Understand Deferred Revenue and Contributions: a NFP Board Member’s How-to Guide
This article is part of a four-part series that defines key terms and important information for a board member to know and understand. The other three articles discuss understanding financial statements, receivables, and accounts payable and accrued liabilities.
Deferred revenue and deferred contributions are among the most difficult concepts to understand in financial statements. It’s important for board members to have a basic knowledge of them because these amounts often significantly impact results from operations.
Sometimes referred to as unearned revenue, deferred revenue generally represents cash received and deposited for goods and services not yet delivered. Membership fees are an example because they typically cover a twelve-month period but are reported as monthly income. The unearned portion is set up as deferred revenue in your financial statements.
In the absence of deferred revenue on financial statements, board members should ask for clarification. Has the organization recorded any revenue in this period that relates to a subsequent period?
Deferred contributions, and/or restricted contributions, are a challenging concept. Unlike a transaction where a customer or member receives goods or services in exchange for money, donors or government departments providing the contributions are not expecting anything in return.
Contributions can be received for specific programs or for specific capital asset purchases to be made.
Like deferred revenue, deferred contributions relating to programs, is to be provided after the period end. Deferred contributions relating to capital asset purchases can be either for assets purchased after the year-end date or the unamortized balance of the contribution.
This funding has restrictions from the donor or funder. The organization’s accounting system must have a means of matching the funding received and the expenditures incurred associated with that funding. If the funding exceeds the expenditure in the period, then the difference would be unearned contributions at the end of the period.
Similarly, if the grant is for the acquisition of a capital asset, then the balance sheet must show the grant as a deferred contribution, and be recognized as income on the same basis as the capitalized asset is expensed.
I know it’s complicated. But anyone that takes on the role of a board member has a responsibility to the organization and its stakeholders to ensure that procedures are in place that guarantee the accuracy of the financial data.
GGFL is well versed in the non-profit realm. We have a team dedicated to the sector and are happy to offer advice and guidance to board members and organizations. Visit ggfl.ca/non-profit-organizations/ to learn more.