Deep Dive into Conditional vs. Unconditional Contributions: Understanding Through Examples (FASB ASC 958-605)
In nonprofit financial management, accurately classifying contributions as conditional or unconditional is crucial for compliance with accounting standards and effective fund management. This classification impacts how funds are recognized and reported, which in turn influences funding strategies and operational planning.
Conditional Contributions
Conditional contributions are those that come with specific donor-imposed stipulations that must be met before the funds can be used. For a contribution to be considered conditional, two key elements must exist: a right of return or release, and a barrier that must be overcome to earn the right to the contribution.
Right of Return/Release: This means that the funds must be returned to the donor if the conditions are not met. For example, a grant agreement may state:
- “Funds must be returned if the project milestones are not achieved by the specified dates.”
- “Please note that a condition has been placed on a portion of this grant as stated in the Grant Agreement. Should the condition not be met, the granted funds will need to be returned to the foundation within 30 days.”
Barrier: This term refers to any measurable, performance-related barriers or stipulations that limit the recipient’s discretion in how an activity is conducted, making the receipt of the contribution contingent upon meeting specific criteria. For example, a grant might stipulate that a certain number of beneficiaries must be served or specific project outcomes achieved before the funds can be fully utilized. Additionally, a grant agreement might specify that the recipient follow defined protocols which dictate allowable versus unallowable activities, further restricting how the funds are applied in practice.
Identifying Barriers: Barriers can often be identified through specific performance targets or detailed project requirements set by the donor. Indicators of a barrier might include requirements to achieve certain quantitative targets, such as “deliver services to 500 beneficiaries within the year” or “complete construction of community housing by the specified deadline.”
Example of Apparent Barrier That Is Merely Administrative: While some requirements might appear to be barriers, they could simply be administrative. For example, the requirement to submit annual progress reports is often misconstrued as a barrier. However, unless these reports are tied to specific performance metrics that influence the continuation of funding, they are typically considered administrative tasks (routine tasks) and do not constitute a conditional barrier. This distinction is crucial for correct classification and accounting of the funds.
- Administrative Example Wording: “Annual progress reports must be submitted to document the project’s development stages. These reports should detail the activities undertaken during the period and provide a general update on project progress.”
Examples to Illustrate Conditional vs Unconditional Contributions
Example 1. Contribution from a Private Foundation:
- Scenario: A nonprofit receives $500,000 to provide career training to immigrants. The grant specifies that the nonprofit must train at least 8,000 immigrants within the fiscal year, with minimum quarterly targets.
- Conclusion: This contribution is conditional. The nonprofit must meet specific service levels (training 8,000 immigrants) as a condition to keep the funding.
Example 2. Contribution from a Private Foundation:
- Scenario: A community center receives $40,000 to support its swimming program. The grant includes recommendations for use (e.g., hiring instructors), but does not stipulate that meeting these recommendations is required for retaining the funds.
- Conclusion: This grant is unconditional. The nonprofit can use the funds for the swimming program without needing to meet specific outcomes to retain the money.
Example 3. Program specific funding from a Foundation:
- Scenario: NFP ABC receives a three-year funding for a college success program. The grant agreement includes:
- A right of return,
- A budget that consists of a few lines: salary compensation, rent and other costs
- A statement that approval must be obtained from the corporate foundation for any significant deviations in spending from the general budget
- A requirement that at the end of the grant period a report must be filed with the foundations that explains how the funds were spent.
- Conclusion: The grant is unconditional as the reporting requirement is administrative in nature and do not constitute barriers to entitlement. The general budget included in the grant proposal is not a barrier to entitlement because adherence to the general budget allows for broad discretion.
Example 4. Program specific funding from a Foundation:
- Scenario: NFP ABC receives a three-year funding for a college success program. The grant agreement includes:
- A right of return requiring that the assets be reimbursed to the foundation if funds are not spent for specified purpose
- First payment is made upon signing the grant agreement. Subsequent payments are contingent on an annual review and check-in with the foundation program officer
- Annual progress reports mist be submitted to the foundation
- Conclusion: The grant is unconditional as the annual progress reports are administrative in nature and bot part of the purpose of the grant. There are no measurable barriers associated with the annual review and check in that would create a condition. The 3-year time period creates a donor restriction, and it doesn’t create a barrier to entitlement.
More in This Series:
Part II: Tax and IRS Update | Fall 2024
Part III: Compliance and Legislation | Fall 2024
Part IV: Expert Insights | Fall 2024
