One of the main revenue recognition complications for nonprofits is that contributions cannot always be tied to the year they are used to cover operations. A donor may promise to give $10,000 per year over five years and revenue recognition may be required in the first year.
So, in year one the Statement of Activities will appear to have a great year because the entire $50,000 pledge is reported ($10,000 x 5 years). But the next four years appear to be less healthy as the $10,000 contribution is received in cash but not reported as revenue, yet expenses are reported in the second through sixth years as the organization uses the money to pay those expenses in those particular years.
Now let's imagine a performing arts center launches a $25MM endowment campaign. It's absolutely critical they raise the endowment to secure future operations.
In the first year during the quiet phase of the campaign, the fundraising team approaches board members and wealthier community members that are very attached and committed to the center, and secure $10MM in pledges to be paid over the following five years. They wanted the campaign to have momentum before they unveiled the campaign to the community. The fundraising team was ready to announce to the public its' success and intent to raise the remaining $15MM.
Right about the time they were going to announce the public phase of the campaign, the local news agency released a front page article stating, "Center's Financial Statements Report a $10MM Profit". The article does not mention the increase is because of the pledged $10MM that was reported in revenues as required by generally accepted accounting principles.
Share your thoughts on this challenge. Some questions to consider are:
1. How do you think the donors and community responded to the article?
2. How should the center leadership respond?
3. How do you think the remaining phase of the campaign will play out?
4. What are your thoughts on the contribution recognition rules? Do you believe they are right or fair?
5. Have you worked for organizations that have struggled with this message that you can share?