The Nonprofit GAAP Problem

1
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

2
Interested in two groups

• Voluntary health and welfare organizations
  (VHWOs)
• Other not-for-profit organizations (ONPOs)
  which exclude
• Health care organizations (Chapter 18)
• Colleges Universities (Chapter 17)
• VHWOs

3
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

4
Classes of Net Assets x

• Unrestricted Net Assets
• Temporarily Restricted Net Assets
• Permanently Restricted Net Assets

5
MFBA

• Measurement focus in on economic resources
• Basis of accounting is accrual

6
Required Financial Statements

• Statement of Financial Position (Balance Sheet)
• Statement of Activities
• Statement of Cash Flows

7
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

8
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

9
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

10
Pledges Conditional Promises to Give

• Not reported as receivables
• Note disclosure only
• Support from conditional promises to give
  recognized when conditions are met

11
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

12
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

13
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

14
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

15
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

16
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

17
Statement of Activities
x

• 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

18
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

19
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

20
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

21
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

22
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

23
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

24
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

25
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

26
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

27
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)

28
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

29
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

30
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.

31
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)

32
Overview for Restricted Contributions and
Investment Income (646 647)

• Illustration 16-3 provides comprehensive overview
  of reported restricted contributions and
  investment income
• Meant to summarize much of chapter

33
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

34
Statement of Cash FlowsUnique 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

35
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

36
Prior year donation (651)
Entry is made because the implied (or expressed)
time restriction has been met. Reclassification
is reported as Net assets released from
restrictions.
37
Gifts for current and future years (651)
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.
38
Unrestricted Pledges (651)
50,000 restricted for next year 200,000
designated to support current year operations
10 of pledges expected to be uncollectible.
39
Collections of pledges (651)
205,000 in pledges were collected 18,000 were
written off.
40
Donation and subsequent sale (651)
Land and building donated in current year and
held for resale. No restrictions on donated
property or its sale proceeds.
41
Investment income (651)
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.
42
Fund-raising banquet held (652)
Ticket sales for banquet totaled 75,000. Related
direct costs of 25,000 for meals and gratuities
were paid.
43
Donated materials and facilities (652)
Materials, 10,000 40 unused at year-end 60
used for fund-raising Facilities, 8,000 60 for
research offices 40 for recordkeeping
44
Recordable donated services (652)
Recordable because they meet the 3 conditions.
45
Annual memberships (652)
Dues were billed and collected considered an
exchange transaction for this organization.
46
Salaries and wages paid or accrued (652)
47
Other expenses accruals (653)
48
Restricted gifts meet time requirements (653)

• 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.

49
Restricted gifts pledges received (653)
Pledges are collectible over the next year. Both
gifts and pledges restricted for certain
education efforts. 10 of pledges estimated to
be uncollectible.
50
Pledges collected or written off (653)
51
Investment income (654)
Income on investments of restricted
contributions. Income is also restricted by
donors.
52
Expenses financed by temporarily restricted net
assets incurred paid (654)
53
Gift of a permanent endowment (654)
Gift is permanently restricted for education
programs.
54
Endowment fund earnings (654)
Restricted by donor stipulation to increasing
permanent endowment base.
55
Sale of endowment investment (654)
Cost of investments was 13,000. By donor
stipulation, realized gains (losses) on endowment
must be added (deducted) from permanent
endowment principal.
56
Cash for fixed asset acquisition (654)
57
Purchase of equipment (655)
58
Record depreciation (655)
59
Investment income on restricted investments (655)
Income restricted by donors for fixed asset
purchases.
60
Mortgage principal interest payments (655)
61
Building addition completed (656)
62
Sale of equipment (656)
Equipment had been used in operations. Proceeds
from sale are not restricted.
63
10-year Endowment expired (656)
Endowment was for 100,000, but 65,000 still
restricted for plant purposes.