CHAPTER 9 Nongovernment Not-for-Profit Organizations

1. CHAPTER 9 Nongovernment Not-for-Profit Organizations

2. Learning Objectives • Be able to: • Identify a nongovernmental not-for-profit organizations • Understand the GAAP pertaining to nongovernment not-for-profit organizations including FASB Standards 116, 117, 124, and 136

3. Learning Objectives [cont’d] • Explain the accounting and reporting criteria for nongovernment not-for-profit organizations • Apply nongovernment not-for-profit accounting and reporting requirements to record transactions • Distinguish reporting for health care organizations from other not-for-profit organizations

4. Not-for-Profit Organization Characteristics • Revenues received from providers who do not expect economic benefits in return • Operating purposes of the organization are other than to make a profit • Defined ownership interests are absent

5. In contrast, Government Characteristics • Government must have one of the following • Popular election of officers or appointment by officers by state or local government • Potential for dissolution by government with assets reverting to government • Power to enact and enforce a tax levy • Nongovernment organizations are all those except governmental organizations

6. Types of Not-for-profit (NFP) Organizations • Four major types include • Voluntary health and welfare organizations • Colleges and universities • Hospitals and other health care entities • Other not-for-profit organizations such as social organizations, associations, foundations, political parties, museums, public broadcasting stations, civic organizations, etc.

7. Not-for-profit (NFP) GAAP • 1979 - FASB assumed authority for setting accounting and reporting standards for nonbusiness (NFP) organizations. • 1984 - GASB was given authority to set accounting and reporting standards for state and local governments including governmental not-for-profits

8. GAAP Hierarchy Table - Nongovernment

9. GAAP Hierarchy Table -Government

10. FASB NFP Guidance • SFAS 93 Recognition of Depreciation by Not-for-Profit Organizations • SFAS 116 Accounting for Contributions Received and Contributions Made • SFAS 117 Financial Statements for Not-for-Profit Organizations • SFAS 124 Accounting for Certain Investments Held by Not-for-Profit Organizations • SFAS 136 Transfer of Assets to a Not-for-Profit Organization or Charitable Trust that Raises or Hold Contributions for Others

11. SFAS No. 93 Depreciation • Not-for-Profit must • Record depreciation expense for the period • Report balances of major classes of depreciable assets at balance sheet date • Report accumulated depreciation of major classes of depreciable assets at balance sheet date • Report method used in computing depreciation for major classes of depreciable assets

12. SFAS No. 116 Contributions • Contributions, gifts, and unconditional pledges are recognized as revenues at fair value in the period received • Contributions made are recognized as expenses at their fair values in the period made • Promises to give conditional on a future event, are recognized when the condition is satisfied

13. SFAS No. 116 Contributions [cont’d] • Distinction is made between unrestricted and donor stipulated restrictions on contributions (temporarily restricted or permanently restricted) • Contributions of services recognition criteria • Create or enhance nonfinancial assets • Require specialized skills • Provided by individuals who possess specialized skills • Would typically need to be purchased if donated

14. SFAS No. 117 Financial Reporting • Financial Statements • Statement of Financial Position • Statement of Activities • Statement of Cash Flows • VHWO report additional expense schedule with both functional and natural classification

15. SFAS No. 117 [cont’d] • Classification of organization’s net assets based on presence or absence of donor-imposed restrictions. • Statement of Cash Flows [SFAS 95] amended to extend provisions to NFPs and financing activities include new endowment gifts

16. SFAS No. 124 Investments • Equity and debt securities reported at fair value rather than cost or market • Losses on restricted investments absorbed by temporarily restricted net assets if available. If not available, unrestricted net assets report the loss in the statement of activities

17. SFAS No. 136 Resources Held by Others • Resources received reported as revenue if recipient organization can determine resource usage I.e., variance power • Without variance power, resources are held in trust for others accounted for as an asset and a liability – no revenue is recognized

18. NFP GAAP Guidance in Progress • NFP combinations • Purchase methodology would apply • Fair value is basis of the recognition • Presume that if consideration is greater than fair value, goodwill is recognized • Presume that if consideration is less than fair value, a contribution is recognized

19. Net Assets Classes • Permanently restricted assets-principal must be held in perpetuity and only the income may be used • Temporarily Restricted-limited by donor imposed stipulations such as time or purpose. When restriction are met, the resources are reclassed to unrestricted net assets • Unrestricted net assets-are all assets not permanently or temporarily restricted by donor imposed stipulations.

20. Transactions Types • Exchange Transactions - reciprocal transfers in which each party received and sacrifices something of approximately equal value • Nonexchange Transactions - an unconditional transfer of cash or other assets to an entity or a settlement or cancellation of liabilities in a voluntary non-reciprocal transfer by another acting as other than an owner.

21. Restricted versus Unrestricted • Only donors have the right to restrict not-for-profit resources • External and internal parties, other than a donor, can designate, reserve, or allocate resources • Restrictions are not conditions as restrictions may be satisfied by NFP organization actions.

22. Conditional versus Unconditional Contributions • Conditional contributions depend on a specified future and uncertain event to bind the promissor. • Unconditional contributions are nonexchange transactions that is recognized upon receipt • May involve a cash payment • May be a promise to give

23. Promises to Give • Promise substantiated by sufficient evidence in the form of verifiable documentation are recognized net of any estimated uncollectable portion • Also referred to as pledges • May be • Restricted – permanently or temporarily restricted net asset revenue • Unrestricted – unrestricted net asset revenue • If restriction met in same year as resources are received, may be originally recognized as unrestricted

24. Noncash Contributions • Contributions (gifts in kind) are recognized at fair value when received • Contributions are reported as program expense or cost when items are consumed

25. Collections or Historic Treasures • Works of art or historical treasures need not be recognized as revenues and capitalized if donated items are added to collections held for public exhibition and education, cared for and are not used for financial gain • Disclosures required for collection items not capitalized.

26. Investments • Equity and debt securities with readily determinable fair values must be reported at fair value. • Both realized and unrealized investment income included in the current period revenues.

27. Required Financial Statements • Statement of Financial Position • Statement of Activity • Statement of Cash Flows • Voluntary health and welfare organizations required to include a matrix statement that compares expenses by natural class to functions programs

28. Statement of Financial Position • Single column – highly aggregated • Presents totals by type of asset, liability and nets asset in liquidity order • Net Asset Section categorized into three classes of net assets • Permanently restricted • Temporarily restricted • Unrestricted

29. Statement of Activities • Focuses on the organization as a whole and reports • Revenue by type • Expenses by natural class or by function/program • Gains • Losses • Change in net assets by net asset type

30. Statement of Cash Flows • Classifies cash receipts and cash payments during the period resulting from • Operating activities using either the direct or indirect method of presentation • Investing activities • Financing activities