KEY ACCOUNTING & REPORTING ISSUES FOR NONPROFITS—
REVENUES RECOGNITION
By Larry L. Perry, CPA
CPA Firm Support Services, LLC
LEARNING OBJECTIVES
 Understand principles of revenue recognition in Statements of Financial
Accounting Standards for nonprofit organizations
 Be able to properly account for revenues of nonprofit organizations
 Understand basic principles of accounting and reporting for revenues accounts
presented on the statement of activities
 Become familiar with internal controls over cash receipts and revenues that
enable their proper recognition in financial statements
KEY SFASs AFFECTING NONPROFIT ORGANIZATIONS
Most nonprofit organizations (NPOs) adopt the accounting and reporting requirements of
US generally accepted accounting principles (GAAP). When financial statement users
permit, some NPOs are utilizing other comprehensive bases of accounting (reporting
frameworks) such as modified cash or the income tax basis. For-profit and nonprofit
organizations may also adopt International Financial Reporting Standards (IFRS) or IFRS
for Small and Medium-Size Entities as an alternative reporting framework that is
recognized as GAAP by the FASB and the AICPA.
Our discussions in this series will focus on accounting and reporting requirements
included in US GAAP. A brief discussion of Statements of Financial Accounting
Standards (SFASs) that specifically affect NPOs accounting and reporting for revenues is
included below.
FASB Summary of Statement No. 116 (Topic 958)—Accounting for Contributions
Received and Contributions Made
This Statement establishes accounting standards for contributions and applies to all
entities that receive or make contributions. Generally contributions received, including
unconditional promises to give, are recognized as revenues in the period received at their
fair values. Contributions made, including unconditional promises to give, are recognized
as expenses in the period made at their fair values. Conditional promises to give, whether
received or made, are recognized when they become unconditional, that is, when the
conditions are substantially met.
This Statement requires not-for-profit organizations to distinguish between contributions
received that increase permanently restricted net assets, temporarily restricted net assets,
and unrestricted net assets. It also requires recognition of the expiration of donor-imposed
restrictions in the period in which the restrictions expire.
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This Statement allows certain exceptions for contributions of services and works of art,
historical treasures, and similar assets. Contributions of services are recognized only if
the services received (a) create or enhance nonfinancial assets, or (b) require specialized
skills, are provided by individuals possessing those skills, and would typically need to be
purchased if not provided by donation. Contributions of works of art, historical treasures,
and similar assets need not be recognized as revenues and capitalized if the donated items
are added to collections held for public exhibition, education, or research in furtherance
of public service rather than financial gain.
This Statement requires certain disclosures for collection items not capitalized and for
receipts of contributed services and promises to give.
Issues Related to Reporting Frameworks
With the exception of a few disclosure requirements, GAAP is basically the same for
large and small entities. As an alternative to GAAP, management may elect to prepare its
financial statements on another comprehensive basis of accounting (OCBOA), such as
the modified cash or income tax basis. When such presentations are acceptable to users
of the financial statements, accountants may audit, review, or compile OCBOA
statements. IFRS and IFRS for Small and Medium-Size Entities are also recognized as
GAAP by the AICPA and FASB as alternatives to US GAAP.
GAAP-basis financial statements are usually required by accountability organizations,
government agencies and grantors. In these circumstances, all the requirements of
generally accepted accounting principles applicable to nonprofit organizations must be
met, if material. When auditing entities that receive federal funds, governmental
accounting and reporting principles, and requirements of oversight agencies, must also be
reflected in performing the engagement and preparing reports.
NONPROFIT ORGANIZATION FINANCIAL STATEMENTS
Basic nonprofit organization financial statements include:
Statement of Financial Position
This statement reports total assets, liabilities, and net assets of an organization and any
consolidated subsidiaries. SFAS No. 117 (Topic 958) requires net assets to be reported as
permanently restricted net assets, temporarily restricted net assets, and unrestricted net
assets. Unrestricted net assets may include designations made by an entity’s board of
directors or trustees.
Statement of Activities
This statement reports the changes in permanently restricted net assets, temporarily
restricted net assets, unrestricted net assets, and the total change in net assets. Revenues
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are reported in the classes to which they apply. Temporarily restricted revenues are
reclassified as unrestricted when time and purpose designations have been accomplished.
Revenues from permanently restricted net assets will be accounted for as specified in the
related agreements or, if not specified, as unrestricted. All expenses will be recorded as
unrestricted in functional categories, program services, management and general,
fundraising and, if applicable, member development.
Statement of Cash Flows
This statement follows the requirements of SFAS No. 95. The statement of cash flows
reports cash flows in total rather than by the three classes of net assets. One significant
difference is that certain restricted donations (usually permanently restricted) are
classified as cash flows from financing activities and not included in income from
operations.
Statement of Functional Expenses
Voluntary health and welfare organizations must present this statement in a matrix format
that identifies major categories of expense and their allocation among major categories of
program services, management and general and fundraising expenses. Other nonprofit
organizations may voluntarily present this statement to provide financial statement users
a better understanding of the entity’s use of resources.
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ILLUSTRATIVE FINANCIAL STATEMENTS AND FOOTNOTES
DISASTER RELIEF, INC.
STATEMENT OF FINANCIAL POSITION
December 31, 2014
ASSETS
CURRENT ASSETS
Cash:
Unrestricted
Restricted
Inventories of merchandise and supplies
Prepaid expenses and deposits
Total Current Assets
$192,712
87,896
33,214
9,188
323,010
INVESTMENTS
215,632
PROPERTY AND EQUIPMENT
167,946
TOTAL ASSETS
$706,588
LIABILITIES AND NET ASSETS
CURRENT LIABILITIES
Current portion of long-term debt
Accounts payable
Payroll tax liabilities
$ 32,259
15,333
3,115
Total Current Liabilities
50,707
LONG-TERM DEBT
113,839
NET ASSETS
Unrestricted (Board designated—$29,672)
Temporarily restricted
454,146
87,896
Total Net Assets
542,042
TOTAL LIABILITIES AND NET ASSETS
See Accompanying Notes to Financial Statements.
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$706,588
DISASTER RELIEF, INC.
STATEMENT OF ACTIVITIES
Year Ended December 31, 2014
Unrestricted
Temporarily
Restricted
Total .
SUPPORT AND REVENUES
Contributions:
Unrestricted
Restricted
In-kind
Unrealized gain on investments
Interest
Net assets released from restrictions
$3,676,820
$3,676,820
240,960
205,000
863
1,101
(153,064)
-0-
$ 240,960
205,000
863
1,101
153,064
Total Support and Revenues
4,036,848
87,896
4,124,744
EXPENSES
Program services
Supporting services
Management and general
Fundraising
Total Expenses
2,593, 401
2,593,401
751,923
563,710
751,923
563,710
3,909,034
3,909,034
INCREASE IN NET ASSETS
127,814
87,896
215,710
NET ASSETS AT BEGINNING OF YEAR
326,332
-0-
326,332
$ 454,146
$ 87,896
$ 542,042
NET ASSETS AT END OF YEAR
See Accompanying Notes to Financial Statements.
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DISASTER RELIEF, INC.
STATEMENT OF CASH FLOWS
Year Ended December 31, 2014
CASH FLOWS FROM OPERATING ACTIVITIES
Increase in net assets
Adjustments to reconcile increase in net assets to net cash
provided by operating activities
In-kind contributions
Depreciation
Increase in unrealized gains and losses on investments
Increase in accounts payable
Increase in payroll tax liabilities
$ 215,710
(205,000)
18,738
(863)
6,886
1,175
NET CASH PROVIDED BY OPERATING ACTIVITIES
36,646
CASH FLOWS USED IN INVESTING ACTIVITIES
Purchase of tractor/trailer
(64,031)
CASH FLOWS USED BY FINANCING ACTIVITIES
Payments on debt obligations
__ (54,229)
NET DECREASE IN CASH
(81,614)
CASH AT BEGINNING OF YEAR
362,222
CASH AT END OF YEAR
$
See Notes to Accompanying Financial Statements.
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280,608
DISASTER RELIEF, INC.
NOTES TO FINANCIAL STATEMENTS
Year Ended December 31, 2014
NOTE A—SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Organization
Disaster Relief, Inc. was organized in 1983 and is a nonprofit organization, exempt from income
taxes under Section 501 (c) (3) of the Internal Revenue Code. It’s purpose if to distribute lifesustaining supplies and services to residents of areas of the United States that have suffered
natural or man-made disasters. The Organization receives a majority of its support and revenues
from contributions made by the general public.
The Organization maintains operating relationships with several affiliated entities but has no
monetary investment in, or substantial influence or control over, these entities. These financial
statements, therefore, include only the accounts of Disaster Relief, Inc.
Summary of Significant Accounting Policies
Method of Accounting:
The financial statements of Disaster Relief, Inc. have been prepared on the accrual basis of
accounting and in accordance with the American Institute of Accountants’ Audit and Accounting
Guide, Not-for-Profit Organizations. The significant accounting policies followed are described
below to enhance the usefulness of the financial statements to the reader.
Basis of Presentation
Financial statement presentation follows the recommendations of the Financial Accounting
Standards Board in its Statement of Financial Accounting Standards (SFAS) No. 117 (ASC 958),
Financial Statements of Not-for-Profit Organizations. Under SFAS No. 117, the Organization is
required to report information regarding its financial position and activities according to three
classes of net assets: unrestricted net assets, temporarily restricted net assets, and permanently
restricted net assets.
Unrestricted Net Assets:
Unrestricted net assets are resources over which the Board of Directors has discretionary control
and are available for the various programs and administration of the Organization.
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Temporarily Restricted Net Assets:
Temporarily restricted net assets are resources subject to donor imposed restrictions which will
be satisfied by actions of the Organization or the passage of time. Donor restricted contributions
for which restrictions are met in the same reporting period are reported as unrestricted support.
Permanently Restricted Net Assets:
Permanently restricted net assets are resources subject to donor imposed restrictions that neither
expire by the passage of time nor can be fulfilled or otherwise removed by actions of the
Organization. There currently are no permanently restricted net assets.
Inventory of Merchandise and Supplies
The inventory consists of merchandise and supplies used in the Organization’s program services.
The purchased inventory is valued at average cost, which is less than market value. Donated
merchandise and supplies are recorded at their fair value at the date of donation.
Property and Equipment
Property and equipment expenditures of $1,000 or more are capitalized at cost and depreciated
over the estimated useful lives of the respective assets on a straight-line basis. Donated fixed
assets are capitalized at fair market value and depreciated on a straight-line basis. Routine
repairs and maintenance are expensed as incurred.
Revenue Recognition
All contributions are considered to be available for unrestricted use unless specifically restricted
by the donor. Amounts received that are designated for future periods or restricted by the donor
for specific purposes are reported as temporarily restricted support, which increases that category
of net assets. When a donor restriction expires, that is, when a stipulated time restriction ends or
the purpose of the restriction is accomplished, temporarily restricted net assets are reclassified to
unrestricted net assets and reported in the statement of activities as net assets released from
restrictions.
Income Taxes
Disaster Relief, Inc. is a nonprofit organization that is exempt from income taxes under Section
501 (c) (3) of the Internal Revenue Code. Management has reviewed all open tax years for all
tax jurisdictions and there are no uncertain tax positions or other provision for income taxes that
should be recognized in these financial statements. The Organization has also been classified as
an entity that is not a private foundation within the meaning of IRC Section 509(a) and qualifies
for deductible contributions as provided in IRC Section 170(b)(1)(A)(vi).
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Use of Estimates
The preparation of financial statements in conformity with generally accepted accounting
principles requires management to make estimates and assumptions that affect the reported
amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of
the financial statements and the reported amounts of revenues and expenses during the reporting
period. Actual results could differ from those estimates.
Concentrations Risk
Concentrations risk consists of cash deposits. The Organization maintains its cash in various
bank deposit accounts that, at times, may exceed federally insured and other insured limits. The
Organization has not experienced any losses in such accounts nor does it expect to incur any
such losses in the future.
Cash
Cash consists of funds on deposit at financial institutions. The Organization has no cash
equivalents.
NOTE B—INVESTMENTS
The Organization has invested in various marketable equity securities. All of the investments are
accounted for using fair value accounting (Topic 820) in accordance with SFAS Nos. 124 (Topic
958-320). All securities were valued based on quoted market prices on the New York Stock
Exchange as of December 31, 2014.
Unrealized
Description
Shares
Input Level Gains and Losses Fair Value
Dorcus, Intl.
Pork Belly Feeds
Shovels, Inc.
Bean Bagger Co.
U.S. Motors
100
390
510
10,105
215
Level 1
Level 1
Level 1
Level 1
Level 1
$
298
1,398
5,135
1.133
(7,101)
$
863
$
8,432
43,315
88,999
50,250
24,636
$215,632
NOTE C—PROPERTY AND EQUIPMENT
Property and equipment, at cost, consists of the following at December 31, 2014:
Office furniture and equipment
Delivery trucks
$
87,789
124,664
212,453
44,507
$ 167,946
Less accumulated depreciation
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Depreciation expense was $18,738 for the year ended December 31, 2014.
NOTE D—RELATED PARTY TRANSACTIONS
The Organization purchases merchandise and supplies from affiliated organizations dedicated to
disaster relief. The Organization has no monetary investment in any of the affiliates or the
power to control their operating activites. These organizations and the volume of transactions
during the year ended December 31, 2014 are:
 Pure Water, Inc.—Purchased bottled water--$ 39,548
 Surplus Supplies—Purchased canned rations --$ 71,598
 Tents and Poles—Purchased tents--$ 149,713
All purchase prices in these transactions were at arms-length and approximated fair market
value.
NOTE E—DEBT OBLIGATIONS
Debt obligations as of December 31, 2014 consist of:
Note payable to bank, payable in monthly installments of
$ 1,252 including interest at 1.75%, collateralized
by 2010 Gruman van
$ 15,768
Installment contract payable to GMAC, payable in
monthly installments of $ 1,250 including
interest at 3.5%, collateralized by 2011 GMC
tractor/trailer
64,765
Installment contract payable to Easy Credit Company,
payable in monthly installments of $ 668 including
interest at 5.99%, collateralized by 2012 Ford F350
flatbed
22,646
Installment contract payable to Legal Lenders, payable in
monthly installments of $ 497 including interest at
10.25%, collateralized by 2008 Strato-Liner
42,919
146,098
Less current portion
(32,259)
$ 113,839
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Principal maturities on these obligations are:
Year Ending December 31,
2015
2016
2017
2018
2019
2020 and thereafter
$ 32,259
19,288
20,999
19,132
16,257
38,163
$146,098
Interest paid during the year ended December 31, 2014 amounted to $ 12,196.
NOTE F—RESTRICTED NET ASSETS
Unexpended temporarily restricted net assets as of December 31, 2014 result from gifts
containing donor restrictions requiring use of the funds in the following locations:
New Orleans
Balance, January 1, 2014
$
Contributions
Change in net assets
Transfer to unrestricted funds
upon satisfaction of
purpose restrictions
Increase in temporarily restricted
net assets
Balance, December 31, 2014
$
-0-
Galveston
$
-0-
Total
$ -0-
210,980
29,980
240,960
210,980
29,980
240,960
(135,255)
(17,809)
(153,064)
85,725
2,171
$ 87,896
85,725
$ 2,171
$ 87,896
One individual contributed $ 100,000 of these designated funds during the year ended December
31, 2014.
NOTE G—OPERATING LEASE
The Organization leases office facilities under an operating lease. As of December 31, 2014, the
lease payments are as follows:
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Year Ended December 31,
2015
2016
2017
2018
$ 62,112
63,729
65,670
10,999
$202,510
Rental expense for the year ended December 31, 2014 amounted to $ 64,887.
NOTE H—DONATED SERVICES
A number of volunteers have donated significant amounts of their time to the organization’s
program services and administrative operations. These donated services are not reflected in the
financial statements since none are specialized and, therefore, these services do not meet the
criteria for recognition as contributed services.
NOTE I—NON-CASH TRANSACTIONS
Non-cash transactions during the year ended December 31, 2010, not included in the Statement
of Cash Flows, consist of the following:
1. Purchase of 2006 GMC tractor/trailer on an installment contract for $ 69,399.
2. Donations of bedding and linens recorded at fair market value of $ 205,000.
NOTE J—JOINT COST ALLOCATION
In 2014, the Organization conducted activities that were multi-functional, i.e., they
contained program, management and general and fundraising components. Such
activities were special events, conferences, workshops and direct mail campaigns. Joint
activity costs not directly attributable to these activities are $31,000. Joint costs for each
activity were $5,000, $10,000, $9,000 and $7, 000, respectively. These costs were
allocated to functional components as follows:




New Orleans relief
Galveston relief
Management and general
Fundraising
Total
$ 8,000
4,000
10,000
9,000
$31,000
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UNDERSTANDING REVENUE RECOGNITION
All principles of revenue recognition discussed in these materials are based on US
accounting standards. On July 1, 2009, the Financial Accounting Standards Board
(FASB) launched its online Accounting Standards Codification (ASC) which is the one
authoritative source of US GAAP. The FASB combined all accounting standards
included in the existing GAAP Hierarchy from SFAS No. 162 in the ASC, all of which is
now considered authoritative GAAP. While other literature may be useful for guidance
in accounting and reporting activities, it is not considered authoritative.
To understand principles of revenue recognition for both for-profit and nonprofit
organizations, we must begin with the authoritative standards from the ASC.
Revenues and Gains Overview:
605-10-25-1: The recognition of revenue and gains of an entity during a period involves
consideration of the following two factors, with sometimes one and sometimes the other
being more important consideration:
a. Being realized or realizable. Revenue and gains generally are not recognized
until realized or realizable. Paragraph 83(a) of FASB Concepts Statement No. 5,
Recognition and Measurement in Financial Statements of Business Enterprises,
states that revenue and gains are realized when products (goods or services),
merchandise, or other assets are exchanged for cash or claims to cash. That
paragraph states that revenue and gains are realizable when related assets received
or held are readily convertible to known amounts of cash or claims to cash.
b. Being earned. Paragraph 83(b) of FASB Concepts Statement No. 5,
Recognition and Measurement in Financial Statements of Business Enterprises,
states that revenue is not recognized until earned. That paragraph states that an
entity’s revenue-earning activities involve delivering or producing goods,
rendering services, or other activities that constitute its ongoing major or central
operations, and revenues are considered to have been earned when the entity has
substantially accomplished what it must do to be entitled to the benefits
represented by the revenues. That paragraph states that gains commonly result
form transactions and other events that involve no earning process, and for
recognizing gains, being earned is generally less significant than being realized or
realizable.
Not-for-Profit Entities--Revenue Recognition—958-605-25
General Note: The Recognition Section provides guidance on the required criteria,
timing, and location (within the financial statements) for recording a particular item in the
financial statements. Disclosure is not recognition.
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General:
958-605-25-1: Revenue from exchange transactions follow generally accepted accounting
principles (GAAP); for example, revenue derived from membership dues in exchange
transactions shall be recognized over the period to which the dues relate. Nonrefundable
initiation and life membership fees received in exchange transactions shall be recognized
as revenues in the period in which the fees become receivable if future fees are expected
to cover the costs of future services to be provided to members. If nonrefundable
initiation and life membership fees, rather than future fees, are expected to cover those
costs, nonrefundable initiation and life member fees received in exchange transactions
shall be recognized as revenue over the average duration of membership, the life
expectancy of members, or other appropriate time periods.
Contributions Received:
958-605-25-2: Except as provided in paragraphs 958-605-25-16 through 25-18,
contributions received shall be recognized as revenues or gains in the period received and
as assets, decreases of liabilities, or expenses depending on the form of the benefits
received. The classification of contributions received as revenues or gains depends on
whether the transactions are part of the NFP's ongoing major or central activities
(revenues), or are peripheral or incidental to the NFP (gains). A contribution made and a
corresponding contribution received generally are recognized by both the donor and the
donee at the same time, that is, upon occurrence of the underlying event—the
nonreciprocal transfer of an economic benefit.
958-605-25-3: Donor-imposed restrictions place limits on the use of contributed
resources and may affect an entity's performance and its ability to provide services.
However, limitations on the use of donated resources do not change the fundamental
nature of the contribution transaction or conclusions about when to recognize the
underlying event.
958-605-25-4: A major uncertainty about the existence of value may indicate that an item
received or given should not be recognized. For example, a gift of clothing or furniture
has no value unless it can be utilized in either of the following ways:


Used internally by the not-for-profit entity (NFP) or for program purposes
Sold by the NFP
If an item is accepted solely to be saved for its potential future use in scientific or
educational research and has no alternative use, it may have uncertain value, or perhaps
no value, and shall not be recognized. For example, contributions of flora, fauna,
photographs, and objects that are identified with historic persons, places, or events often
have no value or have highly restricted alternative uses.
958-605-25-5: However, contributed tangible property worth accepting generally
possesses the common characteristic of all assets—future economic benefit or service
potential. The future economic benefit or service potential of a tangible item usually can
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be obtained by exchanging it for cash or by using it to produce goods or services. Certain
forms of contributed resources may be more difficult to measure reliably than others, but
the form of the contributed resources alone should not change conclusions about whether
to recognize the underlying event.
The following section discusses the application of nonprofit accounting and reporting
standards to the statement of activities.
STATEMENT OF ACTIVITIES—REVENUES
Contributions
Paragraph 5 of SFAS No. 116 (ASC 958-605) describes a contribution as an
unconditional transfer of assets or settlement of liabilities in a voluntary nonreciprocal
transfer. Transferred assets may be cash, securities, property, use of facilities or utilities,
materials and supplies, services, and unconditional promises to give those items in the
future.
Unconditional promises to give, contributions, must be distinguished from:



Intentions to Give—planning to or intending to give.
Exchange Transactions—“This for that” transactions in which tangible benefits
are transferred in exchange for payments. Selling merchandise or collecting fees
in connection with program services are examples. Some government grants that
require the grantee to perform services are usually considered exchange
transactions.
Agency or Intermediary Transactions—Transfers of assets as an agent or
intermediary, not as the principal beneficiary of a transaction.
Contributions received and promises to give are recorded at their fair value and reported
as an increase in net assets when received as unrestricted, temporarily restricted, or
permanently restricted. When the donor has imposed restrictions on the gift that will be
met in the future reporting period, the gift is restricted, not deferred revenue.
Restricted Contributions
When the donor has restricted the use of a contribution, or its use to a future time period,
the contribution is restricted. Gifts for building programs, specific program services or
projects, or endowments will be recorded as a restricted contribution. The use of gifts can
be expressly specified in letters, trust agreements or other written documents given in
response to an appeal in a newsletter or conference. In any case, there must be some
evidence of the promise to give and the restrictions on its use.
Temporary and Permanent Restrictions:
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Temporary restrictions usually give the recipient organization control over the disposition
of the funds in accordance with the donor-imposed restrictions. Permanent restrictions
usually establish endowments that prohibit invasion of the principal but usually permit
unrestricted use of the income from the endowment’s assets. The trust instrument
creating an endowment may restrict the use of income for specified purposes, in which
case a temporary restriction would be created.
Temporarily restricted contributions are recognized as support when received and
reclassified to unrestricted net assets when time and purpose restrictions have been
satisfied.
Unrestricted Support:
Contributions not subject to donor-imposed time and purpose restrictions are recorded in
unrestricted net assets when received or promised. When contributions are promised for
future periods, they are recorded in temporarily restricted net assets unless the donor
specifies their use in a current period.
Restrictions on Contributions Met in the Same Year:
Restricted contributions may be reported as unrestricted support if:
a)
b)
c)
d)
the restrictions are met in the same reporting period,
that policy is followed consistently,
the policy is disclosed, and
the organization has a similar policy for accounting for restricted investment
income and gains.
Designations Imposed by the Board of Directors:
The board of directors or trustees of a nonprofit organization may designate portions of
unrestricted net assets for specific purposes. Amounts may be set aside to accommodate
special needs of certain programs, unusual expenses or other expenditures consistent with
the organization’s exempt purposes. Different from restricted net assets, these
designations can be reversed by the governing board. They are, therefore, presented as a
sub-category of unrestricted net assets.
Donated Materials or Merchandise:
Donated materials or merchandise are generally recorded as contributions and inventory
or expenses in the period received. Such donations are recorded at their fair value on the
date of donation.
Materials or merchandise donated for a specific program or purpose would be recorded as
restricted contributions. Unconditional promises to give materials and merchandise
should be recorded as contributions even though the promise is for a future date. The
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requirements of SFAS No. 157 (ASC 820) should be followed in determining fair value.
An established market price may be determined from industry valuation services,
catalogs, vendor price lists, independent appraisals, or subsequent sales prices. Donations
of unusable assets should not be recorded.
The Internal Revenue Code and Regulations permit certain nonprofit organizations to
receive donations from manufacturers and retailers of usable products and merchandise.
These NPOs redistribute the products and merchandise to other tax-exempt organizations,
charging only a small administrative fee. The manufacturers and retailers receive a
contributions deduction on their tax returns for one-half the difference between cost and
the last sales price of the products or merchandise. These in-kind contributions are
recorded at their fair market values by the recipient organizations.
The downside is, however, that recipients of products must maintain detailed inventory
records and track the disposition of each individual donated item. Penalties can run as
high as the fair value of all products and merchandise received under the program.
Organizations may receive contributions of gifts-in-kind (such as tickets, gift certificates,
or merchandise) to be used for raffles, auctions or giveaways for fundraising purposes.
Contributions of these items should be recognized as contribution and measured at fair
value. Any differences in amounts received in exchange for these donated items should
be recognized as adjustments to the contributions revenues.
Donated Long-lived Assets and Free Use of Facilities:
Contributions of long-lived assets or the free or below-market use of facilities should be
recorded in the period received at fair value. Unconditional promises to give are recorded
on the date of the promise. When the free use of facilities is not promised for a specified
period of time, the contribution and expense would be recorded in each period of
occupancy. Long-term promises of free use of facilities should be recorded in restricted
net assets and reclassified as time periods expire. The long-term free use of facilities may
be classified according to the nature of the facility, e.g., office space, building, recreation
center, etc.).
Donated Services:
SFAS No. 116 (ASC 958-605) requires the fair value of donated services to be recorded
if the services:


Create or enhance a nonfinancial asset or
Require specialized skills, are provided by entities or persons possessing those
skills, and would need to be purchased if they were not donated.
The value of services are recorded as in-kind contributions in the period provided and
charged to a nonfinancial asset (such as a building) or to an expense account, depending
on their nature.
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SFAS No. 116 (ASC 958-605) requires that organizations receiving donated services
disclose the activities or programs for which those donated services were used, the nature
and extent of those services, and the amount recognized as revenue during the period. An
organization may disclose the number of volunteer hours received during the year and
their estimated fair value, even though they cannot be recorded under SFAS No. 116.
A major benefit or recording in-kind donations is that they become program services
expenses as they are used or consumed. Increased program services expenses lower the
ratio of general and administrative expenses to total expenses. Accountability
organizations, grant agencies and potential donors look for low general and
administrative expense ratios to maximize the use of their support in accomplishing the
exempt purposes of the nonprofit organization.
Agency Transactions:
A donor may transfer assets to the organization and instruct the organization to distribute
to a beneficiary:



the assets received,
income from those assets, or
both.
Agency transactions are voluntary transfers of assets to recipient organizations that have
little or no discretion in determining the use of the transferred assets. When a recipient
organization can choose the beneficiary of the gift, i.e., has variance power, it would
normally record the gift as a contribution. If an organizations receives gifts to be passed
through to designated beneficiaries, these gifts would be recorded as liabilities until paid
to the beneficiaries.
Exchange Transactions:
Exchange transactions are essentially purchases of goods and services from another entity
and are not contributions. Government grants are often exchange transactions because
they provide assets in exchange for goods or services. Grants from non-governmental
organizations are normally recorded as contributions because there is no reciprocal
exchange.
Recognizing Other Accrual Basis Revenues:
Recognizing revenue on the accrual basis for nonprofit organizations follows the same
principles as for-profit organizations: revenue is recognized in the period when it is
earned. Other than contributions revenue for nonprofit organizations may consist of the
following:
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Special events
Program service fees
Sales of merchandise and publications
Third-party reimbursements
Investment income and gains and losses
Special Events
Fundraising events most commonly include dinners, benefit concerts and appearances by
artists, or athletic events. Funds received by the nonprofit organization normally include
an exchange transaction and a contribution. The portion of the funds that represents the
fair value of the tangible benefits received by the donor is the exchange transaction. Any
amount in excess of the tangible benefits would be the donor’s deductible contribution.
Nonprofit accounting principles require that the gross amounts of revenues and expenses
from special events be reported in the statement of activities if they are major activities in
the organization’s fundraising plan. If the special events are only held occasionally,
expenses may be netted against revenues. Income tax regulations, however, prohibit
netting revenues and expenses from special events in an organization’s Form 990. To
avoid possible penalty assessments in the event of an IRS audit, a good practical rule is to
always present the gross amounts of special event’s revenues and expenses in both
financial statements and information returns.
Service Fees/Dues
Service fees are usually exchange transactions that are recorded when services are
provided. Fees for ticket sales that relate to events in future periods should be deferred
until the period in which the event occurs.
Membership dues may include a contribution as well as an exchange transaction. The
portion considered a contribution should be recorded as such. The exchange transaction
would be recognized over the period of benefit. An example of the exchange portion of
dues would be when a member receives a magazine or a monthly service throughout the
period covered by the dues.
Sales of Merchandise and Publications
Merchandise and bookstores are operated by many nonprofit organizations to earn
revenue. Sales of merchandise, books, subscriptions and other products are sold through
these and other outlets. Sales of these items are recorded at the time of sale or shipment.
The sales of subscriptions, on the other hand, should be recognized over the period to
which the subscription applies.
Third-Party Reimbursements
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Health and welfare organizations are often reimbursed by third parties for the costs of
providing the services to the public. These reimbursements should be recognized in the
same period reimbursable costs are incurred.
ASSERTIONS, INTERNAL CONTROLS AND REVENUE RECOGNITION
For management’s representations in financial statements (assertions) regarding support
and revenues to be accurate, an effective system of internal control should be designed
and operating. A system of internal control should contain entity-level and activity-level
controls. Entity-level control procedures are normally performed by management
personnel, while activity-level control procedures are performed by accounting and other
personnel.
Financial Statement Assertions
Here is an easy way to remember the common, relevant assertions for account balances,
transactions and footnotes:
C ompleteness
To determine that all transactions and accounts that should be presented
have been included in the financial statements.
O ccurrence and cutoff
To determine that all transactions occurring during the period have been
recorded in the financial statements in the proper period.
V aluation and accuracy
To determine that all asset, liability, revenue and expense components
have been included in the financial statements at accurate amounts,
classified properly.
E xistence
To determine that all recorded assets and liabilities exist at a given
date.
R ights
To determine that the entity has rights to all assets recorded at a given
date.
O bligations
To determine that all liabilities are obligations of the entity at a given date.
D isclosure and Presentation
To determine that all components of the financial statements and other
transactions and events are accurately classified, clearly described and
disclosed.
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For both for-profit and nonprofit organizations, the completeness assertion is often the
most difficult to establish. Management of an entity is responsible for designing internal
controls that provide reasonable assurance all transactions that exist have been recorded.
Since auditors may not be able to evaluate the completeness assertion by performing
substantive tests, at least limited tests of controls may be necessary for this purpose.
Therefore, the presence or absence of effective internal controls will directly affect the
completeness of the revenues classifications in nonprofit organizations.
Entity-Level Controls
The following are some examples of entity-level or key controls for cash receipts for a
small nonprofit organization.
 The director receives bank and credit card statements directly either by mail or
electronically.
 The director reviews contents of bank and credit card statements and investigates
unusual items.
 The director receives or picks up unopened mail or uses a bank lock box for
receipts.
 The director opens mail, supervises opening and/or reviews a daily listing of cash
receipts.
 The director prepares the daily deposit or supervises and reviews its preparation.
Activity-level Controls
Examples of activity-level controls for cash receipts that can help prevent errors from
occurring and going undetected in a small nonprofit organization are:
 Mail and cash receipts are recorded as received and deposited intact, daily.
 Duplicate deposit slips are prepared, matched with bank receipts and retained.
 Mail and cash receipts are counted by two independent persons other than the
person entering the receipts in the accounting records.
An Illustration of Effective Counting Procedures for Cash Receipts (Activity-Level
Controls)
Procedures for Counting Mail Receipts, Can Collections, Offerings and
Other Cash Receipts
General Notes
 Two people must perform all counts. Two people must remain with uncounted
cash at all times.
 Receipts will be counted daily.
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For neighborhood campaigns, the control procedures for distributing and
collecting donation devices must be followed. The counting procedures below
begin with the receipt of donations in the office, at conferences or at special
events.
References to donation devices may include envelopes, cans, remittance devices,
solicitation devices or other container or document accompanying a gift or
receipt.
Specific Counting Procedures
1. Label count sheet with current date and time.
2. Separate all offering envelopes into 3 piles:
a. Un-identified cash (any $ without an donation device)
b. Un-identified cash (or $ in a donation device without giver information on
it.)
c. Identified cash (any money given which identifies the giver).
Note: If both cash and check are in one donation device, separate these into two
devices and mark each one for the appropriate cash or check pile.
3. Counting checks:
a. Open each device and remove check. Circle the amount on the device
indicating it matches check amount. Write check number on each device.
Write address information on device if the gift is from a first time giver.
b. Tape orders and payments for merchandise, retreats, conferences, etc.
should not be included with the regular mail or other cash receipts count.
Make a separate deposit slip for each class of these items.
c. Any check received without a donation device must have one. Fill out a
device if one is not included.
d. If a giving designation is on the check (i.e. missions purpose, a
missionary, a program, a restricted gift, etc.), note this information on the
device.
4. Stamp “check” on bottom front of all devices containing checks. Date stamp the
backs of all check devices.
5. Run an adding machine tape of the checks. Rubber-band the tape to the checks
and write “checks, date and time” on tape.
6. Run an adding machine tape of the devices containing checks. If the total is the
same as the checks, rubber-band it to these envelopes and write “check devices,
date and time” on this tape.
7. Enter check amount on count sheet.
8. Counting Identified Cash
a. Verify that amount in each device is the actual amount inside. Circle the
total amount on each device.
b. Stamp “cash” on bottom front of each device. Date stamp backs of all
devices.
c. Separate all cash and coin by denomination and face all bills in the same
direction.
d. One person counts each denomination and fills in amounts on the count
sheet.
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e. Run adding machine tape from the devices for cash. Verify that amount
matches actual cash counted. Label tape “cash devices, date and time” on
the tape.
f. Place the currency and coin in a business envelope and write “identified
cash, amount, date and time” on the envelope. Seal envelope and place in
bank bag.
9. Counting Un-identified Cash (Any money without an envelope or in a blank
envelope)
a. Separate all cash and coin by denomination and face all bills in the same
direction.
b. One person counts each denomination and fills in amounts on the count
sheet.
c. Second person recounts the currency and coin to verify total.
d. Place the currency and coin in a business envelope and write “unidentified cash, amount, date and time” on the envelope. Seal envelope
and place in bank bag.
10. Complete count sheet totals. When all totals balance, both counters should sign
the front of the count sheet. Prepare deposit slip, include one copy with cash and
checks for deposit and retain a duplicate copy in the deposit slips packet.
11. Place count sheet, bundled check devices and bundled cash devices in manila
folder marked with the date and time of count and deliver to the director’s office.
12. Bank bag can be locked (bundled checks, coin and currency and deposit slips
inside) and delivered to director for safekeeping.
These counting procedures ensure the accuracy of each count of cash receipts and the
completeness of receipts and revenues in the financial statements of nonprofit
organizations. They also generate documentation for inspection by independent auditors
and for satisfaction of any IRS inquiries or examination questions.
CONCLUSION
Accurate revenue recognition is one of the most important elements in a nonprofit
organization’s financial statements and footnotes. Nonprofit organization’s financial
statements and footnotes are often widely distributed and used by grantors, donors, and
others. In these materials, we’ve learned the generally accepted accounting principles for
recording nonprofit organization revenues, their presentation and disclosures in financial
statements, and the effects of an entity’s internal controls on revenue recognition.
Combined with materials from Part 1 (Key Accounting & Reporting Issues for NonProfits
– Introduction, Overview and Statement of Position) and Part 3 (Key Accounting &
Reporting Issues for NonProfits – Expense Accounting) of this series, preparers and
auditors of nonprofit organization financial statements have a basic resource library that
can be used to ensure high-quality financial reporting.
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