Question

7. A generous benefactor pledges $1 million to The Smith Foundation, a NPO that promotes the arts. The gift is to be used to provide scholarships for talented musicians at a music camp operated by the Foundation. The gift was given in August 2006 to support the Summer 2007 music program. The Foundation Director argues that the gift is a conditional restricted gift and therefore cannot be recognized as revenue in 2006. The accountant argues that the gift is an unconditional restricted gift and must be recognized in the current year. What is the basis for the Director’s argument? What is the basis for the accountant’s argument? In your answer provide an explanation of the terms conditional, unconditional, restricted and unrestricted.

Answer 1

Answer:

What is the basis for the Director’s argument?

• The director believes that this is a temporarily restricted contribution and therefore it should be classified as restricted and recognized in 2007 once it can be classified as unrestricted.

What is the basis for the accountant’s argument?

• Unconditional gifts or donations must be recognized when they are made, and since the money was received in 2006, it should be recognized then.

Explanation:

I agree with the Director since this is a restricted donation, i.e. the donor established strict conditions for its use both in time and purpose. For it to be unconditional, the donor should have stated that the money could be used in the best way that the NPO considers and at any time. But instead it established that it must be used to provide scholarships to musicians during 2007.

Both a condition and a restriction exits:

• the restriction refers to the time: 2007
• the condition refers to its use: scholarships for musicians