Free CPA Exam Deep Dive: Donations, Pledges, Contributions and Net Assets

Ask anyone who’s taken the CPA Exam which topics they had the most trouble with on the FAR section and there’s a good chance you’ll hear “not-for-profit accounting”. Even if you don’t plan to work for or in the nonprofit field, you still have to master this complicated topic.

That’s why we’ve dedicated this past month to helping you better understand how to deal with donations, pledges, contributions and net assets in NFP accounting. First, it was the overview video lecture on the topic. Today, it’s the Deep Dive lecture.

Enjoy this Deep Dive Lecture on NFP Accounting

This 13-minute video lecture features the knowledgeable Prof. Don Deis of Texas A&M University-Corpus Christi.

Check it out:

And just like last time, we’re including part (but not all) of the study text that accompanies the full UWorld CPA lesson on NFP accounting and Donations, Pledge, Contributions & Net Assets. Sign up for a free trial if you want to try out a complete lesson, including examples, practice questions, slides, and more.

Part Two of the Accompanying Study Text

Pledges

A. Promises to contribute (“pledges”) may also be recognized as contributions as long as they are unconditional. Conditional promises to give are promises that depend on a specific event occurring in the future. They cannot be recognized as contributions until the uncertain future event has occurred. Conditional promises to give are recognized when the conditions are substantially met or when the likelihood that the conditions will not be met is remote. An allowance for uncollectible pledges should be recorded in a manner similar to a for-profit organization’s accounting for accounts receivable.

B. Unconditional pledges  —  Are recognized as contribution revenue net of the estimated uncollectible pledges (allowance for uncollectible pledges).

Pledges Made Over Multiple Fiscal Periods

When revenue is to be received over multiple fiscal periods, as happens when contributions are pledged over several years (e.g., a pledge $10,000 per year for four years), special recognition rules apply:

A. Recognize revenue at the net present value of the contribution;

B. The portion of the pledge that is to be received in subsequent fiscal periods is considered “temporarily restricted” (time restricted – see below); the portion that is to be received in the current period is recognized as “unrestricted,” assuming that no other restrictions, such as a purpose restriction, are specified;

C. The net present value of the pledge is recalculated at the end of the period (or whenever the financial statements are prepared) and increases in net present value are booked as contribution revenue, not interest;

D. When the future payments are received the assets are reclassified to unrestricted net assets, assuming that there are no other restrictions on how the money may be spent, but revenue is not recognized. (It was recognized when the pledge was made and as the interest element was realized.)

Donated Services

A. FASB allows NPF organizations to recognize the value of services that are donated to the organization, but only if certain conditions are met. Donated services are recognized if either:

1. Non-financial assets are enhanced OR

2. services requiring a) special skills are provided b) by persons possessing those skills and the services would c) normally have been purchased by the organization (e.g., CPA who donates audit services).

B. The entry to record the donated service recognizes the fair market value of the service as a credit to contribution revenue and as a debit to either an asset (if non-financial assets are enhanced) or as an expense (if services are provided) account.

Donated Fixed Assets and Donated Collections

A. Donated fixed assets are recorded at FMV at date of donation. These assets are generally subject to depreciation.

B. Classification of revenue from the donation  — Fixed assets are normally considered to be unrestricted so contribution revenue related to the donation is usually recognized as Unrestricted. If, however, there are restrictions on how the asset must be used or on how proceeds from the sale of the asset may be expended, it should be classified as Temporarily Restricted or even Permanently Restricted.

C. Not-for-profit organizations have the option of not recognizing donated works or art, historical artifacts, rare books, and other similar donated collections as revenues or gains and assets if all of the following conditions are met (ASC 958-360-20):

1. Held for public exhibition, education or research in furtherance of public sector rather than financial gain’

2. Protected, kept unencumbered, care for, and preserved,

3. Subject to an organizational policy that requires the proceeds from sales of collection items to be used to acquire other items for collections.

What Else Would You Like to See?

We’re always interested to know which topics you need help with or the kinds of insight and advice you find most useful. Want advice on how to ask for a raise? Need help with a different NFP accounting topic? Something else?

Tell us in the comments below and we’ll do our best to make it happen.

And don’t forget to sign up for our weekly quiz emails to the right.