Chapter

1. Chapter 13 Accounting for Not-for-Profit Organizations

2. Learning Objectives After studying Chapter 13, you should be able to: • Distinguish not-for-profit organizations (NFPs) from entities in the governmental and commercial sectors of the U.S. economy • Identify the authoritative standards-setting body for establishing GAAP for nongovernmental NFPs

3. Learning Objectives (Cont’d) • Explain financial reporting and accounting for NFPs: • Required financial statements • Classification of net assets • Accounting for revenues, gains, and support • Accounting for expenses • Accounting for assets

4. Learning Objectives (Cont’d) • Describe the accounting for NFP combinations and consolidations • Prepare financial statements in accordance with the generally accepted accounting principles governing NFP organizations • Describe optional fund accounting

5. Not-for-Profit Sector The not-for-profit sector of the U.S. economy is very diverse, consisting of many different kinds of organizations • The majority of NFPs are philanthropic and quite often rely on contributions and the services of volunteers • Some NFPs are designed to serve the interest of the organizations’ members • Most are not governments or governmental in nature • A minority of NFPs are owned or operated by governments

6. How Does a Nongovernmental NFP Differ from a Business Entity? • Contributions of resources from • providers who do not expect a • proportionate return (i.e., nonexchange • transactions) • Operating purposes other than to earn a profit for owners (i.e., no one expects a return on their investment) • Lack of defined ownership (i.e., lack of owner oversight)

7. How Does a Nongovernmental NFP Differ from a Governmental Entity? • It was not created by a government, but rather by individuals who are not placed in power through popular election or appointment by government officials • It does not have the power to levy taxes • It may not have the power to issue tax-exempt debt

8. GAAP for Nongovernmental NFPs • The FASB, not the GASB, sets accounting and financial reporting standards for nongovernmental not-for-profit organizations • Unless otherwise indicated, all FASB standards apply to NFP organizations, but the FASB Accounting StandardsCodification (ASC) in Section 958 apply specifically to NFPs

9. Financial Statements for NFPs • Statement of financial position (Ill. 13-2) • Statement of activities (Ill. 13-3) • Statement of cash flows (Ill. 13-4) • Statement of functional expenses for VHWOs (Ill. 13-5) • Notes to the financial statements

10. Statement of Financial Position • Can also be called a balance sheet • Net assets (the difference between assets and liabilities) must be classified into three classes: • Unrestricted • Temporarily restricted • Permanently restricted • Flexibility in displaying information, including fund-based data, is allowed as long as net assets are classified

11. Statement of Activities • Reports on changes in all classes of net assets for a period of time • Changes take the form of revenues, gains, 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

12. Statement of Activities (Cont’d) • FASB allows flexibility in presenting information; it can be presented as a single column or three separate columns, one for each class of net assets • Within net asset classes additional classifications can be used, such as operating and nonoperating, expendable and nonexpendable, earned and unearned, and recurring and nonrecurring • Expenses are reported on the face or in the notes by functional categories (i.e., program expenses vs. support expenses)

13. Statement of Cash Flows • NFP organizations follow the same standard as for-profit entities when preparing the statement of cash flows • Cash flows are reported as changes in operating, investing, and financing activities • The indirect method or direct method (with reconciliation) may be used for reporting cash flows from operating activities

14. Statement of Cash Flows (Cont’d) • Unrestricted contributions and gifts are reported as part of operating activities • Restricted contributions given for long-term purposes are included with financing activities along with the related income • Noncash gifts or in-kind contributions are disclosed as noncash investing and financing activities in a separate section

15. Natural Expenses FunctionalExpenses Program Support Statement of Functional Expenses VHWOs must present this statement showing both functional expenses and natural (object or line item) expenses (Ill. 13-5) Salaries Adoption Mgt and General Supplies Counseling Fund-raising Depreciation Education

16. Revenues • Traditionally, revenues have been defined as increases in unrestricted net assets that arise from 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

17. Support • Support is a category of revenue that arises from • receipt of resources in nonexchange transactions in • which the donor derives no tangible benefit from the • recipient agency • Contributions – support in the form of cash, other assets or services (or cancellation of liabilities) • Pledges – the promise of a contribution

18. 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 from the assets

19. Pledges or Promises to Give • Unconditional pledges depend only on the passage of time or demand by the promisee for performance. Record these as support in the period made • Conditional pledges 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

20. Recording Pledges • Unconditional pledges received in less than a year can be reported at net realizable value (at year end adjust for any estimated uncollectible amount) • Long-term unconditional pledges are generally recorded at fair value • Apply fair value criteria to determine the present fair value of future receipts • The difference between the pledge amount and the fair value amount is recorded as a discount that is amortized as the pledges are received

21. Recording Pledges (Cont’d) • Example: A charity receives pledges of $1,000 to be paid within the next year. It also receives pledges of $5,000 to be collected 2 and 3 years from now. It is estimated the fair value of the long-term pledges is $4,760. DebitCredit Contributions Receivable 6,000 Contributions—Temporarily Restricted 5,760 Discount on Contributions Receivable 240

22. Donated Materials • Donated materials (gifts-in-kind) should be recorded as contributions and as expenses (supplies expense or cost of goods sold) at fair value on the date of the gift if an objective, clearly measurable basis for fair value can be established

23. Contributed Services Contributed services should be recorded as contributions and asset/expense (salaries expense) at fair value if the services: • Create or enhance nonfinancial assets (such as a carpenter constructing a building), or • Are provided by individuals possessing specialized skills that typically would need to be purchased if not provided by donation (e.g., accountants or nurses)

24. Recording Contributed Services • A certified electrician contributes $10,000 in services to wiring a new building for a charity (enhances nonfinancial asset) DebitCredit Building 10,000 Contributions—Unrestricted 10,000 • A nurse contributes $3,000 in services to provide professional services at the free clinic (these services are part of the clinic’s mission) Salary expense 3,000 Contributions—Unrestricted 3,000

25. Special Events • Special events are fund-raising activities in which something of tangible value is offered to donor participants for a payment that includes a contribution • Examples include: • Dinners • Dances • Golf outings • Bazaars • Cookie sales

26. Special Events (Cont’d) • If special events give rise to incidental revenue, such as advertising, this revenue is reported in the special events category of support • Special event revenue and direct costs of the event should be reported at gross amounts, unless the expenses are peripheral or incidental in nature, in which case they can be netted against the gross revenue

27. Contributions Involving an Intermediary • An intermediary is a fiduciary, assisting with the transfer of assets between a donor and a beneficiary • As a general rule, the intermediary recognizes an asset (debit) and a liability to the beneficiary (credit) when it receives a contribution from the donor for the beneficiary • In this instance, the beneficiary recognizes the contribution as support revenue

28. Contributions Involving anIntermediary (Cont’d) • An exception occurs if one of the following situations exists: • The intermediary has “variance power,” which allows it to redirect the assets to another beneficiary • The intermediary is financially interrelated with the beneficiary organization (e.g., a captive fund-raising foundation) • If one of the exceptions occurs the intermediary recognizes the contribution as support revenue rather than as a liability

29. Expenses • Recognized on the accrual basis of accounting • All expenses are reported as decreases in unrestricted net assets • Report depreciation expense for all capital assets, except collections

30. Joint Costs with a Fund-Raising Appeal • Report these as fund-raising support expenses, rather than allocating them to functional programs, such as education or advocacy • Criteria to be applied includes considering • Purpose • Audience • Content Q: Can you define each criterion?

31. Investments • Equity securities that have readily determinable values and debt securities are reported at fair value • 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

32. Investments (Cont’d) • NFPs are not required to classify investments into trading, available-for-sale, and held to maturity • Unless restricted by donor or law, realized and unrealized gains/losses are adjustments to unrestricted net assets • FASB requires extensive disclosures regarding investments and related income

33. Collection Items • Collections include works of art, historical treasures, or other types of similar assets • NFPs can opt to recognize or not recognize collections • If recognized • Record at cost if acquired and at fair value if contributed • Depreciation is not recorded if the economic benefit of the collection is used so slowly the estimated useful life is extraordinarily long

34. Collection Items (Cont’d) • To not recognize assets related to a collection the assets must meet the definition of a collection • Held for public exhibition, education, or research in furtherance of the public interest • Protected, kept unencumbered, cared for, and preserved • Proceeds from sale of collection items are to be used to acquire other items for the collection

35. Consolidations and Combinations • NFPs have varied relationships with other NFPs, for-profit businesses, and governments that could result in: • Consolidations – generally occur if the NFP has a controlling financial interest in another organization • Combinations – occur through merger • or acquisition

36. Optional Fund Accounting • NFPs may use fund accounting for internal purposes to facilitate reporting back to grantors or funding agencies • FASB permits NFPs to present disaggregated data classified by fund groups, as long as the aggregated net asset statements are also presented

37. Concluding Comments • There are many types of NFP organizations • GAAP for nongovernmental NFPs is set by FASB • Unique to NFPs is a dependence on contributions • Although there are many accounting similarities between for-profit and NFP organizations there are also several accounting issues unique to NFP organizations • END