How to approach it
- Classify each receipt: unrestricted, externally restricted for future expenses, restricted for capital assets, or endowment.
- Apply the deferral method rule for that class, then say where it appears (revenue, deferred contributions, or directly in net assets).
- For restricted capital contributions, explain the subsequent release in line with depreciation.
- Give a reason for every treatment; 'discuss' means a conclusion plus the rule that drives it.
Key rules to apply
- Unrestricted contributions: revenue when received or receivable.
- Restricted contributions for future-period expenses: deferred and recognised as revenue when the related expenses are incurred.
- Restricted contributions for depreciable capital assets: deferred and recognised as revenue on the same basis as the asset's depreciation.
- Endowment contributions: recognised directly as increases in net assets, not revenue. Investment income the donor requires to be added to the endowment also goes directly to net assets.
- Contributed materials may be recognised at fair value when it can be reasonably estimated and the materials are used in normal operations and would otherwise have been bought.
- A contribution restricted to repaying debt follows what the debt financed: current expenses (revenue now), future expenses (deferred) or capital assets (deferred and amortised).
Common mistakes
Drawn from the examiners' comments for this sitting (summarised in our words) and from typical errors on this topic.
- Taking an endowment to income, or not splitting investment income between the endowment and operations (examiners' point).
- Deferring a capital contribution but never explaining its release to revenue.
- One-line answers with no reasoning.
Similar question with worked solution
Written by us with our own numbers; it tests the same skills as Q5 without copying it.
Original practice question
Deferral method in practice
A charitable hospital uses ASNPO and the deferral method. During 2025: (a) it received Rs 3m restricted to buying an ambulance, bought on 1 April 2025 and depreciated over 5 years; (b) it received a Rs 10m endowment, earned Rs 0.8m on it, and the donor requires 40% of earnings to be added to the endowment; (c) a supplier donated medicines worth Rs 0.5m that the hospital would otherwise have bought; (d) it received Rs 1.2m restricted to repaying a loan that financed X-ray equipment depreciated over 6 years.
Required: State the 2025 accounting for each item.
Worked solution
| Item | Treatment | 2025 effect |
|---|---|---|
| (a) Ambulance | Deferred capital contribution; released as depreciation is charged | Revenue 3 × 1/5 × 9/12 = Rs 0.45m; deferred balance Rs 2.55m |
| (b) Endowment | Principal direct to endowment net assets | Net assets +Rs 10m (no revenue) |
| (b) Income | 40% restricted to endowment, 60% unrestricted | Rs 0.32m direct to endowment; Rs 0.48m revenue |
| (c) Medicines | May be recognised at fair value (estimable, used in operations, would be bought) | Revenue and expense Rs 0.5m |
| (d) Loan repayment | Debt financed a capital asset, so treat like a capital contribution | Deferred; released over the X-ray equipment's depreciation pattern |
Answer: Only Rs 0.45m (ambulance), Rs 0.48m (investment income), Rs 0.5m (medicines, if recognised) and the year's release on item (d) reach revenue. The endowment and the restricted income go straight to net assets.