non-slg not-for-profit organizations - firmenich
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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 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
Unrestricted Net Assets
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
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
#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
Temporarily Restricted Support –
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
Allowance for Uncollectible Pledges
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
Unrestricted Support –
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
Unrestricted Support –
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
Unrestricted Support – Donated
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]
Expenses – Management & General
Expenses – Research
Unrestricted Support – Donated
Services
7,000
3,000
10,000
#12 Salaries and wages paid or accrued [Page 661]
Expenses – Management & General
Expenses – Fund-raising
Expenses – Education
Expenses – Research
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
Expenses – Management & General
Expenses – Fund-raising
Expenses – Education
Expenses – Research
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
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
Allowance for Uncollectible Pledges
Temporarily Restricted Support –
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
Allowance for Uncollectible Pledges
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
Expenses – Education
Expenses – Research
Cash
Reclassification of Net Assets
Temporarily Restricted Net Assets –
Reclassifications Out
Unrestricted Net Assets –
Reclassifications In
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]
Cash Restricted for Endowment
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]
Cash Restricted for Endowment
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
Temporarily Restricted Support –
Contributions
100,000
100,000
#24 Purchase of equipment [Page 663]
Purchase
Equipment
Cash Restricted for Plant Purposes
Reclassification of Net Assets
Reclassification Out
Reclassification In
140,000
140,000
140,000
140,000
#25 Record depreciation [Pages 663–664]
Expenses – Management & General
Expenses – Fund-raising
Expenses – Education
Expenses – Research
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]
Cash Restricted for Plant Purposes
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
Reclassification of Net Assets
Reclassifications Out
Reclassifications In
40,000
20,000
60,000
60,000
60,000
#28 Building addition completed [Page 664]
Purchase
Buildings & Improvements
Cash Restricted for Plant Purposes
Cash
Reclassification of Net Assets
Reclassifications Out
Reclassifications In
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 Restricted for Plant Purposes
Cash
Cash Restricted for Endowment
Reclassification of Net Assets
Reclassifications Out
Reclassifications In
65,000
35,000
35,000
100,000
35,000
Endowment was for 100,000, but 65,000 still restricted for plant purposes.