Chapter 12
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Chapter 12
Not-for-Profit Organizations
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“Service to others is the rent you pay for your room
here on earth.”
Mohammed Ali
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“We make a living by what we get. We make a life by
what we give.”
Winston Churchill
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Thoughts to Ponder
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Life’s Lessons : Chapter 12
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Learning Objectives
Identify the authoritative standards-setting bodies for establishing GAAP
for Not-For-Profits (NFPs).
• Explain financial reporting and accounting for NFPs:
o Contributions, contributions of services, pass through
contributions
o Pledges
o Collection Items
o Gains and losses on Investments
o Fixed Assets
• Special problems of determining the cost of fund-raising activities
• Assessing the financial conditions of NFPs’
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• Reporting of Cash Flows by NFPs
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• Division of Resources into:
o Unrestricted
o Temporarily restricted
o Permanently
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How to determine whether it is a
‘Nongovernmental NFP’ or ‘Governmental Entity’
• It was not created by a government, but rather by individuals.
• FASB is the authoritative standards-setting body for financial
reporting, not the GASB.
• Examples of not-for-profit organizations: March of Dimes, American
Red Cross, etc.
o March of Dimes’ mission is to improve the health of babies by
preventing birth defects, premature birth, and infant mortality.
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• It may not have the power to levy tax-exempt debt.
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• It does not have the power to levy taxes.
o American Red Cross works to provide relief to victims of
disasters and help people prevent, prepare for, and respond to
emergencies.
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Governments Vs. Non-profits
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• FASB: sets standards for non governmental nonprofits except federal government.
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• GASB: sets standards for all state and local
governmental entities (including governmental
nonprofits).
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A wide variety of entities!
• Some non-profits are hybrids:
o Funding derived from both exchange & nonexchange transactions.
Ex. colleges and universities.
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• Some not-for-profits are comparable to
business.
o Funding derived from exchange
transactions.
 Ex. Hospitals, nursing homes, child care
centers.
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• Some not-for-profits are like governments.
o Funding derived from non-exchange
transactions.
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• Accounting is where the nonprofit buck stops.
Accounting gives the nonprofit a key tool to run its
business, plan its future, and show donors and
regulators it is spending and tracking its funds the
way it should (management tool for protection and
efficient use of assets to accomplish mission)
• Tax/regulatory compliance
o Maintain tax exempt status
o Reporting (Form 990, 990-PF, 990-T as well as
state and local compliance)
o Payroll
• Grant compliance
• Transparency
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Importance of Not-For-Profit Accounting
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Accountant and attorney fees saved . . .
Thousands of dollars
Avoiding sanctions on officers . . .
Penalty up to 200% of excess benefit plus
Repayment
Keeping exempt status so you can accomplish your
mission . . .
Priceless!
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What are the benefits of sound accounting
policies and procedures?
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AICPA Audit and Accounting Guide Not-for-Profit
Organizations (AAG-NPO, revised 2012)
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FASB Statement (SFAS) No. 93 — Depreciation
FASB Statement (SFAS) No. 95 — Stmt of cash flows
FASB Statement (SFAS) No. 116 — Contributions
FASB Statement (SFAS) No. 117 — Financial
statement display
FASB Statement (SFAS) No. 124 — Investments
FASB Statement (SFAS) No. 136---Transfers of assets
FASB Statement (SFAS) No. 164 – NFP entities:
Mergers & Acquisitions
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GAAP for Nongovernmental NFPs
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Required
• Statement of financial position
• Statement of activities (change in net assets)
• Statement of cash flows
• Amounts of each of three classes of net assets permanently restricted, temporarily restricted, and
unrestricted – be displayed in statement of financial
position
• Amounts of change in each of the three classes of
net assets be displayed in the statement of
activities
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SFAS 117: Financial Statements of
Not-for-Profit Organizations
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Financial Statements for NFPs
1. Statement of Activities (Table 12-2)
4. Notes to the Financial Statements
5. Statement of Financial Position (Table 12-1)
Example on next slides:
Christopher Reeve Foundation
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3. Statement of Cash Flows (Table 12-4 and 12-5)
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2. Statement of Functional Expenses (Table 12-3)
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Not all nonprofits include full financial
statements in their annual report – Below are
the condensed financial statements of March of
Dimes Foundation
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Popular Reporting
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FASB and GASB standards differ
on these issues:
• Investments
• Cash flows
• Pensions
• Compensated absences
• Operating leases
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• Reporting entity
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• Financial statement display
• Risks and uncertainties
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• Net Assets (assets less liabilities) must be classified
as either:
1) unrestricted OR
2) temporarily restricted OR
3) permanently restricted
Classifications are based on the existence or absence
of donor-imposed restrictions.
• As long as net assets are classified, there is
considerable flexibility in displaying information
including showing disaggregated fund-based data
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• Reports on an aggregate view of the entity as a whole,
rather than on disaggregated funds, as of a point in
time.
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I) Statement of Financial Position
FASB Statement No.117
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March of Dimes
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• FAS125 (similar but simpler than FAS115)
More similar to GASB than to For-Profit rules!
• Fair value accounting for all investments
• Gains and losses always impact “bottom line”
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Investments
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Investments
GAAP: FASB Statement No. 124
• SFAS No. 124 requires extensive disclosures
regarding investments and related income.
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• Similar to SFAS No. 115 for businesses and GASB
Statement No. 31 for governments, but simpler.
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• Mark equity investments that have readily
determinable values and all debt securities to fair
value.
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II) Statement of Activities
FASB Statement No.117
b) Expenses
c) Gains/losses
d) Contributions (Support)
When net assets are released from restrictions (as
restrictions are met), it causes both,
1) Decrease in temporarily restricted net assets
AND
2) Increase in unrestricted net assets
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a) Revenues
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Reports on changes in all classes of net assets for a
period of time. Changes take the form of:
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II) Statement of Activities (Cont’d)
FASB Statement No.117
1) A single column (March of Dimes) OR
2) Three columns (Red Cross)
Additional classifications to be used in addition to
unrestricted, temporarily restricted, & permanently
restricted. Examples include:
• operating and non operating
• expendable and nonexpendable
• earned and unearned
• recurring and nonrecurring
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Considerable flexibility in presenting Statement of
Activities information
Most commonly used presentations include:
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SFAS No. 117 allows:
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• Revenues are increases in unrestricted net assets
that arise from bilateral exchange transactions in
which the other party receives direct tangible benefits
commensurate with the resources provided.
o Examples include:
 membership dues
 program service fees
 sales of supplies and services
 investment income
 some grants
• Revenues should be reported as increases in one of
the 3 categories of net assets.
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a) Revenues
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• Record depreciation expense for all
capital assets, except collections.
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• Use accrual accounting.
• All should be reported as decreases in unrestricted
net assets.
• Should be reported by functional
categories (i.e. program vs. support)
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b) Expenses
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Salaries
Grants Made
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Each expense is coded two ways –
“object” versus “function”
Salaries
Depreciation
Utilities
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• Criteria to be applied includes considering
1) Purpose
2) Audience
3) Content
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• Reported as fund-raising support expenses, rather
than allocate to functional programs, such as
education or
advocacy
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Joint Costs with a Fund-raising Appeal
AICPA SOP 98-2.
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c) Investment Gains/Losses
• Should be included separately from Revenues & Expenses.
• Report realized and unrealized investment gains/losses.
o GAINS/LOSSES on sale or disposal of equipment
• Report income and GAINS and LOSSES as changes in unrestricted net
assets, unless their use is restricted by the donor or state law.
• Donors may stipulate that a portion of appreciation is to be permanently
restricted to maintain the purchasing power of the endowment.
• If a donor is silent as to LOSSES:
A) they reduce unrestricted net assets if the net appreciation requirement
has been reached OR
B) Otherwise they reduce temporarily restricted net assets.
• GAINS:
o Relate to peripheral or incidental transactions of the entity
o Often are beyond the control of management
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o realized GAINS/LOSSES on investment transactions
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Examples include:
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• Applies to all entities receiving or making charitable
contributions
• Generally, contributions received, including
unconditional promises to give, are recognized as
revenues in period received at their fair values.
• Generally, contributions made, including unconditional
promises to give, are recognized as expenses in the
period made at their fair values.
• Conditional promises to give are recognized when
they become unconditional, i.e. when conditions met.
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SFAS 116: Accounting for Contributions
Received and Contributions Made
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• Recognition of expiration of donor-imposed
restrictions in the period they expire.
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• Contributions received increase
o Permanently restricted net assets
o Temporarily restricted net assets
o Unrestricted net assets
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SFAS 116, Continued
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d) Contributions
FASB Stmt. No 116
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• Contributions are increase in net assets arising from
contributions of resources in non exchange
transactions in which the donor derives no tangible
benefit from the recipient agency.
(i.e. Nonreciprocal Receipts of Assets/Services)
--Compare this definition to “Revenue” on earlier
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• Contributions are the main means of support in NFP’s
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d) Contributions (cont’d)
FASB Stmt. No 116
• Permanently restricted net assets when the donor
stipulates that the assets must be held in perpetuity,
but the organization can spend the income.
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• Temporarily restricted net assets when the donor
imposes restrictions as to purpose (how the asset is
used) or time (when the asset is used).
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Contributions Increase:
• Unrestricted net assets when no donor restrictions
exist or the restrictions have expired.
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• Depend on the occurrence of a specified future and uncertain event
to bind the promissor, such as obtaining matching gifts by the
recipient.
• Do not record these as support until the conditions are substantially
met.
Donated material (gifts-in-kind):
• should be recorded as contributions and as expenses (supplies
expense or cost of goods sold)
• at fair value on the date of the gift
• if an object, clearly measurable basis for fair value can be
established.
Purpose-Restricted Contributions:
• Equivalent to government’s restricted grants.
• Used only for donor-specified purposes.
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Unconditional promises (“Pledges”):
• Depend only on the passage of time or demand by the promisee for
performance.
• Record these as support in the period made.
Conditional promises:
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d) Contributions (cont’d)
FASB Stmt. No 116
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d) Contributions (cont’d)
Unconditional Promises (“Pledges”)
• Definition:
o Promises to make donations of cash or other assets.
• Legally enforceable if donor reneges?
o Pledges are enforceable when the organization has relied on
the pledge and thereby incurred costs.
o However, from a practical standpoint, legal action will rarely be
taken by a NFP.
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o PRIOR to Statement released:
Revenue recognized when pledges received
o AFTER Statement released:
Revenue not recognized until cash has been collected
More conservative approach
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• FASB Stmt. #116:
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• FASB Stmt. # 116:
o conditional promise shall be recognized
when the specified conditions are met
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• Definition:
o Specific conditions have to be satisfied
for the donor to provide the resources.
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d) Contributions (cont’d)
Conditional Promises
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d) Contributions (cont’d)
Contributed Services
FASB Stmt. # 116:
• Contributed Services recognized only if they are of:
o professional nature
o the entity would have paid for it if it had not been
donated.
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A) create or enhance non financial assets (such as a carpenter
constructing a building), OR
B) are provided by individuals possessing specialized skills that
typically would need to be purchased if not provided by
donation (e.g., secretaries or accountants).
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Contributed services should be recorded as
contributions and expense (salaries expense) at fair
value if the services:
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American Red Cross:
• The organization recognizes contributions, which
include unconditional promises as revenues in the
period received or promised.
• The organization reports contributions in the temporarily
or permanently restricted net asset class if they are
received with donor stipulations.
• When the stipulated time ends, then it is reclassified
from restricted to unrestricted net assets in the
consolidated statement of activities.
• Products and services revenue, which arises from sales
of whole blood and components, and plasma derivative
products, and health and safety course fees, is
generally recognized upon delivery of products and
services to the customer.
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d) Contributions (cont’d)
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III) Statement of Functional Expenses
Voluntary health and welfare organizations (VHWOs)
must present this statement showing both functional
expenses and natural (object or line item) expenses
Functional Expenses
Program
Salaries
Adoption
Supplies
Counseling
Depreciation
Education
Support
Mgmt and General
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Natural
Expenses
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(Table 12-3).
Fund-raising
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IV) Statement of Cash flows
FASB Statement No. 95
• The indirect method or direct method (with
reconciliation) may be used.
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• Cash flows are reported as changes in operating,
financing and investing activities (Table 12-5).
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• SFAS No. 95 was amended to extend coverage to
not-for-profit organizations as well as for-profit entities
(Table 12-4).
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• REMEMBER: GASB requires that cash flow
statements be categorized into:
I) Operating activities
II (a) Non capital financing activities
II (b) Capital and financing activities
III) Investing activities
• It also mandates that governments use direct
method to report cash flows.
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• FASB requires that cash flow statements includes:
I) Operating activities
II) Financing activities
III) Investing activities
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IV) Statement of Cash flows
FASB Statement No. 95
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IV) Statement of Cash flows
Miscellaneous Accounting Reminders
• Noncash gifts or in-kind contributions are disclosed
as noncash investing and financing activities in a
separate section.
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• Restricted contributions given for long-term purposes
are included with financing activities along with the
related income.
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• Unrestricted gifts are included with operating
activities.
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•
•
•
•
Liquidity: --Quick ratio and Current ratio
Burden of debt: Total debt/Total assets
Adequacy of available resources: shows extent of
organization’s reserves.
Current fiscal performance: extent of operating
surpluses or deficits.
Reliability of budgetary projections
Proportion of revenues directed to the organization’s
mission
4 important ratios:
o
o
o
o
Fund raising ratio: fund-raising expense measured as a % of total
related revenues.
Program ratio: compares expenses of mission-oriented programs
to administrative costs.
Contributions and grant ratio
Revenue from services ratio
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•
•
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Additional Topics-Financial Indicators
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• FASB Stmt. No. 117
Permits NFPs to present disaggregated data
classified by fund groups, as long as the
aggregated net asset statements are also
presented.
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• NFPs may use fund accounting for internal
purposes to facilitate reporting back to grantors or
funding agencies.
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Optional Fund Accounting
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Optional Fund Accounting
AICPA AAG-NPO pars. 16.01 -16.20
• Plant funds (or land, building, and equipment funds)
• Loan funds (most often in private universities)
• Endowment funds.
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• Restricted current funds (or restricted operating or specific
purpose funds)
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• Unrestricted current funds (or unrestricted operating or general
funds)
• Annuity and life income funds (or split-interest funds)
• Agency funds or (custodian funds).
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• FASB sets accounting standards for Not-for-Profits (NFPs) other
than governments. Thus they follow the full accrual basis of
accounting.
• NFPs should classify their resources into three categories:
unrestricted, temporarily restricted and permanently restricted.
• NFPs should recognize as revenue all unconditional
contributions including both pledges and restricted donations
when they are received.
• NFPs should recognize contributed services only if they are of a
professional nature and would be required by the NFP if not
donated.
• NFPs are not required to recognize and capitalize works of art.
• NFPs like governments face special problems of accounting for
pass-through grants and contributions.
• NFPs follow AICPA’s SOP 98-2 to allocate joint costs that have a
fund-raising appeal.
• The Fiscal health of an NFP can be assessed using traditional
financial ratios.
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Summary
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