Conditional vs Restricted Contributions in NFP Accounting: What Is the Difference?
Conditional and restricted answer different questions. Keeping those questions separate removes a lot of nonprofit accounting confusion.
First question: is the contribution conditional?
A condition generally involves a barrier that must be overcome and a right of return or release from the obligation if the condition is not met. Conceptually, ask whether the organization has earned recognition under the arrangement yet.
Second question: is there a donor restriction?
A donor restriction addresses how or when recognized resources may be used. The contribution may already be recognized while still carrying a donor restriction.
Condition example
A donor promises money only if the organization completes a specified qualifying milestone and can reclaim the funds if the milestone is not met. Think condition first.
Restriction example
A donor gives money today but requires it to be used for a scholarship program. That can be a donor restriction even though the contribution has already been recognized.
Board designation is different
If the organization's own board earmarks unrestricted resources for a purpose, that is not the same as a donor-imposed restriction because the restriction did not come from the donor.
Use the two-question method
Question 1: Is recognition conditional?
Question 2: If recognized, is the resource donor-restricted?
Do not answer question two before question one.
The takeaway
Conditions affect whether recognition has occurred. Restrictions affect how recognized resources may be used.
Related Summit guides
FAQ
Can a contribution be unconditional but restricted?
Yes.
Is board-designated money donor-restricted?
No. A board designation is internally imposed rather than donor imposed.
Should I memorize NFP rules or practice scenarios?
Know the rules, then use scenarios because wording drives classification.