Characteristics Not-for-Profit Organization

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CHAPTER 9 Nongovernment Not-for-Profit Organizatio
ns
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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

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Learning Objectives contd

• 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

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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

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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

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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.

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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

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GAAP Hierarchy Table - Nongovernment
Hierarchical Level A FASB statements and interpretations, APB opinions and AICPA ARBs
Hierarchical Level B FASB technical bulletins and AICPA industry audit and accounting guides and SOPs if cleared FASB
Hierarchical Level C AICPA practice bulletins cleared by FASB and Emerging Issues Task Force (EITF) consensus positions
Hierarchical Level D AICPA accounting interpretations, FASB implementation guides, and industry practices that are widely recognized or prevalent
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GAAP Hierarchy Table -Government
Hierarchical Level A GASB statements, AICPA and GASB pronouncements made specifically applicable by GASB
Hierarchical Level B GASB technical bulletins and AICPA industry audit and accounting guides SOPs if made specifically applicable and cleared by GASB
Hierarchical Level C AICPA practice bulletins cleared by GASB EITF consensus positions, if GASB creates a group
Hierarchical Level D GASB implementation guides and industry practices -- widely recognized or prevalent
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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

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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

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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

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SFAS No. 116 Contributions contd

• 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

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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

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SFAS No. 117 contd

• Classification of organizations 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

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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

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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

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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

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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.

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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.

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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.

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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

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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

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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

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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.

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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.

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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

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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

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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

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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