It’s the end of the year and the auditors are in the conference room auditing away on your year-end financials. You feel confident because you know you accrued for all open invoices in accounts payable. You even setup a new account for deferred revenue for the grant money you received that is to be used for your next fiscal year. All of a sudden, the Senior Auditor knocks on your door and says “Can we discuss this new deferred income account?” You’re happy to explain but then you’re not so happy to hear him say what you’ve done isn’t right.
The first principle we all learned is the matching principle; revenues and their related expenses should be recognized in the same period. The rules surrounding deferred revenue are different for not-for-profit organizations. The guidance states any money received and/or granted during the year should be recognized as revenue in that same year. Per ASC 958-605-25, contributions received shall be recognized as revenues or gains in the period received and as assets, decreases of liabilities, or expenses depending on the form of the benefits received. If there is a restriction on when the money can be used (time restriction) or how the money can be used (specific purpose), the funds should be reported as temporarily restricted revenue until the restriction is met.Read More