Module 4 External (GAAP) Financial Reporting

1. Module 4 External (GAAP) Financial Reporting Convery 2013

2. Learning Objectives • Describe alternative forms of financial reporting • Identify financial statements required by GAAP • Describe the differences between the cash and accrual bases of accounting • Define exchange and nonexchange transactions • Identify the sources of GAAP for NPOs • FASB • AICPA • Identify other resources to assist in staying current with GAAP Convery 2013

3. Alternative Forms of Financial Reporting • Audited financial statements that comply with GAAP • IRS annual reporting Form 990 • Periodic Treasurer’s Reports to the Board • on a cash or accrual basis • comparisons of budget to actual • Annual Reports that include outcomes measures as well as some financial data Convery 2013

4. GAAP Financial Statements(SFAS No. 117) • Statement of Financial Position • Statement of Activities • Statement of Cash Flows • Statement of Functional Expenses - for VHWOs • With Notes to the Financial Statements Convery 2013

5. Statement of Financial Position • Reports on an aggregate view of the entity as a whole, rather than on disaggregated funds, as of a point in time • Net assets (assets less liabilities) must be classified into classes: • unrestricted • temporarily restricted • permanently restricted • Flexibility is allowed in displaying information as long as net assets are classified; such as showing disaggregated fund-based data Convery 2013

6. Statement of Activities • Reports on changes in all classes of net assets for a period of time (revenues, gains, support, expenses, and losses) • Net assets released from restrictions decrease temporarily restricted net assets and increase unrestricted net assets, as restrictions are met • All expenses decrease unrestricted net assets and are reported by functional categories (i.e., program vs. support) • SFAS No. 117 allows considerable flexibility in presenting information; either a single column or three columns for each class of net asset Convery 2013

7. Statement of Cash Flows • Cash flows from Operations • includes unrestricted gifts • Cash flows from Investing • includes temporarily and permanently restricted net assets given for long-term purposes (and related income) • Cash flows from Financing • includes issuance and repayment of long-term debt • Noncash Investing and Financing Activities • Includes gifts-in-kind contributions Convery 2013

8. Natural Expenses Functional Expenses Program Support Statement of Functional Expenses • Voluntary health and welfare organizations (VHWOs) must present this statement showing both functional expenses and natural (object or line item) expenses Salaries Adoption Mgt and General Supplies Counseling Fund-raising Depreciation Education Convery 2013

9. Reporting to the Board:Cash or Accrual? • Argument for Cash: • It (most often) matches the budget • Board members understand it • Inadequate cash flows put organizations at high risk • Arguments for Accrual: • Monthly reports should lead into the audited annual financial statement so there are no surprises caused by auditor’s accrual adjustments, such as depreciation • All information is captured (i.e., what is earned and incurred) Convery 2013

10. Revenues-Exchange Transactions • Revenues are increases in unrestricted net assets that arise from bilateral exchange transactions in which the other party receives direct tangible benefits commensurate with the resources provided. • Examples include: • membership dues • program service fees • sales of supplies and services • investment income • some grants Convery 2013

11. Support increases: • Unrestricted net assets when no donor restrictions exist or the restrictions have expired • Temporarily restricted net assets when the donor imposes restrictions as to purpose (how the asset is used) or time (when the asset is used) • Permanently restricted net assets when the donor stipulates that the assets must be held in perpetuity, but the organization can spend the income Convery 2013

12. Promises to Give • Unconditional promises depend only on the passage of time or demand by the promisee for performance. Record these as support in the period made • Conditional promises depend on the occurrence of a specified future and uncertain event to bind the promissor, such as obtaining matching gifts by the recipient. Do not record these as support until the conditions are substantially met Convery 2013

13. AICPA guidance • Audit and Accounting Guide Not-for-Profit Organizations, updated each May • Not-for-Profit Organizations – Annual Audit Risk Alert • See: www.aicpa.org Convery 2013

14. Example: GAAP for a Health Care Organizations For-Profit: Proprietary Not-for-Profit: Voluntary Governmental: Public FASB Guidance GASB Guidance AICPA Audit and Accounting Guide Health Care Organizations Convery 2013

15. GAAP from FASB (note: see Codification) • SFAS No. 93 — recognition of depreciation • SFAS No. 116 — accounting for contributions • SFAS No. 117 — financial statement display • SFAS No. 124 —accounting for investments • SFAS No. 136—agent, trustee, intermediaries • SFAS No. 133 derivatives and hedging activities, June 2000, see related 137, 138. • SFAS No. 132 - pension disclosures • SFAS No. 121 —impairment of long-lived assets • SFAS No. 157 Fair Value Measurements • SFAS No. 158 Employers’ Disclosures about Pensions and Other Postretirement Benefits-an amendment of FASB Statements No. 87, 88, and 106 • SFAS No. 159 The Fair Value Option for Financial Assets and Financial Liabilities • SFAS No. 164 Mergers and Acquisitions for Not-for-Profit Organizations Convery 2013

16. GAAP from AICPA and GASB (see Codification) • AICPA Statement of Position 98-2 • GASB Statement No. 39 Determining Whether Certain Organizations are Component Units, June 2002. Convery 2013

17. GAAP that Differs between GASB and FASB • reporting entity • contributions • financial statement display • cash flows • deposits and investments (i.e., see GASB Statement No. 31, SFAS No. 115, and SFAS No. 124) • operating leases • compensated absences • debt refunding; risks and uncertainties • pensions; other post retirement benefits (OPEB) Convery 2013

18. AICPA SOP 98-2 Accounting for Costs of Activities of Not-for-Profit Organizations and State and Local Governmental Entities That Include Fund-Raising (Dec. 1998) • Revises SOP 87-2 on joint costs making it more difficult to allocate “educating the public” or “advocacy” costs to program expenses. • Provides that costs of all materials and activities that include a fund-raising appeal should be reported as fund-raising costs unless a bona fide program or management & general function has been conducted in conjunction with the appeal for funds. • Costs that are clearly identifiable should be charged to program, management and general, or fund-raising. The joint costs of a bona fide program or management and general function should be allocated between those cost objectives and fund-raising. • Criteria of (1) purpose, (2) audience (3) content must be met in order to conclude that a bona fide program or management & general function has been conducted in connection with fund-raising. • Goes beyond SOP 87-2 by covering total costs, not just joint costs, and applying to state and local governmental entities, as well as to NPOs. Convery 2013

19. Investments SFAS No. 124 Accounting for Certain Investments Held by Not-for-Profit Organizations • Mark equity and debt investments to market. • Report realized and unrealized gains and losses and investment income in the Statement of Activities • Report income and gains and losses as changes in unrestricted net assets, unless their use is restricted by the donor or legally restricted by state law • Similar to SFAS No. 115 for businesses and GASB Statement No. 31 for governments, but simpler Convery 2013

20. Financially Interrelated Entities NPOs have varied relationships with other NPOs, for-profit businesses, and governments characterized by: Ownership - financial equity interest in another organization Control - having the power to appoint the majority of Board members Economic interest - having the right to receive or use resources, receive income or services, or obligated to pay the debt of another organization. Convery 2013

21. Raising and Holding Contributions for Others as an Intermediary SFAS No. 136 • “Transfers of Assets to a Not-for-Profit Organization or Charitable Trust That Raises or Hold Contributions for Others” (June 1999) • An organization that receives financial assets from a donor and agrees to transfer them to a specified “unaffiliated” beneficiary should recognize the fair value of those assets as a liability, not revenue. • i.e., acting as an intermediary • e.g., most federal fund-raising foundations, such as United Ways and community foundations. • An organization that receives “variance power” to redirect the assets to another beneficiary, or if the recipient organization and the specified beneficiary are “financially interrelated” organizations recognizes the assets as contributions received. • i.e., acting as a donee and donor • e.g., captive fund-raisers, such as institutionally-related foundations Convery 2013

22. SFAS No. 136, cont’d. • If the designated beneficiary organization is “financially interrelated” to the recipient NPO, then it records an interest in net assets of the intermediary • If not financially related, then no accounting prior to the transfer. Convery 2013