Accounting Question

Introduction to Governmental andNot-for-Profit Accounting, 7e
Chapter 12: Accounting For
Not-For-Profit Organizations
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Chapter 12 Topics
• Characteristics of Not-for-Profits
• Financial Reporting
• Contributions Other Than Services and
Collections
• Contributed Services
• Contributions to Collections
• Investments and Split Interest Agreements
• Other Accounting Matters
• Fund Accounting in Not-for-Profits
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What is a Not-For-Profit
Organization (NFPO)?
• Receives contributions without expectation
of return
• Operates for purposes other than profit
• No ownership interest to sell, etc.
• Four categories of NFPOs
Categories
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Not-For-Profit Organization (NFPO)
– Categories
– Voluntary health and welfare organizations
• Provide voluntary social services
• Primary resources from contributions from general
public
• Also receive governmental grants/contracts
• No charge or low charge for services
• Tax exempt
• American Cancer Society, Boy Scouts of America
– Health care organizations
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Not-For-Profit Organization (NFPO)
– Categories
– Colleges and universities
– Other
• Derive resources primarily from membership dues
and fees
• Labor unions, private foundations, political parties
• Social and country clubs
• Religious organizations, professional/research
organizations
• Private elementary, secondary schools
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What Makes Government
Organizations Different?
• Officers are popularly elected or
appointed/approved by other governments
• May have the power to:
– Tax
– Issue tax-exempt debt
• Can be dissolved (melt/ liquefy)
unilaterally by a government
– Assets assumed by government without
compensation
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Financial Reporting – Overview
• Set by FASB; full accrual basis of
accounting
• Reporting focuses on total entity, not funds
• Reporting by net asset classification
– Restrictions placed only by donors
• Statements: financial position, activities,
cash flow
– VHWOs must also prepare statement of
functional expenses
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Financial Reporting –
Classifying Net Assets
• Net assets, inflows/outflows: reported as
– Unrestricted, temporarily restricted, or
permanently restricted
– Temporarily/permanently restricted only if
donor imposed
– Unrestricted may have non-donor imposed
restrictions
• Because of contracts, suppliers, trustee
designations
• Non-donor restrictions must be disclosed
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Financial Reporting – Statement of
Financial Position: Outline
Assets (in order of liquidity)
Total assets
Liabilities and net assets:
Liabilities (in order of liquidation)
Total liabilities
Net assets:
Unrestricted
Temporarily restricted
Permanently restricted
Total net assets
Total liabilities and net assets
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XXX
XXX
XXX
XXX
XXX
XXX
XXX
XXX
XXX
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Financial Reporting – Statement of
Activities: Outline*
Unrestricted Temporarily Permanently Total
Restricted
Restricted
Revenues, gains, and other support:
(Details by source)
XXX
Net assets released from restrictions XXX
Total
XXX
Expenses and losses:
Program (details by program)
XXX
Management and general
XXX
Fund raising
XXX
Total expenses
XXX
Losses
XXX
Total expenses and losses
XXX
Change in net assets
XXX
Net assets at beginning of year
XXX
Net assets at end of year
XXX
XXX
(XXX)
XXX
XXX
XXX
XXX
XXX
(all expenses must
be unrestricted)
XXX
XXX
XXX
XXX
XXX
XXX
XXX
XXX
XXX
XXX
XXX
XXX
XXX
XXX
XXX
XXX
XXX
XXX
XXX
* Multi-column format; single-column, pancake also acceptable.
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Donor Restrictions
• Temporary – may be removed by:
– Passage of time-imposed restrictions
– Accomplishment of purpose-imposed restrictions
• Permanent:
– Restricted in perpetuity (time without end/
permanency), like endowments (award/ grant / gift)
– But use of income from donation may be
unrestricted or temporarily restricted
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Financial Reporting – Statement of
Activities: Inflow Terms
• Revenues: inflows from selling
goods/services
– Organization’s ongoing major operations
• Gains: inflows from peripheral (bordering/
outlying ), incidental activities
• Donations may be revenues or gains
– Based on frequency, whether sought-out
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Financial Reporting – Statement of
Activities: Outflow Terms
• Outflow categories
– Program expenses—reported by functional
classification (by program or service)
• On the statement or in notes
• Program—an activity directly related to
organization’s purpose(s)
– Management and general expense (or
administrative)
– Fund-raising expense
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Financial Reporting – Statement
of Cash Flows
• Reports all cash receipts and payments
• Organized in three categories or activities:
– Operating
– Investing
– Financing
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Financial Reporting – Statement
of Functional Expenses
• Required, 4th statement for all VHWOs
• Additional perspective on the way
resources spent
• For each program or function
– Identify expenses by natural/object
classification—e.g. salaries, supplies, travel
• ONPOs may present statement voluntarily
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Contributions Other Than Services
and Collections – General Rule
• Reported in the period received
• Assets, decreases of liabilities, or
expenses
– Example: a contribution of free electricity
• Recorded as a revenue and expense
• Use fair market value of contribution
• Reported as restricted or unrestricted
support
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Contributions Other Than Services
and Collections – Example Entries
• Unrestricted
Cash
Investments
Inventory-medical supplies
Unrestricted support-contributions
Unrestricted support-supplies
25,000
4,000
10,000
29,000
10,000
• Restricted (time or purpose restriction)
Cash
Temporarily restricted support-contributions
Permanently restricted support-contributions
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37,000
12,000
25,000
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Contributions Other Than Services and
Collections – Reclassification Example
Expenses–special research programs
Cash
5,000
Temporarily restricted asset reclassifications
Out – satisfaction of purpose (or time)
restrictions
5,000
Unrestricted asset reclassifications
in – satisfaction of purpose (or time) restrictions
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5,000
5,000
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Contributions – Unconditional Promises to
Give (Pledges)
• Recognize net realizable value as
receivable and revenues/gains when
promised (#1 next page)
• Temporarily restricted if intended for future
periods
– Use present value (discount) for future
receipts (#2 next page)
• Must disclose allowance for uncollectible
pledges, when expected
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Contributions – Unconditional Promises to
Give (Pledges)
• Sample entries
(1) Contributions receivable
Allowance for uncollectible contributions
Unrestricted support-contributions
50,000
(2) Contributions receivable
10,000
Temporarily restricted support-contributions
Discount on contributions receivable
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5,000
45,000
9,700
300
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Contributions Other Than Services and
Collections – Conditional Promises to Give
• Future and uncertain, includes bequests
• Record any receipts as refundable
advance (deferred revenue)
• Conditions ≠ restrictions
• Recognize revenue only when conditions
substantially met
– When met, the contribution becomes
unconditional
• Must disclose amounts and description
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Contributed Services
• Record fair value of contributed services
if:
– Services create or enhance nonfinancial
assets OR
– Services are needed and require specialized
skills and performed by someone with those
skills
• Disclose nature, extent of services
received
Expenses-counseling services
Unrestricted support-services
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3,000
3,000
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Contributions to Collections
• Report fair value of donated art, artifacts,
rare books, etc. as assets/revenues/gains
• Option to NOT report as assets, revenues,
IF:
– Held for public
– Protected, preserved, cared for, etc.
– Sale proceeds used for other collection items
• Consistency: must capitalize all or none
• Disclosure requirements for notes and
statements
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Other Accounting Matters – Investments:
Valuation, Income, Gains, Losses
• Report investments at fair value:
– Equity securities at closing sales price
– Debt securities at market price
• Unrealized gains/losses (resulting from fair
value reporting) on statement of activities
– May separate realized from unrealized
gains/losses
– Requires second valuation/adjustment
account
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Other Accounting Matters – Investments:
Valuation, Gains, Losses
• Using a single adjustment account
Year one, year-end valuation adjustment:
Investments
Net unrealized and realized investment
gains and losses
Year two, at time of sale:
Cash
Net unrealized and realized investment
gains and losses
Investments
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300
300
4,400
100
4,300
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Other Accounting Matters – Investments:
Valuation, Gains, Losses
• Using 2 adjustment accounts
Year one, year-end valuation adjustment:
Investment valuation account
300
Change in net unrealized investment gains and losses
300
Year two, at time of sale:
Change in unrealized investment gains and losses
Investment valuation account
300
Cash
Realized gains and losses on investments
Investments
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300
4,400
400
4,000
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Other Accounting Matters –
Investments: Interest & Dividends
• Recognize as income is earned
• Income generally increases unrestricted
net assets
• If income must be used to support
particular program
– Report as increase in temporarily restricted
net assets
– Reclassify from temporarily restricted to
unrestricted when purpose restriction met
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Other Accounting Matters –
Split Interest Agreements
• Donor enters into trust agreement with
NFPO
– Revocable or irrevocable
• NFPO may have lead or remainder
interest
– Lead interest receives distributions during
agreement term
– Remainder interest receives all or part of
assets at end of agreement term
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Other Accounting Matters –
Split Interest Agreements
• Irrevocable split interest agreement—
cannot be canceled
– When executed, recognize contribution
revenue and related assets equal to fair value
of beneficial interest
– Recognize changes in fair value of assets
• Revocable agreement—can be canceled
– No recognition
– Simply an intention to give
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Other Accounting Matters
• Exchanges – same as for-profit entities
– Accrual, recognize bad debt expense
• Subscription, membership income – same
– Recognize revenue in period service provided
– Initiation fees when due, usually unrestricted
• Depreciation expense – same
– Don’t necessarily depreciate capitalized
collections
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Other Accounting Matters –
Fund-Raising Expenses
• Allocate between fund-raising, program
expenses if
– Purpose, audience, and content rule met
– Otherwise, all fund-raising
• Purpose/content: asks audience to take
specific action that will help accomplish
mission
• Audience: not based on contribution
likelihood
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Other Accounting Matters –
Board Designations
• Trustees of NFPO designate portion of
unrestricted net assets
• Does not create restriction
• Report as sub-category of unrestricted of
net assets
– On face of financial statements or in notes
Unrestricted net assets
Unrestricted net assets—
designated for plant expansion
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100,000
100,000
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Fund Accounting in NFPOs
• Internally, NFPOs may use fund
accounting; not permitted by GAAP
• Fund types:
– Unrestricted current fund (aka general fund or
unrestricted operating fund
– Restricted current funds
– Endowed (gifted/ awarded/ donated) funds
– Plant funds
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Appendix –
Colleges and Universities
• Present same financials required for other
NFPOs
• Generally use pancake format to
distinguish between changes in
unrestricted from temporarily restricted
and permanently restricted net assets
• Report operating and nonperating
revenue
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