By TJ Rigg, Senior Associate

All contributions to not-for-profit organizations are not created equal. Not-for-profit leaders need to understand how different types of donations can be utilized so their organization can effectively budget, plan, and align donor requests with mission-based and programmatic priorities. Knowing how different types of donations can – and can’t – be used provides important context for successful fundraising and meaningful interactions with donors, while avoiding possible challenges with fund allocation and donor relations.

Here is a breakdown of the three main types of contributions and what they mean for the not-for-profit organizations receiving them.

Unconditional Contributions: Unconditional contributions are the most straightforward method for a donor to give money to an organization. These donations are made to support an organization’s broad activities, with the freedom to use the money however they see fit.

Unconditional contributions are immediately recognized as revenue in an organization’s financial statements and are considered part of net assets without restrictions. Unconditional contributions are often used when donors want to give organizations the autonomy and trust to use funds to achieve their mission.

Unconditional Contributions with Donor Restrictions: Unconditional contributions with donor restrictions are when donors give money to an organization and specify how that money should be used. These requirements could include the timeframe in which the contribution must be used or what specific programs the gift should support.

These contributions are immediately recognized by the not-for-profit as revenue, but are listed as net assets with restrictions in the organization’s financial statements until the requirement for the gift has been met. When the restriction is met, the funds move to net assets without restrictions in the organization’s financial statements. If the restriction is not met, the funds transfer to the following fiscal year as net assets with restrictions. These donations do not have a right of return to the donor.

Conditional Contributions: Conditional contributions come with specific barriers or contingencies that must be met in order to secure the contribution. These differ from unconditional contributions with restrictions in that, if the conditions are not met, the donor has a right of return of the funds given.

Contributions with restrictions dictate how the funds should be used, whereas conditional contributions spell out benchmarks that must be met in order to receive and use the funds. Examples of conditional contribution conditions include: showing a certain percentage of organizational growth over time, meeting specific reporting requirements, or reaching a certain number of people per year.

The money given to an organization as a conditional contribution is not immediately recognized as revenue in financial statements. Instead, it is considered deferred revenue (a liability) in financial statements until the condition is met – at which point the money shifts to revenue. For example, if a donor makes a $20,000 conditional contribution and in the next year the organization meets the conditions for $5,000 of the gift, $5,000 is moved from deferred revenue to revenue. The remaining $15,000 balance either stays in deferred revenue or is returned to the donor if the conditions of the gift are not met and the right-of-return is exercised.

Donations of all kinds can be given as unconditional, unconditional with donor restrictions, or conditional, including cash, stocks, grants and securities, charitable trusts, and valuable assets. When receiving and managing donations, not-for-profit leaders should closely examine the kinds of contributions they are receiving, what conditions may exist, and how those conditions impact their financial management.

Dembo Jones works with not-for-profit organizations to consider how to manage contributions so they can be used to their best advantage while meeting all requirements. Get in touch today to learn how we can help.