Deferred or Temporarily Restricted Revenue: How to Differentiate Between the Two

The key to identifying the difference between deferred revenue and temporarily restricted revenue is to understand the distinction between restricted contributions and exchange transactions.

A contribution received by a not-for-profit organization is defined as a voluntary unconditional promise to give and should be recognized at time of receipt and classified as unrestricted, temporarily restricted, or permanently restricted depending upon the donor-imposed restrictions on the contribution. If a donor imposes time and purpose restrictions on a contribution, those contributions would be classified as temporarily restricted until the time and/or purpose restrictions are satisfied by the recipient not-for-profit organization. The unconditional promise to give aspect of a contribution distinguishes it from an exchange transaction, and therefore the contribution cannot be recognized as deferred revenue.

If a not-for-profit organization receives funds in advance for an exchange transaction, they should record the funds as deferred revenue until the exchange transaction takes place. The FASB glossary defines exchange transactions as reciprocal transfers between entities that result in an entity obtaining assets/services in exchange for either other assets/services or liabilities of approximately equal value.  An exchange transaction occurs when the recipient receives a substantial benefit from the goods or services provided; examples of such transactions include membership benefits, educational services, and medical services.  The timing of an exchange transaction is important when determining if the transaction should recognized as revenue or deferred revenue.

A not-for-profit organization should give careful, consistent consideration to determine whether funds received are a contribution or exchange transaction as it is an important step in differentiating between recording deferred revenue or temporarily restricted revenue.