Chapter 19

Non-SLG Not-for-Profit OrganizationsChapter 16Learning ObjectivesUnderstand the sources of GAAP for nongovernment not-for-profit organizationsExplain basis of accounting and the financial statements required for nongovernment not-for-profit organizationsDistinguish 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 2013 Pearson Education, Inc. All rights reserved.2Learning Objectives (continued)Understand the reporting of restricted contributions and restricted investment incomeAccount for and report the satisfaction of donor-imposed temporary restrictions on the use of resourcesPrepare journal entries for common transactions of nongovernmental not-for-profit organizationsPrepare nongovernment not-for-profit organization financial statements3 2013 Pearson Education, Inc. All rights reserved.The Nonprofit GAAP ProblemPrivate sector (nongovernmental) nonprofit organizations (NPOs) look to the FASB for GAAPPublic sector (governmental) NPOs look to the GASB for GAAP

Focus of this chapter is on nongovernmental NPOs4 2013 Pearson Education, Inc. All rights reserved.Interested in Two GroupsVoluntary health and welfare organizations (VHWOs)Other not-for-profit organizations (ONPOs)which excludeColleges and Universities (Chapter 17)Health care organizations (Chapter 18)VHWOs5 2013 Pearson Education, Inc. All rights reserved.Evolution of NPO GAAPIndustry organizations started developing accounting standardsAICPA started playing role in mid-1960sFASB assumes responsibility in 1979FASB #32 adopted AICPA Statements of Position (SOPs), audit guides, and accounting guidesFASB NFP Advisory Committee began advisory activities in 20106 2013 Pearson Education, Inc. All rights reserved.Current Primary Authoritative GuidanceFASB #116Accounting for Contributions Received and Contributions MadeFASB #117Financial Statements for Not-for-Profit OrganizationsAICPA Audit and Accounting Guide, Not-for-Profit Organizations, adopts all this guidance7 2013 Pearson Education, Inc. All rights reserved.Governmental NFP OrganizationsGASB sets standards for governmental VHWOs, colleges and universities, hospitals, and other NFP organizationsGASB #29 prohibits governmental NFP organizations from following FASB standards8 2013 Pearson Education, Inc. All rights reserved.How to Distinguish between Governmental and Nongovernmental NFP OrganizationsSee Chapter 1definition of a governmentGASB standards apply to all NFP entities that meet definitionFASB standards apply to all NFP entities that do not meet definition9 2013 Pearson Education, Inc. All rights reserved.How to Distinguish between a VHWO and an ONPOONPOs defined as all NFP organizations other than:Hospitals (and similar health care institutions)Colleges and universitiesVHWOs10 2013 Pearson Education, Inc. All rights reserved.Distinguishing Features of VHWOsPurposeto meet a community health, welfare, or other social service needVoluntary natureno fee is charged, or only a very small fee in proportion to the service provided is chargedRelationship to resource providersnot the primary recipients of services or benefits11 2013 Pearson Education, Inc. All rights reserved.Examples of VHWOsUnited WayBoy Scouts and Girl ScoutsAmerican Heart AssociationYMCA and YWCA12 2013 Pearson Education, Inc. All rights reserved.Services Provided by VHWOsChild care for working mothersFamily counselingNutritious means and recreation for the elderlyCare and treatment of persons with mental/ physical handicapsProtection of children from abuseHalfway houses for criminal or drug offendersSheltered workshops for citizens who are impaired physically or mentally13 2013 Pearson Education, Inc. All rights reserved.Examples of ONPOsCemetery organizationsCivic organizationsFraternal organizationsLibrariesMuseumsOther cultural institutionsPerforming arts organizationsPolitical partiesPrivate and community foundationsPrivate elementary and secondary schoolsProfessional associationsReligious organizationsResearch and scientific organizationsZoological and botanical societies14 2013 Pearson Education, Inc. All rights reserved.Classes of Net AssetsUnrestricted Net AssetsTemporarily Restricted Net AssetsPermanently Restricted Net Assets

Examine in reverse order15 2013 Pearson Education, Inc. All rights reserved.Permanently Restricted Net AssetsDonor-imposed restrictions are permanent in naturenot capable of being satisfied or removed by organizationExamplesAssets that were donated as permanent endowmentsAssets that are restricted for a certain purpose and must be preserved16 2013 Pearson Education, Inc. All rights reserved.Temporarily Restricted Net AssetsDonor imposed restrictions will be met (satisfied) by passage of time or by use of resources for required purposeExamplesAssets restricted to certain useresearch, capital asset acquisition, etc.Assets restricted for use in certain time periodPledges receivable due in future yearsAssets with implied time restriction based on organizations policy17 2013 Pearson Education, Inc. All rights reserved.Unrestricted Net AssetsNo donor-imposed restrictionsExamplesall other assets, including board-designated resources that are not donor-restricted, even if restricted by bond indentures or other contracts not involving donors or grantors18 2013 Pearson Education, Inc. All rights reserved.Non-GAAP Accounting and Reporting RequirementsIRS requirement for annual filing of Form 990Donors and grantors may require special reports to ensure funding is properly spentFund accounting may be used for tracking large grants or because it has been used successfully in the past19 2013 Pearson Education, Inc. All rights reserved.MFBAMeasurement focus in on economic resourcesBasis of accounting is accrual20 2013 Pearson Education, Inc. All rights reserved.Required Financial StatementsStatement of Financial Position (Balance Sheet)Statement of ActivitiesStatement of Cash Flows

VHWOs must also present Statement of Functional Expenses21 2013 Pearson Education, Inc. All rights reserved.Statement of Financial PositionNo specific format requiredFund reporting not prohibitedAggregated totals for assets, liabilities, and net assets is required, as is reporting the three classes of net assetsSome accounts do have specific requirements22 2013 Pearson Education, Inc. All rights reserved.InvestmentsInvestments initially recorded at cost (if donated, at fair value at time of gift)At report dateInvestments in debt and equity securities reported at fair valueOther investments reported at cost, lower of cost or market, or at market valueChange in fair value reported as unrestricted unless restricted by donor stipulation or law23 2013 Pearson Education, Inc. All rights reserved.PledgesUnconditional Promises to GiveRecognize receivable if pledges are unconditional promises to giveDoes not have provisions that release donor based on future and uncertain eventConditional promise may be unconditional if occurrence of event is remoteRevenue recognized for net amount expected to be collected within one yearRevenue for collections to be made in more than one year recognized at present value24 2013 Pearson Education, Inc. All rights reserved.PledgesConditional Promises to GiveNot reported as receivablesNote disclosure onlySupport from conditional promises to give recognized when conditions are met25 2013 Pearson Education, Inc. All rights reserved.Fixed AssetsRecognized at cost (or fair value if donated)use of estimates allowed but must be disclosed in the notesDonated fixed assets reported as unrestricted unless temporarily restricted requiredDepreciation expense recorded on fixed assets used in operations or in production of incomeAssets held for sale not depreciated26 2013 Pearson Education, Inc. All rights reserved.CollectionsDefined as works of art, historical treasures, or similar assets that areHeld for public exhibitionProtected, cared for, and preservedSubject to policy that requires proceeds from sale of items to acquire other items for collectionNPOs must capitalize works of art, historical treasures, or similar assets that do not meet above requirements27 2013 Pearson Education, Inc. All rights reserved.Collections (continued)Accounting options for collectionsNot capitalizing any collectionsCapitalize collections after adopting FASB #116 but not those acquired prior to that dateCapitalize all collections regardless of when acquired28 2013 Pearson Education, Inc. All rights reserved.Collections (continued)Capitalized collectionsAssets reported at fair value and as contributionsIncrease appropriate net asset classificationCollections not capitalized are disclosed only in notes to financial statements29 2013 Pearson Education, Inc. All rights reserved.Trusts and Similar AgreementsMay be held by a third partyShould be recognized as assets and contributions unless third part has discretion to provide resources to othersIf such discretion is allowed, recognize as assets and contributions when resources providedRevocable trusts are treated as conditional promises30 2013 Pearson Education, Inc. All rights reserved.Trusts and Similar Agreements (continued)Irrevocable perpetual trusts established for sole benefit of NPO increase permanently restricted net assetsTerm endowments increase temporarily restricted net assets31 2013 Pearson Education, Inc. All rights reserved.Statement of Activities (Page 651)Revenues and gains reported by sourceExpensesReported by functionClassified as eitherProgram servicesSupport servicesChanges in classes of net assets reported separately32 2013 Pearson Education, Inc. All rights reserved.Reporting Revenues and ExpensesMust be reported at grossResult from ongoing major or central activitiesRevenues reported in appropriate net asset categoryAll expenses reported in unrestricted net asset category33 2013 Pearson Education, Inc. All rights reserved.Reporting Gains and LossesMay be reported as net or grossResult from transactions that are considered peripheral or incidental to organizationReported in appropriate net asset category34 2013 Pearson Education, Inc. All rights reserved.ContributionsSignificant source of revenue for most NPOsDefined 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 owner35 2013 Pearson Education, Inc. All rights reserved.Key Features of ContributionsUnconditionalnot subject to future and uncertain events that could require return of assets or reinstatement of liabilitiesNonreciprocalnothing of significant value is given in return for the contributionVoluntaryNot an ownership investment36 2013 Pearson Education, Inc. All rights reserved.Recognizing Contribution RevenueIn period received or unconditionally promisedMust analyze grants, memberships dues, and sponsorshipsPart may be contributionsPart may be exchange transactionReported in appropriate net asset category37 2013 Pearson Education, Inc. All rights reserved.Options for Use Restriction ContributionsReport as temporarily restricted net assetssatisfaction of restrictions reported as decrease to temporarily restricted net assets and increase to unrestricted net assetsReport satisfied portions as changes in unrestricted net assets38 2013 Pearson Education, Inc. All rights reserved.Contributions and Intermediary OrganizationRecognize revenues if holder has right to redirect use of assets to party other than designated beneficiaryIf power not explicitly granted, liability recognized instead of revenue39 2013 Pearson Education, Inc. All rights reserved.PledgesRevenues recognized when unconditional pledge is receivedConditional pledges and transfers recognized as revenues when conditions are metUnconditional pledges due in future years reported as restricted support unless donor specifies it is for current operations40 2013 Pearson Education, Inc. All rights reserved.Membership DuesCan Take Many FormsMembership dues that are exchange transactions recognize revenue over the period(s) that benefits are providedContributionsrecognized as revenues when receivedLifetime membership dues and nonrefundable initiation feesRecognized as revenues when received if future fees are assessed to cover costs of future servicesRecognized over future periods if not future fees41 2013 Pearson Education, Inc. All rights reserved.Special Fund-Raising EventsRevenues reported at gross unless event is incidental or peripheralOptions for reporting expense direct costsExpense deduction from related revenueSeparate line in expense sectionGain reported if event is incidental or peripheral (expenses reported parenthetically)

42 2013 Pearson Education, Inc. All rights reserved.Investment Income and Gains/LossesDetermined partly by the investment valuation method usedFor most investments, changes in fair value, interest, and dividends are reported as changes in appropriate net asset categoryRestricted income, gains, and losses reported as changes in temporarily restricted or permanently restricted net assets43 2013 Pearson Education, Inc. All rights reserved.Investment Losses That Reduce Principal of Permanent EndowmentsIn absence of donor stipulations or law to the contrary, losses reduce temporarily restricted net assets to the extent that a donor-imposed temporary restrictions on net appreciation of the fund have not been met before the loss occursAny remaining loss reduces unrestricted net assets44 2013 Pearson Education, Inc. All rights reserved.Investment Losses (continued)If losses reduce the assets below the level required by donor stipulations or law, gains that restore the fair value of the assets to the required level are classified as increases in unrestricted net assets45 2013 Pearson Education, Inc. All rights reserved.Donated Materials, Facilities, and ServicesMaterialsContribution revenue when receivedExpense recognized when materials used or soldDonated services reported as contributions and assets or expenses if services created or nonfinancial assets enhanced46 2013 Pearson Education, Inc. All rights reserved.Other Criteria for Recognizing Donated ServicesRequire specialized skills (accounting, medicine, plumbing),Provided by individuals with those skills, andWould typically have been purchased if they are not donated47 2013 Pearson Education, Inc. All rights reserved.Net Assets Released from RestrictionsReported when donor restrictions on resource use are metReported as both an increase to unrestricted net assets (but are not revenues) and decrease to temporarily restricted net assets (but not as expenses)

48 2013 Pearson Education, Inc. All rights reserved.Overview for Restricted Contributions and Investment Income (Page 648)Illustration 16-3 provides comprehensive overview of reported restricted contributions and investment incomeMeant to summarize much of chapter49 2013 Pearson Education, Inc. All rights reserved.Expense ClassificationsProgram Servicesrelate directly to the primary missions of the organizationSupporting Servicesnot directly related to primary missions; include:General administrationMembership developmentFund-raisingBoth classifications reported by program or function50 2013 Pearson Education, Inc. All rights reserved.Fund-Raising CostsExamplesMailing listsPrintingMailingPersonnelOccupancyNewspaper and other media advertisingCosts of unsolicited merchandise sent to encourage contributions51 2013 Pearson Education, Inc. All rights reserved.Fund-Raising Costs as Joint ActivitiesCosts of joint activities must be reported as fund-raising expenses unlessThe activity meets three conditions related to the purpose of the activityThe audience to whom the activity is addressedActions that the audience is asked to take52 2013 Pearson Education, Inc. All rights reserved.Conditions Related to Purpose of ActivityAt least one purpose of joint activity must be to accomplish some program function that is part of the NPOs mission or to fulfill management and general responsibilitiesAudience for the activity must not be selected based on ability or likelihood to make contributionsActivity must motivate the audience to take specific actions (other than making contributions) that support program goals or fulfill a management and general responsibility53 2013 Pearson Education, Inc. All rights reserved.Statement of Cash Flows:Unique Aspects Reporting contributions and investment earnings that are restricted for capital asset-related, endowment, or other long-term purposes as financing activitiesReporting changes in cash restricted for long-term purposes as investing activitiesReconciliation of the total changes in net assets from the statement of activities to the net cash flows from operating activities54 2013 Pearson Education, Inc. All rights reserved.Statement of Functional ExpensesVHWOs must present statement; optional for ONPOsProvides detail of expenses section of Statement of Activities by object class or type of expense

55 2013 Pearson Education, Inc. All rights reserved.Nongovernment VHWO and ONPOAccounting and Reporting Illustration#1 Prior Year Donation (Page 650)Reclassifications OutReclassifications In22,00022,000Entry is made because the implied (or expressed) time restriction has been met. Reclassification is reported as Net assets released from restrictions.57 2013 Pearson Education, Inc. All rights reserved.#2 Gifts for Current and Future Years (Page 651)CashUnrestricted SupportContributionsTemporarily Restricted SupportContributions15,0005,000

10,0005,000 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.58 2013 Pearson Education, Inc. All rights reserved.#3 Unrestricted Pledges (Page 651)Pledges ReceivableAllowance for Uncollectible PledgesUnrestricted SupportContributionsTemporarily Restricted SupportContributions250,00025,000

180,000

45,00050,000 restricted for next year; 200,000 designated to support current year operations; 10% of pledges expected to be uncollectible.59 2013 Pearson Education, Inc. All rights reserved.#4 Collections of Pledges (Page 652)CashAllowance for Uncollectible PledgesPledges Receivable205,00018,000223,000205,000 in pledges were collected; 18,000 were written off.60 2013 Pearson Education, Inc. All rights reserved.Donation and Subsequent Sale (Page 652)#5 DonationLand and Building Held for ResaleUnrestricted SupportContributions

#6 Subsequent saleCash Land and Building Held for Resale150,000

150,000150,000

150,000Land and building donated in current year and held for resale. No restrictions on donated property or its sale proceeds.61 2013 Pearson Education, Inc. All rights reserved.#7 Investment Income (Page 652)CashAccrued Interest ReceivableUnrestricted RevenuesInvestment Income36,0002,000

34,000Investment 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.62 2013 Pearson Education, Inc. All rights reserved.#8 Fund-raising banquet held (Page 652)CashUnrestricted SupportSpecial Events

ExpensesDirect Cost of SpecialEventsCash75,000

25,00075,000

25,000Ticket sales for banquet totaled $75,000. Related direct costs of $25,000 for meals and gratuities were paid.63 2013 Pearson Education, Inc. All rights reserved.#9 Donated Materials and Facilities (Page 652)Inventory of MaterialsExpensesFund-RaisingUnrestricted SupportDonatedMaterials

ExpensesResearchExpensesManagement and GeneralUnrestricted SupportDonatedServices4,0006,000

4,8003,20010,000

8,000Materials, 10,00040% unused at year-end; 60% used for fund-raisingFacilities, 8,00060% for research offices; 40% for recordkeeping64 2013 Pearson Education, Inc. All rights reserved.#10 Recordable Donated Services (Pages 652653)ExpensesManagement and GeneralExpensesResearchUnrestricted SupportDonatedServices7,0003,00010,00065 2013 Pearson Education, Inc. All rights reserved.#11 Annual Memberships (Page 653)CashUnrestricted RevenuesMembership Dues17,30017,30066 2013 Pearson Education, Inc. All rights reserved.#12 Salaries and Wages Paid or Accrued (Page 653)ExpensesManagement and GeneralExpensesFund-raisingExpensesEducationExpensesResearchCashAccrued Salaries Payable30,00015,00027,00016,00085,0003,00067 2013 Pearson Education, Inc. All rights reserved.#13 Other Expenses and Accruals (Page 653)Vouchers PayableInventory of MaterialsExpensesManagement and GeneralExpensesFund-raisingExpensesEducationExpensesResearchCashVouchers Payable17,00080098,00067,00085,00050,000303,80014,00068 2013 Pearson Education, Inc. All rights reserved.#14 Board Designation (Page 653)Unrestricted Net AssetsUnrestricted Net AssetsDesignated for Endowment50,00050,000Endowment earnings will be used to finance research. Since this is only a Board designation, it does not change the classification from unrestricted to restricted.69 2013 Pearson Education, Inc. All rights reserved.#15 Restricted Gifts Meet Time Requirements (Page 654)No entry and 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.70 2013 Pearson Education, Inc. All rights reserved.#16 Restricted Gifts and Pledges Received (Page 654)CashPledges ReceivableAllowance for Uncollectible PledgesTemporarily Restricted SupportContributions30,000100,00010,000

120,000Pledges are collectible over the next year. Both gifts and pledges restricted for certain education efforts. 10% of pledges estimated to be uncollectible.71 2013 Pearson Education, Inc. All rights reserved.#17 Pledges Collected or Written Off (Page 654)CashAllowance for Uncollectible PledgesPledges Receivable80,0007,00087,00072 2013 Pearson Education, Inc. All rights reserved.#18 Investment Income (Page 654)CashTemporarily Restricted RevenuesInvestment Income20,50020,500Income on investments of restricted contributions. Income is also restricted by donors.73 2013 Pearson Education, Inc. All rights reserved.#19 Expenses Financed by Temporarily Restricted Net Assets Incurred and Paid (Page 654)Expenses incurredExpensesEducationExpensesResearchCash

Reclassification of Net AssetsReclassifications OutReclassifications In70,00018,000

88,00088,000

88,00074 2013 Pearson Education, Inc. All rights reserved.#20 Gift of a Permanent Endowment (Page 655)Cash Restricted for EndowmentPermanently RestrictedSupportContributions55,00055,00075 2013 Pearson Education, Inc. All rights reserved.#21 Endowment Fund Earnings (Page 655)Cash Restricted for EndowmentPermanently RestrictedSupportInvestment Income10,50010,500Restricted by donor stipulation to increasing permanent endowment base.76 2013 Pearson Education, Inc. All rights reserved.#22 Sale of Endowment Investment (Page 655)Cash Restricted for EndowmentInvestments Restricted forEndowmentPermanently Restricted GainGain on Sale of Investments14,40013,000

1,400Cost of investments was 13,000. By donor stipulation, realized gains (losses) on endowment must be added (deducted) from permanent endowment principal.77 2013 Pearson Education, Inc. All rights reserved.#23 Cash for Fixed Asset Acquisition (Page 655)Cash Restricted for Plant PurposesTemporarily Restricted SupportContributions100,000100,00078 2013 Pearson Education, Inc. All rights reserved.#24 Purchase of Equipment (Page 655)PurchaseEquipmentCash Restricted for Plant Purposes

Reclassification of Net AssetsReclassification OutReclassification In140,000

140,000140,000

140,00079 2013 Pearson Education, Inc. All rights reserved.#25 Record Depreciation (Pages 655656)ExpensesManagement and GeneralExpensesFund-raisingExpensesEducationExpensesResearchAccumulated DepreciationBuildings and ImprovementsAccumulated DepreciationEquipment13,00012,0002,0003,00014,000

16,00080 2013 Pearson Education, Inc. All rights reserved.#26 Investment Income on Restricted Investments (Page 656)Cash Restricted for Plant PurposesInterest Receivable Restricted forPlant PurposesTemporarily Restricted RevenuesInvestment Income12,000

3,00015,000Income restricted by donors for fixed asset purchases.81 2013 Pearson Education, Inc. All rights reserved.#27 Mortgage Principal and Interest Payments (Page 656)PaymentMortgage PayableExpenseInterestCash Restricted for PlantPurposes

Reclassification of Net AssetsReclassifications OutReclassifications In40,00020,000

60,00060,000

60,00082 2013 Pearson Education, Inc. All rights reserved.#28 Building Addition Completed (Page 656)PurchaseBuildings and ImprovementsCash Restricted for Plant PurposesCash

Reclassification of Net AssetsReclassifications OutReclassifications In200,000

100,000100,000100,000

100,00083 2013 Pearson Education, Inc. All rights reserved.#29 Sale of Equipment (Page 656)CashAccumulated DepreciationEquipmentEquipmentUnrestricted GainGain on Saleof Equipment40,00045,00075,000

10,000Equipment had been used in operations. Proceeds from sale are not restricted.84 2013 Pearson Education, Inc. All rights reserved.#30 10-Year Endowment Expired (Page 657)Reclassification of CashCash Restricted for Plant PurposesCashCash Restricted for Endowment

Reclassification of Net AssetsReclassifications OutReclassifications In65,00035,000

35,000100,000

35,000Endowment was for 100,000, but 65,000 still restricted for plant purposes.85 2013 Pearson Education, Inc. All rights reserved.Financial Statement ExamplesBalance Sheet (Page 659)Statement of Activities (Page 661)Statement of Cash Flows (Page 663)Statement of Functional Expenses (Page 664)86 2013 Pearson Education, Inc. All rights reserved.Balance Sheet CommentsFinancial resources restricted for long-term purposes are not reported as cash and cash equivalentsshould be reported as noncurrent assets if classified Balance Sheet presentedRestricted financial resourcesAssets restricted for plant purposesAssets restricted for endowment87 2013 Pearson Education, Inc. All rights reserved.Balance Sheet (continued)Classes of net assetsTemporarily Restricted Net Assets classified by nature of restrictionUnrestricted Net Assets are subclassified to disclose amounts designated by organizations governing board (optional)88 2013 Pearson Education, Inc. All rights reserved.Operating Statement CommentsAmount reported for contributions under Changes in Unrestricted Net Assets is sum of the balances of the Unrestricted Support accounts for contributions, donated materials, donates facilities, and donated services89 2013 Pearson Education, Inc. All rights reserved.Operating Statement (continued)Special events reported as revenues with immediate deduction of direct costsAll expenses reported as changes in unrestricted net assetsProgram services and support services expenses reported by functionNet assets released from restrictions are reported as an increase in unrestricted net assets and a corresponding decrease in net assetsnet effect on total net assets is zero90 2013 Pearson Education, Inc. All rights reserved.Alternate Operating StatementPresents total amount of revenues from each revenue sourceEmphasizes that expenses are reported in unrestricted net assetsHighlights offsetting relationship between increase in unrestricted net assets and decrease in temporarily restricted net assets91 2013 Pearson Education, Inc. All rights reserved.Statement of Cash Flows CommentsContributions and earnings that are restricted for plant or endowment purposes are classified as financing activitiesDecrease in cash restricted for long-term purposes is classified as investing activityOperating cash flows are reconciled with changes in net assets92 2013 Pearson Education, Inc. All rights reserved.