The "first dollar rule" for the Financial Accounting Standards Board (FASB) refers to the first dollar release method, an accounting principle mandated by FASB for not-for-profit organizations. This method dictates how organizations recognize the satisfaction of donor-imposed restrictions on contributions.
Under the first dollar release method, a restriction on donor-restricted funds is considered satisfied or "released" when an organization incurs an expense for a purpose for which those restricted resources are available. This holds true even if the organization uses its general, unrestricted funds to cover that expense. Essentially, if an expense is eligible to be covered by restricted funds, the restriction is deemed fulfilled up to the amount of the expense incurred, regardless of the actual cash source used.
Key Aspects of the First Dollar Release Method
This method simplifies the process of recognizing the release of restrictions and ensures consistent reporting across not-for-profit entities.
| Aspect | Description |
|---|---|
| Official Term | First Dollar Release Method |
| Mandating Authority | Financial Accounting Standards Board (FASB) |
| Applicability | Primarily applies to not-for-profit organizations, governing how they account for donor-restricted contributions. |
| Trigger for Release | A donor restriction is deemed released when the organization incurs an expense for a purpose for which restricted resources are available, even if unrestricted resources are used for that purpose. This means the mere eligibility of the expense to be covered by restricted funds triggers the release. |
| Accounting Impact | When a restriction is released, the corresponding amount is reclassified from "net assets with donor restrictions" to "net assets without donor restrictions" on the organization's Statement of Activities. This increases the amount of unrestricted net assets and decreases the restricted amount. |
| Rationale | This approach presumes that an organization fulfills its responsibility for donor-restricted funds as soon as an eligible expenditure is made, regardless of the specific cash flow, simplifying tracking and reporting. |
Practical Example
Consider a scenario involving a charitable organization:
- Initial Contribution: A donor contributes \$50,000 to a university, specifically earmarked for scholarships for STEM students. This \$50,000 is initially recorded as Net Assets with Donor Restrictions.
- Expense Incurred: Later in the year, the university awards \$30,000 in scholarships to eligible STEM students.
- Application of First Dollar Release:
- Even if the university uses its general operating cash (unrestricted funds) to pay for these \$30,000 in scholarships, under the first dollar release method, \$30,000 of the original donor restriction is considered fulfilled.
- The university would then reclassify \$30,000 from "net assets with donor restrictions" to "net assets without donor restrictions" on its financial statements.
- The remaining \$20,000 of the original donation would continue to be classified as "net assets with donor restrictions" until further eligible scholarship expenses are incurred.
This method provides clarity in financial reporting by recognizing the economic impact of fulfilling donor stipulations, regardless of the immediate source of funding for the related expenditure. It reflects the satisfaction of the donor's intent as soon as the specified purpose is achieved.
For more information on accounting standards set by FASB, visit the official FASB website: FASB.org
