Chapter 11

1. Chapter 11 Not-For-Profit Accounting

2. NPO Organizations Defined Not-for-profit organizations normally do not have a transferable ownership interest. © 2009 Clarence Byrd Inc.

3. NPO Organizations Defined Not-for-profit organizations are operated exclusively for social, educational, professional, religious, health, charitable, or other not-for-profit purposes. © 2009 Clarence Byrd Inc.

4. NPO Organizations Defined The resource providers, be they members or contributors, do not stand to benefit because of their status as resource providers. © 2009 Clarence Byrd Inc.

5. NPO GAAP General Approach Some Handbook Sections are applicable (e.g., Section 1506 which deals with accounting changes) Some Sections are not (e.g., Section 3465 on income taxes) © 2009 Clarence Byrd Inc.

6. NPO Handbook Sections Section 4400 – Financial Statement Presentation Section 4410 – Revenue Recognition Section 4420 – Contributions Receivable Section 4430 – Capital Assets Section 4440 – Collections Held Section 4450 – Controlled and Related Entities Section 4460 – Related Party Transactions Section 4470 – Allocated Expenses © 2009 Clarence Byrd Inc.

7. Fund Accounting Defined Paragraph 4400.02(c)Fund accounting comprises the collective accounting procedures resulting in a self-balancing set of accounts for each fund established by legal, contractual or voluntary actions of an organization. Elements of a fund can include assets, liabilities, net assets, revenues and expenses (and gains and losses, where appropriate). Fund accounting involves an accounting segregation, although not necessarily a physical segregation, of resources. © 2009 Clarence Byrd Inc.

8. Problems With Fund Accounting Fund DefinitionIndividual organizations can define the funds that they will use in a totally arbitrary fashion. This means that similar organizations can be made to appear very different through the use of a different group of funds. Further, the use of arbitrarily defined funds can be used to obscure the overall performance of the organization. © 2009 Clarence Byrd Inc.

9. Problems With Fund Accounting Interfund TransfersUntil Section 4400 was added to the CICA Handbook, there were no rules governing the reporting of interfund transfers. Such transfers could be made at the discretion of the organization and could be reported in a manner that suggested more activity than the organization was actually experiencing. © 2009 Clarence Byrd Inc.

10. CICA Handbook SolutionsFund Definitions Paragraph 4400.06An organization that uses fund accounting in its financial statements should provide a brief description of the purpose of each fund reported. (April, 1997) © 2009 Clarence Byrd Inc.

11. CICA Handbook SolutionsFund Definitions Paragraph 4400.12Interfund transfers should be presented in the statement of changes in net assets. (April, 1997) Paragraph 4400.13The amount and purpose of interfund transfers during the reporting period should be disclosed. (April, 1997) Paragraph 4400.14The amounts, terms and conditions of interfund loans outstanding at the reporting date should be disclosed. (April, 1997) © 2009 Clarence Byrd Inc.

12. Recognition Alternatives Paragraph 4410.10An organization should recognize contributions in accordance with either: (a) the deferral method; or (b) the restricted fund method. (April, 1997) © 2009 Clarence Byrd Inc.

13. The Deferral Method Paragraph 4410.02(d) Under the deferral method of accounting for contributions, restricted contributions related to expenses of future periods are deferred and recognized as revenue in the period in which the related expenses are incurred. Endowment contributions are reported as direct increases in net assets. All other contributions are reported as revenue of the current period. Organizations that use fund accounting in their financial statements without following the restricted fund method would account for contributions under the deferral method. © 2009 Clarence Byrd Inc.

14. The Restricted Fund Method Paragraph 4410.02(e) The restricted fund method of accounting for contributions is a specialized type of fund accounting which involves the reporting of details of financial statement elements by fund in such a way that the organization reports total general funds, one or more restricted funds, and an endowment fund, if applicable. Reporting of financial statement elements segregated on a basis other than that of use restrictions (e.g., by program or geographic location) does not constitute the restricted fund method. © 2009 Clarence Byrd Inc.

15. Contributions A contribution is a non-reciprocal transfer to a not-for-profit organization of cash or other assets or a non-reciprocal settlement or cancellation of its liabilities. Government funding provided to a not-for-profit organization is considered to be a contribution. © 2009 Clarence Byrd Inc.

16. Types Of Contributions A restricted contribution is a contribution subject to externally imposed stipulations that specify the purpose for which the contributed asset is to be used. A contribution restricted for the purchase of a capital asset or a contribution of the capital asset itself is a type of restricted contribution. © 2009 Clarence Byrd Inc.

17. Types Of Contributions An endowment contribution is a type of restricted contribution subject to externally imposed stipulations specifying that the resources contributed be maintained permanently, although the constituent assets may change from time to time. © 2009 Clarence Byrd Inc.

18. Types Of Contributions An unrestricted contribution is a contribution that is neither a restricted contribution nor an endowment contribution. © 2009 Clarence Byrd Inc.

19. Application Of The Deferral Method Unrestricted Contributions These contributions can be recognized in the period in which they are received or become receivable. © 2009 Clarence Byrd Inc.

20. Application Of The Deferral Method Restricted Contributions The basic idea here is that the recognition of restricted contributions must be deferred until the restriction is fulfilled. The actual implementation of this will depend on the type of restriction that is involved: © 2009 Clarence Byrd Inc.

21. Application of the Deferral Method – Restricted Contributions Expenses Of Current Period If the restriction is for current period expenses, the contributions should be recognized in the current period. Expenses Of Future Periods In this case, the contributions should be recognized in the same period or periods in which the related expenses are made. © 2009 Clarence Byrd Inc.

22. Purchase Of Capital Assets If the restriction is based on acquiring capital assets that will be amortized, the contributions should be recognized on the same basis that the amortization expense is recorded. Alternatively, if the contributions are restricted to the acquisition of non-amortizable assets, they should be recorded as direct increases in net assets, without being disclosed as a revenue in the Statement Of Operations. Application of the Deferral Method – Restricted Contributions © 2009 Clarence Byrd Inc.

23. Application of the Deferral Method – Restricted Contributions Repayment Of Debt The recognition pattern here will depend on the purpose for which the debt was incurred: If the debt was for expenses of one or more periods, the repayment contributions should be recognized when the related expenses are recognized. If the debt was for the acquisition of non-amortizable capital assets, the repayment contributions should be added directly to net assets without being recorded as revenues in the Statement Of Operations. If the debt was for any other purpose, the repayment contributions should be recognized as revenue in the current period. © 2009 Clarence Byrd Inc.

24. Application of the Deferral Method Endowment ContributionsThese contributions should be recorded as direct increases in net assets during the current period. They should not be included in the revenues disclosed in the Statement Of Operations. © 2009 Clarence Byrd Inc.

25. Application of the Deferral Method Investment Income As was the case with contributions restricted to the repayment of debt, the treatment of investment income amounts is dependent on their nature: If the investment income is not subject to external restrictions, it should be recognized as a revenue during the current period. …... …... © 2009 Clarence Byrd Inc.

26. Application of the Deferral Method Investment Income As was the case with contributions restricted to the repayment of debt, the treatment of investment income amounts is dependent on their nature: …... If the investment income must be added to the principal amount of resources held for endowment, the net investment income should be recorded as a direct increase or decrease in net assets, not as a revenue in the Statement Of Operations. …... © 2009 Clarence Byrd Inc.

27. Application of the Deferral Method Investment Income As was the case with contributions restricted to the repayment of debt, the treatment of investment income amounts is dependent on their nature: …... …... If the investment income is subject to other types of restrictions, it should be allocated to income on the same basis as was used for restricted contributions (e.g., if it is restricted to purchases of amortizable capital assets, it should be recognized as a revenue on the same basis as the amortization expense is recorded). © 2009 Clarence Byrd Inc.

28. Application of the Restricted Fund Method Unrestricted ContributionsThese contributions can be recognized in the period in which they are received or become receivable. They should be disclosed in the general fund. © 2009 Clarence Byrd Inc.

29. Application of the Restricted Fund Method Restricted Contributions The treatment here will depend on whether a restricted fund is being used for the particular type of restriction that is involved. For example, if an organization receives contributions that are restricted to providing food for the homeless, the treatment of these contributions will depend on whether a separate restricted fund has been established for this type of activity. © 2009 Clarence Byrd Inc.

30. Application of the Restricted Fund Method – Restricted Contributions Contributions With A Corresponding Restricted FundIn this case, the restricted contributions should be recognized as a revenue of the related fund in the period in which they are received or become receivable. © 2009 Clarence Byrd Inc.

31. Application of the Restricted Fund Method – Restricted Contributions Contributions With No Corresponding Restricted FundThese contributions should be recognized on the same basis as they would be under the deferral method (e.g., if they are restricted to purchases of amortizable capital assets, they should be recognized as a revenue on the same basis as the amortization expense is recorded). © 2009 Clarence Byrd Inc.

32. Application of the Restricted Fund Method Endowment Contributions These contributions should be recognized as a revenue of the endowment fund in the period in which they are received or become receivable. Note the difference here from the treatment of these amounts under the deferral method. Under the deferral method, endowment contributions are not recorded as revenues, but as direct increases in the endowment fund assets. © 2009 Clarence Byrd Inc.

33. Application of the Restricted Fund Method Investment Income As was the case under the deferral method, the treatment of investment income amounts is dependent on their nature: If the investment income is not subject to external restrictions, it should be recognized as a revenue during the current period. It would be included in the general fund. ….. ….. © 2009 Clarence Byrd Inc.

34. Application of the Restricted Fund Method Investment Income As was the case under the deferral method, the treatment of investment income amounts is dependent on their nature: ….. If the investment income must be added to the principal amount of resources held for endowment, the net investment income should be recorded as a revenue in the Statement Of Operations of the endowment fund in the period in which it becomes received or receivable. ….. © 2009 Clarence Byrd Inc.

35. Application of the Restricted Fund Method Investment Income As was the case under the deferral method, the treatment of investment income amounts is dependent on their nature: ….. ….. If the investment income is subject to a restriction for which there is a corresponding restricted fund, it should be included as a revenue in the Statement Of Operations of that fund in the period in which it becomes received or receivable. If no corresponding restricted fund exists, it should be recognized on the same basis as under the deferral method. © 2009 Clarence Byrd Inc.

36. Section 4420 – Contributions Receivable Paragraph 4420.03A contribution receivable should be recognized as an asset when it meets the following criteria: the amount to be received can be reasonably estimated; and ultimate collection is reasonably assured. © 2009 Clarence Byrd Inc.

37. Section 4420 – Contributions Receivable - Disclosure Paragraph 4420.08When a not-for-profit organization has recognized outstanding pledges and bequests in its financial statements, the following should be disclosed: (a) the amount recognized as assets at the reporting date; and (b) the amount recognized as revenue in the period. © 2009 Clarence Byrd Inc.

38. Non-Monetary Contributions Criteria For Recognition Their value must be subject to reasonable estimation. While this is not explicitly stated, it is likely that many items would not be recognized because the cost of estimation would likely exceed any benefits to be achieved through this process. © 2009 Clarence Byrd Inc.

39. Non-Monetary Contributions Criteria For Recognition Contributed goods and services would only be recognized if they would have otherwise been purchased. This is likely to eliminate the recognition of a significant portion of the voluntary services received. © 2009 Clarence Byrd Inc.

40. Disclosure - Contributions Paragraph 4410.21 An organization should disclose: (a) the policy followed in accounting for endowment contributions; and (b) the policies followed in accounting for restricted contributions. Paragraph 4410.22 An organization should disclose its contributions by major source. © 2009 Clarence Byrd Inc.

41. Disclosure - Contributions Paragraph 4410.23 An organization should disclose the policy followed in accounting for contributed materials and services. Paragraph 4410.24 An organization should disclose the nature and amount of contributed materials and services recognized in the financial statements. © 2009 Clarence Byrd Inc.

42. Revenue Disclosure – Deferral Method Paragraph 4410.52 Deferred contributions balances should be presented in the statement of financial position outside net assets. Paragraph 4410.53 An organization should disclose the nature and amount of changes in deferred contributions balances for the period. © 2009 Clarence Byrd Inc.

43. Revenue Disclosure – Deferral Method Paragraph 4410.55 An organization should disclose the following related to net investment income earned on resources held for endowment: (a) the amounts recognized in the statement of operations in the period; (b) the amounts deferred in the period; (c) the amounts recognized as direct increases or decreases in net assets in the period; and (d) the total earned in the period. © 2009 Clarence Byrd Inc.

44. Revenue Disclosure – Restricted Fund Method Paragraph 4410.73 When restricted contributions are recognized in the general fund in accordance with paragraph 4410.65, any deferred contributions balances should be presented in the statement of financial position outside net assets. Paragraph 4410.74 When restricted contributions are recognized in the general fund in accordance with paragraph 4410.65, the nature and amount of changes in deferred contributions balances for the period should be disclosed. © 2009 Clarence Byrd Inc.

45. Revenue Disclosure – Restricted Fund Method Paragraph 4410.76 An organization should disclose the following related to net investment income earned on resources held for endowment: (a) the amounts recognized in the general fund in the period; (b) the amounts recognized in each restricted fund in the period; (c) the amounts recognized in the endowment fund in the period; (d) any amounts deferred in the period; and (e) the total earned in the period. © 2009 Clarence Byrd Inc.

46. Section 4400 – Financial Statement Presentation Required Statements Financial Position Operations Changes In Net Assets Cash flows © 2009 Clarence Byrd Inc.

47. Financial Position – General Recommendations Paragraph 4400.18 For each financial statement item, the statement of financial position should present a total that includes all funds reported. © 2009 Clarence Byrd Inc.

48. Financial Position – General Recommendations Paragraph 4400.19 The statement of financial position should present the following: (a) deleted (b) net assets subject to restrictions requiring that they be maintained permanently as endowments; (c) other restricted net assets; (d) unrestricted net assets; and (e) total net assets. © 2009 Clarence Byrd Inc.

49. Financial Position – External Restrictions Paragraph 4400.26 The following should be disclosed: (a) the amounts of deferred contributions attributable to each major category of external restrictions with a description of the restrictions; and (b) the amount of net assets subject to external restrictions requiring that they be maintained permanently as endowments. (c) the amount of net assets subject to internal restrictions and, separately, external restrictions other that those in (b) above. © 2009 Clarence Byrd Inc.

50. Financial Position – External Restrictions Paragraph 4400.28 The following should be disclosed: (a) the amount of net assets (fund balances) subject to external restrictions requiring that they be maintained permanently as endowments; (b) the amounts of net assets (fund balances) attributable to each major category of other external restrictions with a description of the restrictions; and (c) the amounts of deferred contributions attributable to each major category of external restrictions with a description of the restrictions. © 2009 Clarence Byrd Inc.