If you are a professional fundraiser or volunteer for an organization, this article is a must-read to help you better understand the difference between deferred and temporarily restricted revenue.
Many of our not-for-profit clients frequently ask me to explain when funding is considered deferred revenue and when is it considered temporarily restricted revenue. This area can be confusing, as the reporting and accounting implications can vary greatly.
Let’s look at a simple explanation of each:
Deferred revenue involves a “this-for-that” exchange between two parties. These transactions involve reciprocal transfers. Deferred revenue hould be recorded as a liability when funds are received, but the goods or services have not been provided by the organization to the recipient party.When the goods or services are provided, the deferred revenue is reversed, and revenue is recorded. Examples of deferred revenue include:
- The sale of tickets in advance of an event
- Program tuition paid now for classes in the future
- Fees received in advance of services being performed
- Dues paid for a subsequent month or year
Temporarily Restricted Revenue
Temporarily restricted revenue is one sided. These transactions involve nonreciprocal transfers. When a donor gives a gift to a not-for-profit organization and and stipulates how or when the nonprofit must use the funds, the donor receives nothing from the nonprofit for the contribution and the contribution is considered temporarily restricted revenue until the donor imposed stipulation is met by the organization.
Temporarily restricted revenue, just like all contributed revenue, should be recognized immediately as revenue when received or pledged. Once the not-for-profit uses the funds for the donor’s intended purpose or the restricted time period has expired, the restriction is released and the revenue is reclassified to unrestricted revenue.
Regardless of the size of the organization or the amount raised, pledged or received, understanding how to treat revenue and the difference between deferred and temporarily restricted revenue will help every organization properly account for its funding.
Our not-for-profit team specializes in helping organizations with their formation, operations and reporting. We are ready to start the conversation. For more information about deferred or restricted revenue, or if you have questions about additional transactions affecting not-for-profit organizations, please contact me at email@example.com or any of our professionals at 216-831-0733.
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