Non-SLG Not-for-Profit Organizations - Firmenich

Non-SLG Not-for-Profit Organizations:SFAS 116 and 117 Approach

Chapter 16

Learning Objectives

Understand the sources of GAAP for nongovernment not-for-profit organizations

Explain basis of accounting and the financial statements required for nongovernment not-for-profit organizations

Distinguish between and among the three net asset classes

Understand the timing of recognition and the classification of revenues and expenses of nongovernment not-for-profit organizations

Learning Objectives (continued)

Understand the reporting of restricted contributions and restricted investment income

Account for and report the satisfaction of donor-imposed temporary restrictions on the use of resources

Prepare journal entries for common transactions of nongovernmental not-for-profit organizations

Prepare nongovernment not-for-profit organization financial statements

The Nonprofit GAAP Problem

Private sector (nongovernmental) nonprofit organizations (NPOs) look to the FASB for GAAP

Public sector (governmental) NPOs look to the GASB for GAAP

Focus of this chapter is on nongovernmental NPOs

Interested in two groups

Voluntary health and welfare

organizations (VHWOs)

Other not-for-profit organizations

(ONPOs) – which exclude

Colleges & Universities (Chapter 17)

Health care organizations (Chapter 18)

VHWOs

Evolution of NPO GAAP

AICPA started playing role in mid-1960s

FASB assumes responsibility in 1979 –

FASB #32 adopted AICPA Statements

of Position (SOPs), audit guides, and

accounting guides

Primary Authoritative Guidance

FASB #116 – Accounting for Contributions Received and Contributions Made

FASB #117 – Financial Statements for Not-for-Profit Organizations

FASB #124 – Accounting for Certain Investments Held by Not-for-Profit Organizations

AICPA Audit and Accounting Guide, Not-for-Profit Organizations, adopts all this guidance

Distinguishing Features of VHWOs

Purpose – to meet a community health, welfare, or other social service need

Voluntary nature – no fee is charged, or only a very small fee in proportion to the service provided is charged

Relationship to resource providers –not the primary recipients of services or benefits

Examples of VHWOs

United Way

Boy Scouts and Girl Scouts

American Heart Association

YMCA and YWCA

Examples of ONPOs

Cemetery organizations

Civic organizations

Fraternal organizations

Libraries

Museums

Other cultural institutions

Performing arts organizations

Political parties

Private and community foundations

Private elementary and secondary schools

Professional associations

Religious organizations

Research and scientific organizations

Zoological and botanical societies

Classes of Net Assets

Unrestricted Net Assets

Temporarily Restricted Net Assets

Permanently Restricted Net Assets

Examine in reverse order

Permanently Restricted Net Assets

Donor-imposed restrictions are permanent in nature – not capable of being satisfied or removed by organization

Examples

Assets that were donated as permanent endowments

Assets that are restricted for a certain purpose and must be preserved

Temporarily Restricted Net Assets

Donor imposed restrictions will be met (satisfied) by passage of time or by use of resources for required purpose

Examples Assets restricted to certain use – research, capital

asset acquisition, etc.

Assets restricted for use in certain time period

Pledges receivable due in future years

Assets with implied time restriction based on organization’s policy


No donor-imposed restrictions

Examples – all other assets, including

board-designated resources that are not

donor-restricted, even if restricted by

bond indentures or other contracts not

involving donors or grantors

Non-GAAP Accounting & Reporting

Requirements

IRS requirement for annual filing of Form 990

Donors and grantors may require special reports to ensure funding is properly spent

Fund accounting may be used for tracking large grants or because it has been used successfully in the past

MFBA

Measurement focus in on economic

resources

Basis of accounting is accrual

Required Financial Statements

Statement of Financial Position

(Balance Sheet)

Statement of Activities

Statement of Cash Flows

VHWOs must also present Statement of

Functional Expenses

Statement of Financial Position

No specific format required

Fund reporting not prohibited

Aggregated totals for assets, liabilities,

and net assets is required, as is

reporting the three classes of net assets

Some accounts do have specific

requirements

Investments

FASB #124 provides guidance

Investments initially recorded at cost (if donated, at fair value at time of gift)

At report date Investments in debt and equity securities reported

at fair value

Other investments reported at cost, lower of cost or market, or at market value

Change in fair value reported as unrestricted unless restricted by donor stipulation or law

Pledges – Unconditional Promises to Give

Recognize receivable if pledges are unconditional promises to give Does not have provisions that release donor

based on future and uncertain event

Conditional promise may be unconditional if occurrence of event is remote

Revenue recognized for net amount expected to be collected within one year

Revenue for collections to be made in more than one year recognized at present value

Pledges – Conditional Promises to Give

Not reported as receivables

Note disclosure only

Support from conditional promises to

give recognized when conditions are

met

Fixed Assets

Recognized at cost (or fair value if donated) –use of estimates allowed but must be disclosed in the notes

Donated fixed assets reported as unrestricted unless temporarily restricted required

Depreciation expense recorded on fixed assets used in operations or in production of income

Assets held for sale not depreciated

Collections

Defined as works of art, historical treasures,

or similar assets that are

Held for public exhibition

Protected, cared for, and preserved

Subject to policy that requires proceeds from sale

of items to acquire other items for collection

NPOs must capitalize works of art, historical

treasures, or similar assets that do not meet

above requirements

Collections (continued)

Accounting options for collections

Not capitalizing any collections

Capitalize collections after adopting

FASB #116 but not those acquired prior

to that date

Capitalize all collections regardless of

when acquired

Collections (continued)

Capitalized collections

Assets reported at fair value and as

contributions

Increase appropriate net asset

classification

Collections not capitalized are disclosed

only in notes to financial statements

Trusts and Similar Agreements

May be held by a third party

Should be recognized as assets and contributions unless third part has discretion to provide resources to others

If such discretion is allowed, recognize as assets and contributions when resources provided

Revocable trusts are treated as conditional promises

Trusts and Similar Agreements (continued)

Irrevocable perpetual trusts established

for sole benefit of NPO increase

permanently restricted net assets

Term endowments increase temporarily

restricted net assets

Statement of Activities [Page 651]

Revenues and gains reported by source

Expenses

Reported by function

Classified as either• Program services

• Support services

Changes in classes of net assets reported separately

Reporting Revenues & Expenses

Must be reported at gross

Result from ongoing major or central

activities

Revenues reported in appropriate net

asset category

All expenses reported in unrestricted

net asset category

Reporting Gains and Losses

May be reported at net or gross

Result from transactions that are

considered peripheral or incidental to

organization

Reported in appropriate net asset

category

Contributions

Significant source of revenue for most

NPOs

Defined as: an unconditional transfer of

cash or other assets to an entity or a

settlement or cancellation of its liabilities

in a voluntary nonreciprocal transfer by

another entity acting other than as

owner

Key Features of Contributions

Unconditional – not subject to future and

uncertain events that could require return of

assets or reinstatement of liabilities

Nonreciprocal – nothing of significant value is

given in return for the contribution

Voluntary

Not an ownership investment

Recognizing Contribution Revenue

In period received or unconditionally promised

Must analyze grants, memberships dues, & sponsorships

Part may be contributions

Part may be exchange transaction

Reported in appropriate net asset category

Options for “Use Restriction” Contributions

Report as temporarily restricted net

assets – satisfaction of restrictions

reported as decrease to temporarily

restricted net assets and increase to

unrestricted net assets

Report satisfied portions as changes in

unrestricted net assets

Still Another FASB Standard

#136 – Transfers of Assets to a Not-for- Profit

Organization or Charitable Trust that Raises

or Holds Contributions for Others

Recognize revenues if holder has right to

redirect use of assets to party other than

designated beneficiary

If power not explicitly granted, liability

recognized instead of revenue

Pledges

Revenues recognized when unconditional

pledge is received

Conditional pledges & transfers recognized

as revenues when conditions are met

Unconditional pledges due in future years

reported as restricted support unless donor

specifies it is for current operations

Membership Dues – can take many forms

Exchange revenues for which benefits

or services are made available –

revenue recognized over period that

benefits are provided

Contributions – recognized as revenues

when received

A little bit of both

Special Fund-Raising Events

Revenues reported at gross unless event is

incidental or peripheral

Options for reporting expense direct costs

Expense deduction from related revenue

Separate line in expense section

Gain reported if event is incidental or

peripheral (expenses reported

parenthetically)

Investment Income and Gains/Losses

Determined partly by the investment valuation

method used

For most investments, changes in fair value,

interest, and dividends are reported as

changes in appropriate net asset category

Restricted income, gains, and losses reported

as changes in temporarily restricted or

permanently restricted net assets

Donated Materials, Facilities, & Services

Materials

Contribution revenue when received

Expense recognized when materials used

or sold

Donated services reported as

contributions and assets or expenses if

services created or nonfinancial assets

enhanced

Other criteria for recognizing donated

services

Require specialized skills (accounting,

medicine, plumbing),

Provided by individuals with those skills,

and

Would typically have been purchased if

they are not donated.

Net Assets Released from Restrictions

Reported when donor restrictions on

resource use are met

Reported as both an increase to

unrestricted net assets (but are not

revenues) and decrease to temporarily

restricted net assets (but not as

expenses)

Overview for Restricted Contributions

and Investment Income [Pages 656 – 657]

Illustration 16-3 provides

comprehensive overview of reported

restricted contributions and investment

income

Meant to summarize much of chapter

Expense Classifications

Program Services – relate directly to the primary missions of the organization

Supporting Services – not directly related to primary missions; include: General administration

Membership development

Fund-raising

Both classifications classified by program or function

Fund-Raising Costs – Examples

Mailing lists

Printing

Mailing

Personnel

Occupancy

Newspaper and

other media

advertising

Costs of unsolicited

merchandise sent to

encourage

contributions

Fund-Raising Costs as Joint Activities

Costs of joint activities must be reported as fund-raising expenses unless

The activity meets three conditions related to the purpose of the activity

The audience to whom the activity is addressed

Actions that the audience is asked to take

Conditions Related to Purpose of Activity

At least one purpose of joint activity must be to accomplish some program function that is part of the NPO’s mission or to fulfill management & general responsibilities

Audience for the activity must not be selected based on ability or likelihood to make contributions

Activity must motivate the audience to take specific actions (other than making contributions) that support program goals or fulfill a management & general responsibility

Statement of Cash Flows:

Unique Aspects

Reporting contributions & investment

earnings that are restricted for capital asset-

related, endowment, or other long-term

purposes as financing activities

Reporting changes in cash restricted for long-

term purposes as investing activities

Reconciliation of the total changes in net

assets from the statement of activities to the

net cash flows from operating activities

Statement of Functional Expenses

VHWOs must present statement;

optional for ONPOs

Provides detail of expenses section of

Statement of Activities by object class

or type of expense

Nongovernment VHWO and ONPO

Accounting and Reporting

Illustration

#1 Prior year donation [Page 658]

Reclassifications Out

Reclassifications In

22,000

22,000

Entry is made because the implied (or expressed) time restriction has been

met. Reclassification is reported as “Net assets released from

restrictions”.

#2 Gifts for current and future years [Page 659]

Cash

Unrestricted Support – Contributions

Temporarily Restricted Support –

Contributions

15,000

5,000

10,000

5,000 was for current year; 10,000 for next year. Restricted support

account is used to record temporarily restricted contributions. This

example is of a time restriction.

#3 Unrestricted Pledges [Page 659]

Pledges Receivable

Allowance for Uncollectible Pledges

Unrestricted Support –

Contributions


Contributions

250,000

25,000

180,000

45,000

50,000 restricted for next year; 200,000 designated to support current year

operations; 10% of pledges expected to be uncollectible.

#4 Collections of pledges [Page 660]

Cash


Pledges Receivable

205,000

18,000

223,000

205,000 in pledges were collected; 18,000 were written off.

Donation and subsequent sale [Page 660]

#5 Donation

Land & Building Held for Resale


Contributions

#6 Subsequent sale

Cash

Land & Building Held for Resale

150,000

150,000

150,000

150,000

Land and building donated in current year and held for resale. No

restrictions on donated property or its sale proceeds.

#7 Investment income [Page 660]

Cash

Accrued Interest Receivable

Unrestricted Revenues –

Investment Income

36,000

2,000

34,000

Investment income of 20,000 on unrestricted investments and 14,000 of

unrestricted income from endowments was received. Interest accrued at

the end of the previous year was also received.

#8 Fund-raising banquet held [Page 660]

Cash


Special Events

Expenses – Direct Cost of Special

Events

Cash

75,000

25,000

75,000

25,000

Ticket sales for banquet totaled 75,000. Related direct costs of $25,000

for meals and gratuities were paid.

#9 Donated materials and facilities [Page 660]

Inventory of Materials

Expenses – Fund-Raising

Unrestricted Support – Donated

Materials

Expenses – Research

Expenses – Management & General


Services

4,000

6,000

4,800

3,200

10,000

8,000

Materials, 10,000 – 40% unused at year-end; 60% used for fund-raising

Facilities, 8,000 – 60% for research offices; 40% for recordkeeping

#10 Recordable donated services [Pages 660 – 661]




Services

7,000

3,000

10,000

#11 Annual memberships [Page 661]

Cash

Unrestricted Revenues –

Membership Dues

17,300

17,300

#12 Salaries and wages paid or accrued [Page 661]


Expenses – Fund-raising

Expenses – Education


Cash

Accrued Salaries Payable

30,000

15,000

27,000

16,000

85,000

3,000

#13 Other expenses & accruals [Page 661]

Vouchers Payable

Inventory of Materials





Cash

Vouchers Payable

17,000

800

98,000

67,000

85,000

50,000

303,800

14,000

#14 Board designation [Page 661]


Unrestricted Net Assets –

Designated for Endowment

50,000

50,000

Endowment earnings will be used to finance research. Since this is only a

Board designation, it does not change the classification from unrestricted

to restricted.

#15 Restricted gifts meet time requirements[Page 662]

No entry – time restriction has been met

but there is another restriction: that

resources be used to for certain

research programs. Resources will not

be reclassified until use restriction is

also fulfilled.

#16 Restricted gifts & pledges received [Page 662]

Cash

Pledges Receivable



Contributions

30,000

100,000

10,000

120,000

Pledges are collectible over the next year. Both gifts and pledges

restricted for certain education efforts. 10% of pledges estimated to be

uncollectible.

#17 Pledges collected or written off [Page 662]

Cash


Pledges Receivable

80,000

7,000

87,000

#18 Investment income [Page 662]

Cash

Temporarily Restricted Revenues –

Investment Income

20,500

20,500

Income on investments of restricted contributions. Income is also

restricted by donors.

#19 Expenses financed by temporarily

restricted net assets incurred & paid [Page 662]

Expenses incurred



Cash

Reclassification of Net Assets

Temporarily Restricted Net Assets –


Unrestricted Net Assets –


70,000

18,000

88,000

88,000

88,000

#20 Gift of a permanent endowment [Page 663]

Cash Restricted for Endowment

Permanently Restricted

Support – Contributions

55,000

55,000

#21 Endowment fund earnings [Page 663]


Permanently Restricted

Support – Investment Income

10,500

10,500

Restricted by donor stipulation to increasing permanent endowment base.

#22 Sale of endowment investment [Page 663]


Investments Restricted for

Endowment

Permanently Restricted Gain –

Gain on Sale of Investments

14,400

13,000

1,400

Cost of investments was 13,000. By donor stipulation, realized gains

(losses) on endowment must be added (deducted) from permanent

endowment principal.

#23 Cash for fixed asset acquisition [Page 663]

Cash Restricted for Plant Purposes


Contributions

100,000

100,000

#24 Purchase of equipment [Page 663]

Purchase

Equipment



Reclassification Out

Reclassification In

140,000

140,000

140,000

140,000

#25 Record depreciation [Pages 663–664]





Accumulated Depreciation –

Buildings & Improvements

Accumulated Depreciation –

Equipment

13,000

12,000

2,000

3,000

14,000

16,000

#26 Investment income on restricted

investments [Page 664]


Interest Receivable Restricted for

Plant Purposes

Temporarily Restricted Revenues –

Investment Income

12,000

3,000

15,000

Income restricted by donors for fixed asset purchases.

#27 Mortgage principal & interest payments[Page 664]

Payment

Mortgage Payable

Expense – Interest

Cash Restricted for Plant

Purposes




40,000

20,000

60,000

60,000

60,000

#28 Building addition completed [Page 664]

Purchase

Buildings & Improvements


Cash




200,000

100,000

100,000

100,000

100,000

#29 Sale of equipment [Page 664]

Cash

Accumulated Depreciation – Equipment

Equipment

Unrestricted Gain – Gain on Sale

of Equipment

40,000

45,000

75,000

10,000

Equipment had been used in operations. Proceeds from sale are not

restricted.

#30 10-year Endowment expired [Page 665]

Reclassification of Cash


Cash





65,000

35,000

35,000

100,000

35,000

Endowment was for 100,000, but 65,000 still restricted for plant purposes.

Financial Statement examples

Balance Sheet [Page 667]

Statement of Activities [Page 668]

Statement of Cash Flows [Page 669]

Statement of Functional Expenses [Page 670]

Documents

Non-SLG Not-for-Profit Organizations - Firmenich