Chapter 18
Accounting
for Nonprofit
Organizations
including Voluntary Health
and Welfare Organizations
Standards for all private not-forprofits
 FASB
93: all private not-for-profits will record
depreciation expense
 FASB 116: defines contributions, exchange
transactions, and agency transactions
 FASB 117: requires "entity-wide" financial
statements
separate funds not needed for external financial
reporting
– funds use is OPTIONAL - may still be used for
internal management or to supplement external
financial statements
–
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Additional standards
124 – investments in marketable equity
securities are to be at fair market value
 FASB 136 – asset/liability recorded when
intermediary (fund-raising agencies,
foundations)
 FASB
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Additional standards, continued
 AICPA
– Affiliated Entities
– if controlling financial interest in a for-profit –
consolidate
– if controlling financial interest and an economic
interest in another npo – consolidate – if both not
met, then disclose nature of relationship
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The new financial statements
(FASB 117)
 Sets
minimum display requirements for
three required statements
–
–
–
Statement of Financial Position
Statement of Activities
Statement of Cash Flows
 Very
flexible with formats - FASB suggests
several in standard
 Additional statement required for VHWOs
–
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Statement of Functional Expense
5
Statement of Financial Position
(Balance Sheet)
 Assets
in order of liquidity, except
– restricted assets are classified as to liquidity based
on asset to be acquired
– assets to be used to acquire plant go next to plant
and endowment assets are last
 Alternative
formats acceptable but
– must have total assets, total liabilities, total net
assets for entire entity,
– plus a breakdown into three net asset categories
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Fund balance is replaced by
three "net asset" categories
assets unrestricted by donors,
assets formerly temporarily restricted by
donors & have become unrestricted, may
include board-designated assets
 Temporarily restricted: donor-imposed
restriction that will lapse when restriction is
met
 Permanently restricted: a donor-impose
restriction, e.g., principal of a permanent
endowment
 Unrestricted:
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Statement of Activities
(Operating Statement)
 Reports
changes in the three net asset
classifications and reports reclassifications from
temporarily restricted net assets to unrestricted
net assets
 Revenues, expenses, gains, and losses are
classified into the three net asset classifications
 Subtotals required for income from continuing
operations and DEC
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Statement of Activities, continued
 Minimum
disclosure requirements include
increase/decrease in the three net asset
classifications, and increase/decrease for the
organization as a whole
–
net assets: beginning of year
–
net assets: end of year
 Revenue
by source
 Expenses by function or program
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Unrestricted net assets
Expenses, including:
• Functional programs
• Supporting programs
• Bad debts expense
• Depreciation
• Student aid (university only)
Auxiliary expenses (university
only)
Revenue (exchange transactions)
Revenue from endowments
Revenue from gov. grants
Revenue from investments
Contributions
Reclassification in (net assets
released from restriction):
Satisfy program restrictions
Fixed asset purchase or use
Passage of time restrictions
Auxiliary revenues (university
only)
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Temporarily restricted net assets
Reclassification out (net assets Contributions
released from restriction):
Investment income
– Satisfy program restrictions
– Fixed asset purchase or use
– Passage of time restrictions
Realized gains (loss) on
investments
Actuarial adjustment for
interest on annuity funds
Life income payments
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Permanently restricted net assets
Contributions
Possible non-distributable
gains(loss)
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Statement of Cash Flows
 Categories
(operating, financing, investing)
similar to business
 Donor-restricted cash contributions that
must be used for long-term purposes part of
financing activities
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Statement of Functional Expense
 Required
only for Voluntary Health and
Welfare Organizations (VHWOs)
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Defining and Recording
Contributions (FASB 116)
 FASB
116 separates transactions into
exchange, nonexchange, and agency
–
exchange transaction - both parties benefit
–
contributions - only one party benefits
–
agency - acting as intermediary
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Contributions are defined as
nonexchange
 Donated
assets (cash, investments or property)
are recorded at FMV when received as
unrestricted, temporarily restricted or
permanently restricted depending on donor
stipulation
 Restrictions are used for those not spendable in
current period, or donor-specified for specific
operating purpose, purchase of fixed assets, or
future time period, or permanently
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Exceptions to revenue recognition
guidelines
 Recording
of donations of art work and
treasures is optional if going into collection
that will be held for research or public
exhibition and if sold, proceeds will be used
to acquire other collectibles
 Donated services are recorded at FMV only
if they create or enhance non-financial
assets or require specialized skills that
would have been purchased
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Pledges
 Recorded
in the period made if unconditional or
when conditions lapse
–
there is an allowance for uncollectible, and present
value is used if beyond a year
– footnote disclosures are required on when collection
is expected
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Pledges, continued
 Unrestricted
pledges are reported as
unrestricted revenue
 Restricted pledges are reported as either
temporarily or permanently restricted revenue
 If pledge is to be applied in the future, report
as restricted revenue
 A pledge to give in the future has an implied
restriction for future use
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Conditional donations
 Conditional
donations of cash or property
are credits to "refundable advances"
 Conditional pledges are not recorded until
condition is met
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Reclassifications are used to
release restrictions
 Donor
restrictions lapse when first dollar is
spent on donor-specified operating purpose,
fixed asset purchase, or passage of time
 Contributions for fixed assets may be released
when asset is placed in service or over the
useful life (as depreciated)
 If restriction is going to be released in the
same period okay to record as unrestricted
upon receipt
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Other Concepts
 Marketable
Securities
–
reported at FMV
–
“mark to market”
–
applies to all investments (no categories)
 Depreciation
–
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all private nonprofit organizations record
depreciation, except for works of art`
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Other Concepts, continued
 Fund
raising and support services costs
–
allocated to programs
–
issue of joint cost allocation
 Government
grants
–
considered to be exchange transactions, not
contributions.
–
treat as refundable deposits (a liability) until
work/service is performed, then they become
revenue
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Other Concepts, continued
 Agency
relationships
–
government grants for student support are not
revenue. they are recorded as "assets held on behalf
of others" and are directly distributed
–
also applies to other intermediary transactions
–
test for agency vs. contribution is on degree of
discretion over assets
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Other Concepts, continued
 Donated
assets held by outside trustee for a
nonprofit organization
–
not reported in financial statements
–
only disclosed in the notes
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Other Concepts, continued
 Related
organizations
–
relationship must be disclosed in the notes if
nonprofit organization controls the separate
organization (foundation, auxiliary, guild) or is the
sole beneficiary of the organization or is liable for
any deficit upon liquidation of the organization
–
if both control and sole beneficiary, then must
either consolidate or disclose summarized
financial information in notes
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Voluntary Health and Welfare
Organizations
 United
Way
 Red Cross
 Boy and Girl Scouts
 American Heart Association
 most social service agencies
Qualifications
 Primary
source of revenue is from donors
who do not directly benefit for the
organization’s programs
 Program must be in the area of health,
welfare, or community service
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Types of Funds
 Current
unrestricted fund
 Current restricted fund
 Land, building, and equipment fund
 Endowment fund
 Agency (custodian) fund
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Principles and Procedures
 Use
full accrual accounting
 Major resource categories
– public support
– revenues
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Public Support
 Contributions
 Special
Events Support
 Legacies and Bequests
 Received from Federated and Nonfederated
Campaigns
Recognize as unrestricted, temporarily restricted
or permanently restricted support in the period
received.
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Volunteers - Materials - Rent-Free
 Volunteers
- recognize at fair market value both
an expense and unrestricted contribution if meet
FASB No. 116 criteria
 Donated Materials - recognize at fair market
value both inventory and unrestricted
contributions when received
 Free Rent - recognize at fair market value both
rent expense and unrestricted contributions
when received
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Revenues
 Unrestricted
Revenues
– membership dues revenue
– program services fees
– sales of Publications and Supplies
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Other Revenues
 Investment
Revenues
– investment revenue for interest, dividends, and
other earnings
– realized gain on investment transactions
– net increase (decrease) in carrying value of
investments
Each item is recorded as unrestricted or
unrestricted depending on donor stipulations
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Releases of Donor Restrictions
 Temporarily
restricted donor contributions
are released from restriction when the
organization spends for the purpose the
donor specified or when the specified time
period occurs
 Release is done by reclassifying the net
assets
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Expenses
 Expenses
reduce unrestricted net assets
 Direct and indirect natural (object) expenses
are allocated to functional and support
classifications
–
program expenses: actual programs conducted by
the voluntary health and welfare organization
–
support expenses: management and general,
fund-raising, membership development
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FASB No. 124
 Requires
VHWOs to carry their investment
at market value
 Unrealized appreciation (or depreciation) is
shown separately in net increase (or
decrease) in carrying value of investments
 Gain/Loss on investments are considered
increases or decreases in unrestricted net
assets
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Financial Statements
 Statement
of Financial Position
 Statement of Activities
 Statement of Cash Flows
 Statement of Functional Expenses
– required for all Voluntary Health and Welfare
Organizations
– matrix providing detail of how natural
expenses have been allocated to program and
support classifications
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Other Not-for-Profits
 religious organizations
 libraries and museums
 cemeteries
 labor unions
 zoos
 social and country clubs
 performing arts centers
 political parties
Accounting for Other NFPs
 May
use fund accounting for internal control
 Financial statements report organization-wide
totals
– Statement of Financial Position
– Statement of Activities
– Statement of Cash Flows
 Net
assets are classified as unrestricted,
temporarily restricted, or permanently
restricted
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