Chapter 12
Not-for-Profit Organizations
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Learning Objectives
 Identify the authoritative standards-setting bodies for establishing GAAP
for Not-For-Profits (NFPs).
 Division of Resources into:
-Unrestricted
-Temporarily restricted
-Permanently
 Reporting of Cash Flows by NFPs
 Explain financial reporting and accounting for NFPs:
-Contributions, contributions of services, pass through contributions
-Pledges
-Collection Items
-Gains and losses on Investments
-Fixed Assets
 Special problems of determining the cost of fund-raising activities
 Assessing the financial conditions of NFPs’
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Governments Vs. Non-profits
 GASB: sets standards for all state and local
governments.
 FASB: sets standards for non governmental nonprofits except federal government.
 FASB Stmt. #117: Requires that non-profits issue
3 statements:
 Balance sheet
 Statement of Activities
 Statement of Cash flows
 FASB Stmt. # 117: also requires that net assets be
classified as unrestricted, temporarily restricted, or
permanently restricted based on the existence or
absence of donor-imposed restrictions.
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Governments Vs. Non-profits (cont’d)
FASB Stmt. # 117 requires that:
 Revenues and expenses be reported in statements of
activities.
 Statement of activities should separately include gains
and losses on investments and other assets.
 Revenues should be reported as increases in one of the
3 categories of net assets.
 Non-profits make 2 entries when spending restricted
resources: 1) in restricted fund 2) unrestricted fund.
 Expenses should be reported by function.
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Governments Vs. Non-profits (cont’d)
GASB requires that cash flow statements be categorized into:
 Operating activities
 Non capital financing activities
 Capital and financing activities
 Investing activities
It also mandates that governments use direct method to
report cash flows.
FASB No. 95 requires cash flow statements to include:
 operating activities
 financing activities
 investing activities
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GAAP for Nongovernmental NFPs
FASB Statement (SFAS) No. 93 — depreciation
FASB Statement (SFAS) No. 116 — contributions
FASB Statement (SFAS) No. 117 — financial statement
display
FASB Statement (SFAS) No. 124 — investments
AICPA Audit and Accounting Guide Not-for-Profit
Organizations (AAG-NPO)
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Nongovernmental NFP Vs. governmental
entity?
 It was not created by a government, but rather by individuals.
 It does not have the power to levy taxes.
 It may not have the power to levy tax-exempt debt.
 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.
-March of Dimes’ mission is to improve the health of babies by
preventing birth defects, premature birth, and infant mortality.
-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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FASB and GASB standards differ
on these issues:
 Financial statement display
 Reporting entity
 Investments
 Cash flows
 Pensions
 Compensated absences
 Operating leases
 Risks and uncertainties
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Financial Statements for NFPs
 Statement of Financial Position (Table 12-1)
 Statement of Activities (Table 12-2)
 Statement of Functional Expenses (Table 12-3)
 Statement of Cash Flows (Table 12-4 and 12-5)
 Notes to the Financial Statements
American Red Cross’s consolidated financial statements
can be found using the following link:
http://www.redcross.org/pubs/car05/2005CFS.pdf
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Statement of Financial Position
FASB Statement No.117
 Reports on an aggregate view of the entity as a
whole, rather than on disaggregated funds, as of a
point in time.
 Net assets (assets less liabilities) must be classified
into classes: unrestricted, temporarily restricted,
permanently restricted
 Considerable flexibility in displaying information
including showing disaggregated fund-based data,
as long as net assets are classified.
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March of Dimes—Statement of Financial
Position
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Statement of Activities
FASB Statement No.117
 Reports on changes in all classes of net assets for a
period of time.
 Changes take the form of revenues, gains, support,
expenses, and losses.
 Net assets released from restrictions decrease
temporarily restricted net assets and increase
unrestricted net assets, as restrictions are met.
 All expenses should be reported as decreases in
unrestricted net assets.
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Statement of Activities (cont’d)
 SFAS No. 117 allows considerable flexibility in
presenting information; either a single column or
three columns (Table 12-2) for each class of net
asset that are often used.
 Additional classifications can be used, such as:




operating and non operating,
expendable and nonexpendable,
earned and unearned, and
recurring and nonrecurring.
 Expenses are reported by functional categories
(i.e., program vs. support)
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March of Dimes—Statement of Activities
for 2003 and 2004
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Statement of Cash Flows
 SFAS No. 95 was amended to extend coverage to not-forprofit organizations as well as for-profit entities
(Table 12-4).
 Cash flows are reported as changes in operating, financing
and investing activities (Table 12-5).
 The indirect method or direct method (with reconciliation)
may be used.
 Unrestricted gifts are included with operating activities.
 Restricted contributions given for long-term purposes are
included with financing activities along with the related
income.
 Noncash gifts or in-kind contributions are disclosed as
noncash investing and financing activities in a separate
section.
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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 (Table 12-3).
Natural
Expenses
Functional Expenses
Program
Salaries
Adoption
Supplies
Counseling
Support
Mgt and General
Fund-raising
Depreciation
Education
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Revenues
 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.
 Examples include:
-membership dues
-program service fees
-sales of supplies and services
-investment income
-some grants
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Expenses
 Use accrual accounting.
 Report all expenses as decreases in unrestricted
net assets.
 Record depreciation expense for all capital assets,
except collections.
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Joint Costs with a Fund-raising Appeal
 Reported as fund-raising support expenses,
rather than allocate to functional programs,
such as education or advocacy
 Criteria to be applied includes considering
 purpose,
 audience, and
 content.
 AICPA SOP 98-2.
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Investments GAAP - SFAS No. 124
 Mark equity investments that have readily determinable values and all
debt securities to fair value.
 Report realized and unrealized gains and losses and investment income
in the Statement of Activities.
 Report income and gains and losses as changes in unrestricted net
assets, unless their use is restricted by the donor or legally restricted
by 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, losses reduce unrestricted net assets if the net
appreciation requirement has been reached, otherwise
temporarily restricted net assets.
 Similar to SFAS No. 115 for businesses and GASB Statement No. 31
for governments, but simpler.
 SFAS No. 124 requires extensive disclosures regarding
investments and related income.
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Investments-Example: American Red Cross
The notes to the financial statements of American Red Cross
indicated the following:
 Investments are reported at fair value.
 The separately managed endowment fund accumulates realized gains and
losses on security transactions which are available to meet current
expenses.
 Investment income classified as operating revenue consists of interest and
dividend income.
 All other realized and unrealized gains and losses are classified as nonoperating activity.
 Revenues, expenses, gains, and losses are classified based on the
existence or absence of donor-imposed restrictions.
 The net assets of the organization are classified and reported as
unrestricted, temporarily restricted, and permanently restricted.
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Contributions
Contributions: nonreciprocal receipts of
assets/services.
 Includes unconditional promises—pledges.
 GAAP: FASB Stmt. # 116 “Accounting for
Contributions Received and Contributions made.”
 Contributions are the main means of support in
NFP’s
 Support is:
-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.
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Contributions (cont’d)
Contributions Increase:
 Unrestricted net assets when no donor restrictions exist or
the restrictions have expired.
Ex: March of Dimes’ unrestricted net assets for 2004 = $15,087,000.
 Temporarily restricted net assets when the donor imposes
restrictions as to purpose (how the asset is used) or time
(when the asset is used).
Ex: March of Dimes’Temporarily restricted assets for 2004 =
$ 4,602,000.
 Permanently restricted net assets when the donor stipulates
that the assets must be held in perpetuity, but the
organization can spend the income.
Ex: March of Dimes’ Permanently restricted assets for March of
Dimes for the year 2004 = $11,950,000.
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Contributions (cont’d)
Unconditional promises:

Depend only on the passage of time or demand by the promisee for performance.

Record these as support in the period made.
Conditional promises:

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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Contributed Services
Contributed services should be recorded as
contributions and expense (salaries expense) at
fair value if the services:
 create or enhance non financial assets (such as a
carpenter constructing a building), or
 are provided by individuals possessing specialized
skills that typically would need to be purchased if not
provided by donation (e.g., secretaries or accountants).
FASB Stmt. # 116:
 Contributed Services recognized only if they are of:
-professional nature
-the entity would have paid for it if it had not been donated.
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Conditional Promises
 Definition:
-Specific conditions have to be satisfied
for the donor to provide the resources.
 FASB Stmt. # 116:
-conditional promise shall be recognized
when the specified conditions are met.
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Contributions—Example: American Red Cross
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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Pledges
 Pledges: promises to make donations of
cash or other assets.
 Pledges are enforceable when the
organization has relied on the pledge and
thereby incurred costs.
 Prior to FASB Stmt. # 116: non-profits
recognized pledges when received.
 Traditional view: not recognize until cash
has been collected.
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Gains on Investments
 Gains are:
 Increases in unrestricted net assets
 Relate to peripheral or incidental transactions of
the entity
 Often are beyond the control of management
 Examples include:
 realized gains on investment transactions
 gains on sale or disposal of equipment
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Assessing Not-for-Profits
 Some not-for-profits are comparable to
business.
 Some not-for-profits are like governments.
 They derive revenues from exchange
transactions.
-Lack of power to tax
-Not-for-profits are private rather than public
institutions.
 Some non-profits are hybrids:
-Rely both on exchange and non exchange
transactions.
-Ex: colleges and universities.
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Financial Indicators
 Liquidity:
-Quick ratio
-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
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Financial Indicators (cont’d)
 Important to know what proportion of revenues
are directed to an organization’s mission.
 4 important ratios:
-Fund raising ratio: fund-raising expense
measured as a % of total related revenues.
-Program ratio: compares expenses of missionoriented programs to administrative costs.
-Contributions and grant ratio
-Revenue from services ratio
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Optional Fund Accounting
 NFPs may use fund accounting for internal
purposes to facilitate reporting back to
grantors or funding agencies.
 SFAS Stmt. # 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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Optional Fund Accounting
AICPA AAG-NPO pars. 16.01 -16.20
 Unrestricted current funds (or unrestricted operating or
general funds)
 Restricted current funds (or restricted operating or specific
purpose funds)
 Plant funds (or land, building, and equipment funds)
 Loan funds (most often in private universities)
 Endowment funds.
 Annuity and life income funds (or split-interest funds)
 Agency funds or (custodian funds).
American Red Cross
http://www.redcross.org/pubs/car05/Annual_Report.PDF
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Summary
 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 passthrough 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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