Restricted Revenue May 26 | Bristol Organization

By: Larry Bomback

Nonprofits should recognize contributed revenue the same way they treat earned income — as deferred until it’s truly earned.

Several years ago, the Financial Accounting Standards Board (FASB) made a significant change to nonprofit financial reporting.

The traditional three-column presentation — unrestricted, temporarily restricted, and permanently restricted — was consolidated into just two: Without donor restrictions and with donor restrictions.

At the time, I applauded the move. As someone who values simplicity, it felt like a long-overdue step forward. It also aligned with evolving legal frameworks like the Uniform Prudent Management of Institutional Funds Act (UPMIFA), which acknowledged that the notion of a permanently restricted endowment corpus was increasingly theoretical.

The line between “temporarily” and “permanently” restricted had already blurred, and FASB wisely chose clarity over tradition.

In hindsight, however, I wish we had gone even further.

A Missed Opportunity

The nonprofit sector missed an opportunity to better align with for-profit financial practices — particularly in how we recognize revenue.

In the corporate world, future revenue — whether received in cash or as a receivable — is classified as “deferred revenue,” meaning it’s treated as a liability until the corresponding goods or services are delivered. Only then is the revenue considered “earned” and recognized on the income statement.

By contrast, nonprofits must recognize restricted contributions — whether for a specific purpose, a specific time, or both — immediately in the statement of activities (our sector’s version of the profit-and-loss statement), even if the funds will not be spent for years.

To the average reader (including many who work in the sector), this nuance is invisible.

Most people look at the total revenue line, where restricted gifts are lumped in alongside available operating income. And who can blame them, especially when the only clue that restricted funds aren’t immediately usable is the confusing “net assets released from restriction” line showing up as a negative number?

This practice creates a distorted picture of financial health. It can suggest that a nonprofit is operating in surplus when, in reality, it simply received a multi-year grant that won’t support current-year operations.

It exacerbates confusion around liquidity, misleads board members and donors, and adds unnecessary complexity for financial statement readers.

A Better Path Forward

There’s a better way — one that nonprofits already use selectively.

Most organizations already apply deferred revenue principles to earned income: Tuition paid in advance, performance-based contracts, multi-month program fees. These are recorded as liabilities and recognized as income over time. Why not extend the same logic to contributed revenue?

Imagine a system with just a single revenue column. Contributions would initially be categorized on the balance sheet in deferred revenue accounts such as:

Deferred Revenue: Earned
Deferred Revenue: Contributed for Purpose Only
Deferred Revenue: Contributed for Purpose and Time
Deferred Revenue: Contributed for Time Only

Contributed revenue would appear on the statement of activities only when realized — either through delivering services or satisfying donor-imposed conditions.

Meanwhile, the balance sheet would clearly show deferred amounts, and net assets would still reflect cumulative contributions, transparently categorized by use restrictions.

How This Would Work in Practice

Here’s a simple example to illustrate what I’m describing:

An organization operating on a calendar fiscal year receives a $100,000 program-restricted grant in January. The program begins in May and runs through December.

Current Practice:

In January:
- Debit (increase) cash (asset) $100,000
- Credit (increase) contributed revenue with donor restrictions $100,000

Then, beginning in May as expenses are incurred:
Reclassify amounts from “with donor restrictions” to “without donor restrictions” using the revenue account called “net assets released from restriction.”

Here’s the simplified year-end presentation of this “make-work”:

Proposed Alternative:

January:
- Debit cash $100,000
- Credit Deferred Revenue: Contributed for Purpose (liability) $100,000
As expenses are incurred:
- Credit contributed revenue
- Debit deferred revenue

This is the transaction that moves the funds from the balance sheet to the income statement.

There is no need for dual columns in the statement of activities because the balance sheet clearly tracks restrictions and releases through deferred revenue categories.

Impact on Net Assets Presentation

Under this model, net assets become even easier to understand:

Suppose in January, after that grant is received, this organization has:

Total assets of $1,000,000
Total liabilities of $500,000 (of which $100,000 is deferred contributed revenue)
Net assets (assets – liabilities) of $500,000, split simply as:
- Without restrictions = $400,000
- With restrictions = $100,000

If, in another hypothetical example, the deferred contributed revenue were to exceed total net assets, it would clearly signal that the organization is spending or borrowing against restricted funds to cover operating needs — a vital governance insight that current reporting often obscures.

A Simpler, Stronger System

Adopting a deferred-revenue-driven model would make nonprofit financials far more intuitive. It would bring our sector into closer alignment with standard accounting logic and make financial reports easier for trustees, funders, and cross-sector professionals to interpret.

It would also alleviate burdens on smaller organizations. Many nonprofits rely on QuickBooks, which is not built for complex nonprofit GAAP accounting. Staff and auditors often resort to creating multi-column Excel spreadsheets just to satisfy presentation requirements. A simpler framework would reduce manual work and improve reporting accuracy.

This is the direction we should head. It’s a relatively small change, but one that could dramatically improve how we communicate financial health — and how we plan for the future.