[Porma Fierles]

Hey, how do you tell the difference between temp restricted, restricted and unrestricted revenues or contributions? I read it in Becker, but I do not feel it give enough info to solve MCQ that have examples of different revenues.

For example, if there is a contribution BOD can decide, if a contribution is promised that has been promised in prior periods too and if there is a contribution that would have been purchased otherwise?

Thank you.

[Mike J]

Now, donated professional services–your last paragraph.

It took me awhile to wrap my head around what this means. But, a NFP doesn't have a profit motive (in theory; insert Clinton & Trump jokes here).

Instead, as I said, NFP must report how resources are being spent. So you often recognize simultaneously a revenue and expense. Revenue (service itself), and the expense (represents the activity they would have paid for).

This is also why expenses are grouped by program. And that non-hospitals and schools must produce a Statement of Functional Expenses.

[Anonymous]

Board restricted funds are considered unrestricted, since its internal

Only the donor can truly restrict the purpose of donated funds

So if the donor has a time limit for the NFP to receive the funds or if the NFP has to satisfy some obligation, then it is temporarily restricted.

[Porma Fierles]

Thanks both of you.

BTW this is from the sample exam.

I find it strange that the promised contribution is a temp restriction while the contribution that would have been purchased is unrestricted. I get why the BOD related contribution is unrestricted though. So the promise is temp restricted because of the time limit defined? The promise is roughly: to contribute in the following year from someone who has made similar contributions in prior periods.

[Anonymous]

are you talking about donated services? Where a revenue and an expense are recorded at the same time?

[Porma Fierles]

Yeah the problem is about a foundation that is receiving support through those three contributions.

[Mike J]

Look at it this way, a contribution from the outside that has a restriction (time or specific purpose) must be listed as Restricted for good reason. A NFP must show external users of their financial statements that they are properly using their resources.

Here is why you recognize a revenue and expense at the same time. As a FOR-profit enterprise, you have to match expenses to revenues to explain how you reached Net Income, yes? Generally. For a PRIVATE NFP enterprise, the point of emphasis isn't profit, but how you are using your resources.

As an aside, I think you may be getting hung-up on what makes something an expense. Think of these things more as activities that you have to describe using GAAP syntax. You capitalize “costs,” or economic activities, of PP&E to get that long-lived asset ready to produce an economic benefit to your company. Whereas, you expense something simple maintenance because you aren't building an asset. An asset is just some thing that you expect to eventually bring you cash. Often that is expected in the long-term.

Now, let's get back to donated professional services. Like I said, for a private NFP, you recognize a revenue and expense on the Statement of Activities (versus a Income Statement) because you have to show to the outside world how you are using your resources.

There are two transactions that are recognized at the same time. As an example, once you're a CPA you could donate your bookkeeping or tax services to a local soup kitchen. First, you recognize “prepaid asset” to be used for bookkeeping services. That is an increased asset. Second, you recognize the economic activity which is the expense. On the Statement of Activities these things wash-out, but outsiders see how you're using the resources.

These donations are UNrestricted donations. There is no time-restriction placed on the bookkeeping services, right? You're just donating them. The soup kitchen would need them to support their enterprises. This donation is different from giving money (other revenue) for the NFP to buy a bunch of Campbell's Soup cans.

Hopefully, this helps

[Mike J]

Only donors (external) can restrict.

To put it another way, one of the main foci of NFP reporting is to provide to users the nature of the relationship between in- and out-flows. It isn't necessarily to report profit, but how NFP uses resources.

So, if a NFP “restricts” funds for something that's nice. But, you have to show others that you are using funds properly. I forget if it was the Red Cross or the Salvation Army. But there was a huge scandal because they took donations from one cause and reinvested them to another charity. That's illegal.

[Mike J]

Ugh! For some reason my first reply didn't show up.

Only external donors can restrict.

It's nice that a board of directors intend to earmark funds.

But, if a NFP receives money from an outside donor it must show that it goes to THEIR intended purpose.

I can't remember which one it was–Red Cross or Salvation Army. One of the two got into a lot of trouble (lawsuits galore) because the BoD took donations from one successful program and put it into another charity without the donors' knowledge.

Hopefully these posts help

[Porma Fierles]

Thanks Mike. I am desperately doing MCQ on FS Accounts category but I will read this later.

[Author]

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