Deferred Revenue Versus Revenue with Donor Restrictions

By Gabbie Chausse

When it comes to identifying the difference between categorizing funds as “deferred revenue” or “revenue with donor restrictions,” the key is to understand the distinction between restricted contributions and exchange transactions.

A contribution received by a not-for-profit organization is defined as a voluntary unconditional promise to give and should be recognized at time of receipt. Contribution revenue, once unconditional, is then classified as either “with donor restrictions” or “without donor restrictions,” depending upon the donor-imposed restrictions on the contribution. If a donor or state law imposes purpose and time restrictions on the use of the contribution, that contribution would be classified as with donor restrictions until said restrictions expire. Expiration occurs when a purpose restriction is satisfied or a stipulated time restriction ends. The contributions are then reclassified as without donor restrictions. The unconditional-promise-to-give aspect of a contribution, where only one side benefits economically from a transaction, distinguishes it from an exchange transaction. Therefore, the contribution cannot be recognized as a liability (deferred revenue), unless the contribution is conditional.

An exchange transaction is defined by the FASB glossary as reciprocal transfers between entities that result in an entity obtaining assets/services in exchange for either other assets/services or liabilities of approximately equal value. An exchange transaction occurs when the recipient receives a substantial benefit from the goods or services provided. Examples of such transactions include membership benefits, educational services and medical services. If a not-for-profit organization receives funds in advance for an exchange transaction, it should record the funds as deferred revenue until the exchange transaction takes place. The timing of an exchange transaction is important when determining if the transaction should be recognized as revenue or deferred revenue.

A not-for-profit organization should give careful, consistent consideration to determine whether funds received are a contribution or an exchange transaction. It is an important step in differentiating between recording the funds as deferred revenue or revenue with donor restrictions.