How to Know When Revenue is Deferred or Temporarily Restricted– July 18, 2013

An audit finding that commonly plagues not-for-profit organizations is the proper recording of restricted revenue. There are two ways to record this type of revenue, either as deferred or temporarily restricted, but the decision can cause much confusion.

While there are many factors that go into determining which is the appropriate method, the most important factor is to determine the type of revenue source. Is there a transfer of economic benefit between the source of the revenue and the organization receiving the revenue, i.e., a two-sided benefit? Or does only one side benefit from the transaction?

If there is a reciprocal transfer of economic benefit between two parties, the revenue should be recorded as deferred. Deferred revenue can occur with the collection of dues, receipt of fees for services, the sale of ticket and the receipt of investment income. Many not-for-profit organizations also obtain revenue by selling items that were purchased, produced or donated for sale, such as the sale of advertising space, publications, used clothing or periodical subscriptions. These examples should also be recorded as deferred income.

Temporarily restricted assets, on the other hand, are generally donated contributions that have only a one-sided economic benefit and are restricted to a specific period of time or set of conditions. For example, when a not-for-profit receives a cash donation that can only be used for a certain program or property that can only be used for a specific purpose, the “revenue” is recorded in temporarily restricted net assets. A temporarily restricted contribution is generally recognized when it is received and is re-classified from temporarily restricted net assets to unrestricted net assets when the donor’s restriction is satisfied or the pre-determined time has elapsed.

Because identifying whether or not a transaction should be recorded as deferred or temporarily restricted revenue can be perplexing, each organization should evaluate its revenue sources on an individual basis to determine the appropriate revenue treatment. Then be consistent with the recording method from one fiscal year to the next.

Taking a little extra time to decipher the type of revenue source during the year could be worth the benefit of reporting one less audit finding to the board during the next audit cycle.

Contact a member of your service team for more information.

This communication is for information only, and any action should only be taken after a detailed review of the specific situation and appropriate consultation.

Notwithstanding that these materials do not constitute legal, accounting or other professional advice, as may be required by United States Treasury Regulations and IRS Circular 230, you should be advised that these materials are not intended or written to be used, and cannot be used by you or any other person, for the purpose of avoiding penalties that may be imposed under federal tax laws. No written statement contained in these materials may be used by any person to support the promotion or marketing of or to recommend any federal tax transaction(s) or matter(s) addressed in these materials, and any taxpayer should seek advice based on the taxpayer's particular circumstances from an independent tax advisor with respect to any such federal tax transaction matter.