FAR · Financial reporting · 6 practice questions
ASC 958 NFP contributions: conditional, restrictions, releases
Recognize unconditional contributions and pledges when received or promised; recognize conditional contributions only when the barrier is met. Below: a decision tree to classify donor restrictions and identify the release event.
Try one first
Hint
Separate two questions for each promise: first, is it conditional or unconditional; second, if recognized now, is it with or without donor restrictions at year-end?
Answer B. Promise 1 is an unconditional donor promise (no barrier), so it is recognized when the promise is made/received even though cash is payable later. Because the donor specified use in Year 2, that promise carries a donor-imposed time restriction and is reported as with donor restrictions at December 31, Year 1. Promise 2 is conditional (it includes a barrier, the matching requirement, and the donor is released if the barrier is not met), so no contribution is recognized until the condition is satisfied.
Why not A: This is tempting if a candidate remembers that unconditional promises are recognized immediately, but it misclassifies Promise 1. Because the donor limited Promise 1 to Year 2 operations, it should be reported as with donor restrictions at year-end. Also, partial progress toward a matching condition does not make a conditional promise unconditional; the condition must be met.
Why not C: This distractor appeals to students who focus on the cash receipt date instead of recognition rules. An unconditional promise is recognized when the promise is made/received, even if payment occurs later. Only the conditional promise (Promise 2) waits until the triggering condition is satisfied.
Why not D: Documentation alone does not make a conditional promise recognizable. Promise 2 remains unrecognized in Year 1 because the matching requirement and the donor's release clause create a condition that has not been satisfied.
Decide it in order
T1Is the inflow a contributed service rather than cash or a pledge?
T2Do the services create or enhance a nonfinancial asset, or require specialized skills that the NFP would otherwise purchase?
YesRecognize contribution revenue and a related expense for the fair value of the services.NoDo not recognize contribution revenue for the services.T3Does the arrangement include a barrier and a donor right of return or release (for example, a matching requirement)?
T4Has the barrier been overcome by the reporting date?
YesGo to T5NoDo not recognize contribution revenue yet; the promise is conditional until the barrier is met.T5Does a donor-imposed time or purpose restriction apply?
YesGo to T6NoRecognize contribution revenue as net assets without donor restrictions when received or promised.T6Is the only restriction to acquire a long-lived asset and the donor did not impose an explicit time maintenance requirement?
YesRecognize as net assets with donor restrictions; release when the asset is placed in service. If the restriction is met in the same reporting period and the entity elected the same-period policy, report the support as without donor restrictions.NoRecognize as net assets with donor restrictions; release when the stipulated time arrives and/or as eligible program expenses are incurred. If the restriction is met in the same reporting period and the entity elected the same-period policy, report the support as without donor restrictions.
Key points
- A matching or measurable barrier with a donor right of return/release makes a promise conditional until it is met.
- “Use in Year 2” is a donor-imposed time restriction, not a condition; recognize now as with donor restrictions and release in the allowed period.
- Unconditional pledges due in future periods are time-restricted until the period arrives.
- For gifts restricted to acquire long-lived assets, use the placed-in-service approach absent an explicit donor time maintenance requirement; release when placed in service.
- If the NFP elects the same-period policy, gifts whose restrictions are met in the same reporting period may be reported without donor restrictions.
- Releases are based on eligible costs incurred or time expiry; physical tracing of the contributed cash is not required.
How the exam traps you
- Recognizing a conditional matching pledge before the match is met. Do not recognize revenue until the barrier is overcome; then record the contribution.
- Treating a donor time restriction (for example, “use in Year 2”) as a condition and deferring revenue. Recognize revenue when received or promised and classify as with donor restrictions until the time arrives.
- Recording deferred revenue or a refundable advance for an unconditional restricted gift. Recognize contribution revenue and classify it as with donor restrictions until released.
- Ignoring the criteria for contributed services or recognizing ordinary volunteer time. Recognize donated services only if they create/enhance a nonfinancial asset or require specialized skills that would be purchased (for example, an audit).
Question 2
Hint
For donated services, do not ask only whether the service is helpful. Ask whether it meets one of the recognition conditions.
Answer A. Donated services are recognized if they either create or enhance a nonfinancial asset or they require specialized skills provided by persons possessing those skills and would typically need to be purchased if not donated. An audit performed by a CPA firm involves specialized professional skills and the question states the entity otherwise would have paid for that service. Therefore, the donated audit should be recognized as contribution revenue and a related expense.
Why not B: This is tempting because the activity saves the entity cash and provides a useful service. However, ordinary clerical or administrative volunteer work is not recognized unless it creates/enhances a nonfinancial asset or meets the specialized-skills test, and the facts rule out creation/enhancement here.
Why not C: Serving food for an event is helpful and reduces costs, which may be tempting to recognize. But event-support volunteer work generally does not meet the recognition criteria unless it creates/enhances an asset or requires specialized skills the entity would otherwise purchase; neither condition is present in the facts.
Why not D: Candidates might choose this because board service is important and performed by knowledgeable people. Still, routine governance activities are not recognized as contributed services unless they meet the specialized-skills or asset-creation/enhancement criteria, which the item does not indicate.
Question 3
Hint
Separate two questions: when the contribution is recognized, and when the donor restriction is actually satisfied.
Answer C. The unconditional contribution is recognized when received but recorded as net assets with donor restrictions because of the donor's time and purpose restrictions. Release occurs when the donor-imposed restrictions are satisfied. The time restriction expired in 20X6 and Beacon incurred $150,000 of qualifying program expenses in 20X6, so $150,000 is reclassified as net assets released from restrictions in 20X6; physical tracing of the contributed cash is not required.
Why not A: Tempting because unconditional contributions are recognized on receipt, but initial recognition does not remove donor restrictions. The donor limited use to the adult-literacy program and until 20X6, so the gift remained donor-restricted in 20X5.
Why not B: Focuses only on the time restriction. Although the time restriction ended at the start of 20X6, the purpose restriction (use for the adult-literacy program) remains and release is recognized as qualifying program expenses are incurred, not merely when the calendar year begins.
Why not D: This reflects an incorrect cash-tracing view. Release depends on satisfaction of donor restrictions (incurrence of qualifying expenses), not on spending particular segregated dollars. Paying from general operating cash does not prevent release when the restriction is met.
Question 4
Hint
Separate the question of when an unconditional contribution is recognized from the question of whether donor restrictions affect its net asset classification.
Answer B. The gift is unconditional, so the university recognizes contribution revenue when received in Year 1. However, the donor's instruction that the funds be used for scholarships during Year 2 imposes donor restrictions (both a time restriction and a purpose restriction), so the contribution is classified as net assets with donor restrictions in Year 1.
Why not A: This confuses timing of recognition with classification. Receipt determines recognition for unconditional gifts, but donor-imposed stipulations still require classification as with donor restrictions.
Why not C: This mixes up donor restrictions with board designations. Board designations are internal and do not create donor-restricted net assets; classification here is governed by the donor's external stipulation.
Why not D: This confuses recognition with satisfaction of a restriction. Because the gift is unconditional, revenue is recognized when received in Year 1; the restriction is satisfied when the scholarships are awarded in Year 2.
Question 5
Hint
Focus on whether the donor's restriction is actually satisfied in the same reporting period the gift is received.
Answer D. Under GAAP an NFP may elect to report donor-restricted contributions as without donor restrictions if the donor-imposed restriction is satisfied in the same reporting period the gift is received. In option C the purpose restriction (legal aid services) is fully met in Year 1, so the contribution may be classified as without donor restrictions in Year 1 under that policy.
Why not A: This is tempting because scholarships fund program activity, but the donor's restriction isn't satisfied until the scholarship is awarded in Year 2. Because the restriction is not met in Year 1, the same-period release does not apply for Year 1.
Why not B: Candidates may recall that long-lived-asset restrictions can be released when an asset is placed in service, but here the equipment is not purchased (or placed in service) until Year 2. The donor restriction remains unmet in Year 1, so it cannot be reported as without donor restrictions in Year 1.
Why not C: This distractor sounds useful because the income is available for operations, but the donor requires the principal to be maintained permanently. That permanent restriction on the gift itself is not satisfied in Year 1, so it remains donor-restricted.
Question 6
Hint
Separate the timing of revenue recognition from the donor's restriction on when the funds may be used.
Answer B. An unconditional pledge (promise to give) is recognized as contribution revenue when the promise is made, assuming collectibility is probable. The donor's instruction that the funds be used for the 20X6 youth program imposes a time restriction, so the amount is reported as with donor restrictions in 20X5. This is not deferred (exchange) revenue, classification within net assets, not recognition timing, reflects the donor restriction.
Why not A: Tempting because the funds cannot be used until 20X6, but 'deferred revenue' applies to exchange transactions. For an unconditional pledge, GAAP requires recognizing contribution revenue when the promise is made and reporting it as with donor restrictions until the restriction is satisfied.
Why not C: It may seem reasonable since the funds will pay program expenses, but the donor specifically limited timing to 20X6. That donor-imposed time restriction means the support must be classified as with donor restrictions until the restriction lapses.
Why not D: This reflects a cash-basis mistake. GAAP for nongovernmental NFPs recognizes an unconditional promise to give when made (not when cash is received); the entity records a receivable and contribution revenue in 20X5.
Common questions
When is a donor matching requirement a condition, and when is revenue recognized?
A match requirement with a barrier and a donor right of return/release makes the promise conditional. Recognize contribution revenue when the match is met, not when the pledge is signed or cash is received.
For a gift restricted to a program in a future year, when are donor restrictions released?
If only time is restricted, release when the stipulated time arrives. If purpose is also restricted, release as eligible program costs are incurred in the allowed period.
How are gifts restricted to acquire equipment reported and when are they released?
Recognize the gift as with donor restrictions. Using the placed-in-service approach, release when the asset is placed in service. If the restriction is met in the same period and the NFP elected the same-period policy, report as without donor restrictions in that period.
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