The basic premise of recognizing contributions revenue by not-for-profit organizations is simple. That is to say, contributions revenue is recognized immediately when unconditionally promised or received. This makes sense because contributions are gifts. Since there is no earnings process attached to a gift, immediate recognition of contributions revenue is logical.
This sounds easy enough, but it becomes tricky when there are potential conditions placed on the contribution. In other words, if something has to happen before a not-for-profit truly has a right to the contribution, revenue is not recognized until the condition is satisfied. Given the wide variety of donor arrangements, determining whether a contribution agreement contains a condition often involves professional judgment.
So, what makes a contribution conditional? To be conditional, a contribution arrangement must contain the following two elements:
- A barrier that must be overcome before the not-for-profit is entitled to the contribution, and
- Failure to satisfy the barrier gives the donor a right of return to its funds or a right of release from its commitment.
An agreement does not need to have the specific terms “right of return” or “right of release” to incorporate these concepts. There just needs to be the ability to draw a reasonable conclusion that such a right has been incorporated into the agreement. If there is true ambiguity about the donor’s intent, organizations are supposed to presume there is a right of return/release contemplated within the arrangement.
Stipulations that are not tied to the purpose of the award, such as routine administrative tasks, basic reporting requirements, or typical “good behavior” clauses or trivial items, are not considered to be barriers.
When analyzing contribution agreements, it is important to remember that a donor restriction is not the same as a condition. A restriction controls how or when an organization can use funds. A condition states at what point an organization actually has a right to the funds.
The following chart shows how the presence of conditions and donor restrictions impacts the timing of revenue recognition for contributions.
| Conditional | Donor Restrictions | Timing of Revenue Recognition |
|---|---|---|
| No | No | Immediate recognition of revenue without donor restrictions |
| No | Yes | Immediate recognition of revenue with donor restrictions |
| Yes | No | Revenue is recognized as revenue without donor restrictions only after the condition is satisfied |
| Yes | Yes | Revenue is recognized as revenue with donor restrictions only after the condition is satisfied |
When determining whether there are indications of a condition within a contribution arrangement, one of the key considerations is the level of discretion the recipient organization has on how to use the funds. The more an arrangement specifies what kinds of costs can be incurred and how the activity is to be conducted, the more likely it is to be a conditional contribution. This is a primary reason why many government awards are considered to be conditional contributions. In most instances, the organization only has a right to the government award to the extent it incurs specific, allowable costs permitted under the government’s criteria.
Reviewing some examples will help illustrate these concepts.
Example 1
The UFO Finders Organization (UFO) receives a $1,000,000 award from the Alien Watchers of the World (AWW) on Oct. 31, 2025. UFO’s purpose is to seek out and make contact with aliens. UFO has a calendar fiscal year-end. The agreement is structured as a contribution from AWW to UFO. Significant terms of the agreement are:
- UFO must remain in compliance with all applicable laws and regulations over the term of the award.
- UFO must maintain its 501(c)(3) status with the Internal Revenue Service
- UFO must provide AWW quarterly reports on what the funds have been used for and progress on its efforts to make contact with aliens.
- AWW will pay UFO $200,000 per year for five years starting on Oct. 31, 2025
- The agreement is silent on whether AWW has a right of release from the agreement or whether unused funds are to be returned to AWW.
Analysis of Example 1
- Agreement is not conditional. The “good behavior” clauses and reporting requirements are administrative in nature and do not create a barrier to UFO’s right to the funds.
- Agreement is not purpose-restricted. It appears that the agreement supports UFO’s general operating purpose.
- Future amounts due from AWW would be considered time-restricted.
- Journal entry on Oct. 31, 2025 would be:
| Account | Debit | Credit |
|---|---|---|
| Cash | $200,000 | |
| Promises to give | $750,000 | |
| Contributions revenue – without donor restrictions | $200,000 | |
| Contributions revenue – with donor restrictions | $750,000* | |
| *The revenue recognized related to the promises to give is presented net of present value discount of $75,000 | ||
Example 2
The UFO Finders Organization (UFO) receives a $1,000,000 award from the Alien Watchers of the World (AWW) on Oct. 31, 2025. UFO’s purpose is to seek out and make contact with aliens. UFO has a calendar fiscal year-end. The agreement is structured as a contribution from AWW to UFO. Significant terms of the agreement are:
- UFO must remain in compliance with all applicable laws and regulations over the term of the award.
- UFO must maintain its 501(c)(3) status with the Internal Revenue Service
- UFO must provide AWW quarterly reports on what the funds have been used for and progress on its efforts to make contact with aliens.
- AWW will pay UFO $200,000 per year for five years starting on Oct. 31, 2025
- The agreement specifically states that UFO is to return any unspent funds to AWW, and AWW will be released from future obligations if the program is not found to be viable.
Analysis of Example 2
- Agreement is not conditional. The “good behavior” clauses and reporting requirements are administrative in nature and do not create a barrier to UFO’s right to the funds.
- Agreement is not purpose-restricted. It appears that the agreement supports UFO’s general operating purpose.
- Future amounts due from AWW would be considered time-restricted.
- Specific right of return/release from obligation does not in itself create a condition.
- Journal entry on Oct. 31, 2025, would be:
| Account | Debit | Credit |
|---|---|---|
| Cash | $200,000 | |
| Promises to give | $750,000 | |
| Contributions revenue – without donor restrictions | $200,000 | |
| Contributions revenue – with donor restrictions | $750,000* | |
| *The revenue recognized related to the promises to give is presented net of present value discount of $75,000 | ||
Example 3
The UFO Finders Organization (UFO) receives a $1,000,000 award from the Alien Watchers of the World (AWW) on Oct. 31, 2025. UFO’s purpose is to seek out and make contact with aliens. UFO has a calendar fiscal year-end. The agreement is structured as a contribution from AWW to UFO. Significant terms of the agreement are:
- UFO must remain in compliance with all applicable laws and regulations over the term of the award.
- UFO must maintain its 501(c)(3) status with the Internal Revenue Service
- UFO must spend the funds in accordance with a very detailed, specific, approved project budget. Expense line-item variances greater than 5% from the budget must be approved by AWW.
- AWW will pay UFO $200,000 per year for five years starting on Oct. 31, 2025
- The agreement is silent on whether AWW has a right of release from the agreement or whether unused funds are to be returned to AWW.
Analysis of Example 3
- Agreement appears conditional. The requirement to comply with a very specific budget and seek AWW’s approval for small variances limits UFO’s discretion on how the project is to be conducted.
- Agreement is not purpose-restricted. It appears that the agreement supports UFO’s general operating purpose.
- The lack of a specific right of return/release from obligation clause might provide a path for arguing that the agreement is not conditional. But, in cases of ambiguity, there is a presumption that the right does exist.
- Initial journal entries would be:
| Account | Debit | Credit |
|---|---|---|
| On date of donation | ||
| Cash | $200,000 | |
| Refundable advance (liability) | $200,000 | |
| Assume $40,000 of qualifying costs are incurred on November 15, 2025 | ||
| Refundable advance | $40,000 | |
| Contributions revenue – unrestricted | $40,000 |
Example 4
The UFO Finders Organization (UFO) receives a $1,000,000 award from the Alien Watchers of the World (AWW) on Oct. 31, 2025. UFO’s purpose is to seek out and make contact with aliens. UFO has a calendar fiscal year-end. The agreement is structured as a contribution from AWW to UFO. Significant terms of the agreement are:
- UFO must remain in compliance with all applicable laws and regulations over the term of the award.
- UFO must maintain its 501(c)(3) status with the Internal Revenue Service
- UFO must spend the funds in accordance with a very detailed, specific, approved project budget. Expense line-item variances greater than 5% from the budget must be approved by AWW.
- AWW will pay UFO $200,000 per year for five years starting on Oct. 31, 2025
- The agreement stipulates that all funds are to be returned to AWW on Dec. 31, 2029, if UFO is not able to document contact with aliens.
Analysis of Example 4
- Agreement is conditional. The requirement to make alien contact is clearly a barrier. In addition, the need to comply with a very specific budget and seek AWW’s approval for small variances limits UFO’s discretion on how the project is to be conducted.
- Agreement is not purpose-restricted. It appears that the agreement supports UFO’s general operating purpose.
- Initial journal entries would be:
| Account | Debit | Credit |
|---|---|---|
| On date of donation | ||
| Cash | $200,000 | |
| Refundable advance (liability) | $200,000 | |
| Assume on November 15, 2029, UFO makes contact with aliens. On this date UFO has incurred a total of $825,000 of qualifying project costs. The project is concluded on November 15, 2029 and unused funds returned to AWW. | ||
| Refundable advance | $1,000,000 | |
| Contributions revenue – unrestricted | $825,000 | |
| Cash | $175,000 | |
As shown above, determining whether a contribution arrangement is conditional can be a challenge. If you are uncertain about the treatment of an agreement, please let us know. Our not-for-profit specialists have deep experience analyzing contribution agreements and are always happy to help not-for-profits arrive at an appropriate conclusion as to when contribution revenue should be recognized.
Have questions about conditional contributions? Connect with a CBIZ not-for-profit professional to review your agreements and confirm the right revenue treatment.
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