Income is recognised in the profit and loss statement on a systematic basis over the periods in which the entity recognises the expenses for the related costs which the grants are intended to compensate.

The income is recorded as a liability within deferred income, and recognised in profit and loss in the same period as the relevant expenditure.

Where income is received with conditions attached, the conditions giving rise to costs and expenses should be identified. The income should be recognised over those periods when these costs and expenses are incurred.

The income is presented as part of profit or loss, either separately or under a general heading such as ‘Other income’ or deducted from the related expense.


ACCOUNTING ENTRIES

On receipt:

DR Bank

CR Deferred Income (Liability)

As the entity recognises the expenditure related to the income:

DR Deferred Income (Liability)

CR Income (Other Income)

Or, where the income is deducted from the related expense:

DR Deferred Income (Liability)

CR Expenditure


DISCLOSURE OF ADDITIONAL INFORMATION

The entity must disclose accounting policy adopted, including the nature and extent of the grant, any unfulfilled conditions and other contingencies attaching to government grant that has been recognised.


RELEVANT SECTION OF ACCOUNTING STANDARDS/GUIDANCE

IAS 20 Accounting for Government Grants and Disclosure of Government Assistance


ILLUSTRATIVE EXAMPLE

A NPO receives a monetary donation to be used in a specific program to be executed in 4 years. The NPO must treat the money received as deferred income and amortise it during 4 years against revenues.

ACCOUNTING ENTRIES

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New Zealand

Tier 1 and Tier 2 PBE Standards

How is income which will fund activities in future accounting periods recognised?

Recognition differs depending on whether the income is received from an exchange or non-exchange transaction.

Non-exchange transactions occur where a donor gives value to another entity without directly receiving approximately equal value in exchange.

Where funding arises from a non-exchange transaction and is to be spent on activities in future accounting periods, recognition will depend on the basis and conditions of the transfer arrangement.

Where the transfer agreement is not yet binding, the entity will recognise an advance receipt liability. When the transfer arrangement binding occurs, the liability is discharged.

Where the transfer arrangement contains stipulations on how and when the income should be spent, these may be either ‘conditions’ or ‘restrictions’.

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 advance receipt subject to conditions, the entity also incurs a liability. When the conditions are satisfied the liability is subsequently reduced and revenue recognised. The timing of the revenue recognition is determined by the nature of the conditions and their settlement. For example, if the condition specifies that the entity is to provide services to third parties, revenue is recognised as goods or services are provided.

A ‘restriction’ does not impose 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 advance receipt is immediately recognised as non-exchange revenue on the transfer arrangement becoming binding.


ACCOUNTING ENTRIES

On receipt:

DR Bank

CR Advance receipts (Liability)

When the transfer arrangement becomes binding:

For income received with conditions:

DR Advanced receipts (Liability)

CR Non-exchange liability

As the conditions are satisfied:

DR Non-exchange liability

CR Income (Non-exchange revenue)

For income received without restrictions:

DR Advanced receipts (Liability)

CR Income (Non-exchange revenue)


DISCLOSURE OF ADDITIONAL INFORMATION

An entity must disclose the existence and amount of any advance receipts in respect of non-exchange transactions.


RELEVANT SECTION OF ACCOUNTING STANDARDS/GUIDANCE

PBE IPSAS 23 Revenue from Non-Exchange Transactions, Paragraphs 25, 51-54, 105 and 106-112


ILLUSTRATIVE EXAMPLE

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Tier 3 Simple Format Reporting Standard – Accrual (NFP)

How is income which will fund activities in future accounting periods recognised?

Recognition depends on whether funding is received on a ‘use or return’ basis. This funding has to be used as specified by the donor, or is legally required to be returned to them.

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. The revenue shall not be deferred even if the resources are received in advance of any expense on the activity funded by the donation or grant. However, 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.


ACCOUNTING ENTRIES

For income received with 'use or return' conditions:

On receipt:

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 receipt:

DR Bank

CR Income (Non-exchange revenue)


DISCLOSURE OF ADDITIONAL INFORMATION

Where an entity has:

  • received a significant grant or donation which 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; and
  • 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’.


RELEVANT SECTION OF ACCOUNTING STANDARDS/GUIDANCE

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


ILLUSTRATIVE EXAMPLE

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United Kingdom

How is income which will fund activities in future accounting periods recognised?

Recognition differs depending on whether the income is received from an exchange or non-exchange transaction.

Non-exchange transactions occur where the donor pays the entity without receiving equal value in exchange, for example where grant funding is made to secure the provision of particular services.

The timing of recognition of income from grant funding is dependent on whether conditions exist that must be met before the entity is entitled to the funding. Particular consideration is given to performance-related conditions, and conditions which may arise from time restrictions.

No conditions

Where a grant is received with no conditions attached, it must be recognised as income immediately. In these situations, the NFP’s entitlement to the income arises on receipt. The fact that the related expenditure has not been incurred is not a reason to defer the recognition of income.

Performance-related conditions

Where the grant contains conditions that specify the services to be performed by the entity, the income must only be recognised to the extent that the entity has provided the specified services and any performance-related conditions are met. Funding received in advance of delivering the services is required to be recognised as a liability on the entity’s balance sheet as deferred income. The deferred income is released to income in the reporting period in which the performance-related conditions are met.

Time restrictions

Grant funding which has terms or conditions which specify the time period over which the expenditure can take place may also limit the recognition of the income. This depends on the specific terms or conditions of the grant.

Where the terms or conditions specify that the expenditure can only take place in a future accounting period (i.e. there is a time related restriction on the use of funding) this would be likely to reflect a condition which limits the NFP’s entitlement. Similarly, the NFP may only be entitled to a multi-period grant on condition that the donor approves an agreed budget for each annual reporting period. However, terms or conditions such as requirements for submission of accounts to the donor or certification of expenditure are considered administrative verification requirements. Unless the entity fails to provide information, or there are adverse findings arising from the verification requirements, these do not affect the NFP’s original entitlement, and so do not affect recognition of the income.

Where a time-related condition does limits the NFP’s entitlement to the income, the income should be deferred and released in those reporting periods in which the time-condition is met.


ACCOUNTING ENTRIES

When the grant contains conditions:

On receipt:

DR Bank

CR Deferred income (Liability)

On the entity becoming entitled to the income:

DR Deferred income (Liability)

CR Income (Revenue)

DISCLOSURE OF ADDITIONAL INFORMATION

When an entity has deferred income, the notes to the accounts must explain the reasons why income is deferred and should analyse the movement on the deferred income account – identifying income deferred in the current year and the amounts released from previous periods.

Where unrestricted income which is to be spent in a future period is recognised, the entity can include this within a ‘designated fund’. This allows these funds to be shown separately from the entity’s unrestricted funds to indicate that these will be spent in future periods for a particular purpose.


RELEVANT SECTION OF ACCOUNTING STANDARDS/GUIDANCE

FRS 102 The Financial Reporting Standard applicable in the UK and Republic of Ireland, Paragraphs PBE34.64-PBE34.74 and Appendix B to Section 34 (specifically Paragraphs PBE34B.13-PBE34B.14)

Charities SORP (FRS 102), Paragraphs 2.9, 5.10 to 5.28 and 5.39 to 5.47


ILLUSTRATIVE EXAMPLE

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ACCOUNTING ENTRIES

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ACCOUNTING ENTRIES

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USA

How is income which will fund activities in future accounting periods recognised?

Recognition differs depending on whether the income is received from an exchange or non-exchange transaction.

Non-exchange transactions are non-reciprocal transfers, where an entity incurs a liability or transfers an asset to another entity without directly receiving (or giving) value in exchange.

Donors can place restrictions on the income received from non-exchange transactions. These can arise 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. Restrictions on the time period or purpose of the contribution are temporary in nature and expire when the purpose has been satisfied or time passed.

Contributions are initially reported as restricted support that increases net assets with donor restrictions. These net assets are released from donor restrictions by incurring expenses satisfying the restricted purposes or by occurrence of other events specified by donors. The entity recognises the expiration of these restrictions by reclassifying those temporary restricted net assets as unrestricted net assets in the period in which the restriction expires.


ACCOUNTING ENTRIES

On receipt:

DR Bank

CR Income (Contributions - with Donor Restrictions)

On the entity becoming entitled to the income:

DR Income (Contributions - with Donor Restrictions)

CR Income (Net assets released from 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 positions or by including relevant details in notes to the financial statements.

Reclassifications of net assets for expirations of donors-imposed restrictions are reported separately from other transactions within the Statement of activities and Balance Sheet.

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 dis-aggregated information by fund group.


RELEVANT SECTION OF ACCOUNTING STANDARDS/GUIDANCE

FASB Accounting Standards Codification, ASC 606-10-65-1

FASB Accounting Standards Codification, ASC 958-225-20

FASB Accounting Standards Codification, ASC 958-605-20, ASC 958-605-25-1 and ASC 958-605-25-2


ILLUSTRATIVE EXAMPLE

FASB Accounting Standards Codification, ASC 958-20-45-10, ASC 958-205-55 (Example 1, Paragraphs 2-5)

ACCOUNTING ENTRIES

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ACCOUNTING ENTRIES

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ACCOUNTING ENTRIES

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On the entity becoming entitled to the income:

DR Deferred income (Liability)

CR Income (Revenue)