Module 9: Financial reporting in the not-for-profit sector
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Module 9: Financial reporting in the not-for-profit sector
Required CICA Handbook readings for this module
z
z
z
z
z
z
Introduction to accounting standards, paragraph .04
Paragraph 1000.46
Specific areas of section 4400 as set out below:
{ Paragraphs 01-.02, .31, .46, and illustrative examples
Specific areas of section 4410 as set out below:
{ Paragraphs .26, .28-.29, .31-.34, .38-.40, .45, .47, .60, .62, .65, and .68
Specific areas of section 4430 as set out below:
{ Paragraphs .03, .06, .16, .31-.34, and .40
Paragraph 4440.06
Required readings from the textbook are listed with each topic.
Overview
This module outlines the accounting and reporting issues specific to not-for-profit
organizations (NFPOs) and the public sector. These two categories include a wide variety of
entities but, in general, profit making is not the principal goal of governments and NFPOs.
The unique characteristics and reporting requirements of these organizations have direct
implications for their financial statements.
Throughout the module, the CICA Accounting Handbook applies to governmental and nongovernmental NFPOs, government business enterprises, and business organizations. The
CICA Public Sector Accounting Handbook governs the financial accounting for governments.
Organizations falling into the CICA category of "other government organizations" use either
Handbook.
Test your knowledge
Begin your work on this module with a set of test-your-knowledge questions designed to
help you gauge the depth of study required.
Learning objectives
9.1
Define not-for-profit organizations and compare their financial reporting objectives
with those of profit-oriented organizations. (Level 1)
9.2
Explain the major financial reporting issues in not-for-profit organizations. (Level 1)
9.3
Explain the basics of accounting for, and reporting of, contributions under the
restricted fund and deferred contribution methods. (Level 1)
9.4
Determine appropriate accounting policies for not-for-profit organizations. (Levels 1
and 2)
9.5
Explain how formal recording of a budget helps NFPO managers control operations.
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Module 9: Financial reporting in the not-for-profit sector
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(Level 1)
9.6
Apply the requirements for financial instruments as they pertain to not-for-profit
organizations. (Level 2)
9.7
Explain the reporting implications of governments’ unique characteristics (Level 1),
and describe the key messages the financial statements should convey. (Level 2)
9.8
Explain the concept of the public sector, determine the Handbook applicable to each
component of the public sector, and describe the objectives of public sector financial
statements. (Level 1)
Exhibit 8: Substantive differences between Canadian GAAP and IFRS that apply to this
module
CICA Handbook
sections
referenced
Comparable IFRS
standards
Section 4400,
Not applicable
Financial statement
presentation by notfor-profit
organizations;
Comments
IFRS does not include separate
standards for not-for-profit
organizations.
Section 4410,
Contributions —
Revenue
recognition; Section
4430, Capital assets
held by not-forprofit organizations;
Section 4440,
Collections held by
not-for-profit
organizations
Source: Adapted from The CICA’s guide to IFRS in Canada,
http://www.cica.ca/download.cfm?ci_id=39765&la_id=1&re_id=0, Accessed February 3,
2009.
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9.1: Not-for-profit organizations
9.1 Not-for-profit organizations
Learning objective
●
Define not-for-profit organizations and compare their financial reporting objectives
with those of profit-oriented organizations. (Level 1)
Required textbook reading
●
●
Chapter 13, pages 614-615, up to "The Basics of Fund Accounting"
Chapter 13, page 653 "August 2007 Exposure Draft"
LEVEL 1
Note: The exposure draft detailed on page 653 was adopted by the CICA for fiscal years
beginning on or after January 1, 2009. The finalized standards differed somewhat from that
proposed. For full details see CICA Handbook — Accounting release no. 50
(September 2008).
There are two principal changes that affect this course. The first is that NFPOs may now
elect to show their net assets invested in capital assets as a separate component of equity
(as per the previous standard) or to describe this amount as internally restricted under the
category other restricted assets. The net assets invested in capital assets approach is still
permissible under GAAP, and will continue to be used by many NFPOs. For consistency with
the textbook, these module notes will adopt the net assets invested in capital assets
approach.
The second change is that the inclusion of separate sections for financing and investing
activities in an NFPO’s statement of cash flows is now mandatory. The textbook was printed
prior to the standard being adopted, and does not reflect this requirement. The examples in
the module notes and the solutions to the related questions reflect this requirement. Your
solutions to assignment, quiz, and exam questions must be in accordance with the
revised standard.
The CICA Handbook defines not-for-profit organizations (NFPOs) as entities, normally
without transferable ownership interests, organized and operated exclusively for social
educational, professonal, religious, health, charitable or any other non-for-profit purpose. A
not-for-profit organization's members, contributors and other resource providers do not, in
such capacity, receive any financial return directly from the organization.
NFPOs meet a wide variety of needs. Some provide products or services to a broad user
base and are usually perceived to be for the greater good of society, such as food banks,
hot-lunch programs, hospices, and amateur theatre groups. These organizations may
receive some government funding and cover additional expenses through donations,
fundraising activities, and, in some cases, user fees. Other NFPOs serve a specific user
group. Member-based organizations, such as the Certified General Accountants Association
of Canada, exist to provide service to their members on a cost-recovery basis. Other
professional associations, amateur sports groups, and some community groups follow this
model. Some NFPOs have been formed for a specific purpose (to meet the needs of a
defined group), and do not have a profit motive.
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9.1: Not-for-profit organizations
Many NFPOs are hybrids — organizations that start as special-interest groups (such as a
local theatre group) but that also meet the criteria of providing a perceived societal benefit
and qualify for government funding and charitable status.
All NFPOs need to provide clear, unambiguous information to stakeholders. While a forprofit business can measure its success by profit and shareholder satisfaction, these metrics
do not exist for NFPOs. The Handbook has attempted to address some of these special
reporting needs in Sections 4400-4460.
Despite their many differences, profit-oriented organizations and NFPOs have common
financial reporting objectives; both must provide users with financial information in the
following areas:
●
●
●
Economic resources, obligations, and net assets
Changes in economic resources, obligations, and net assets
Economic performance
NFPOs must demonstrate to current and potential supporters that they behave in a
business-like way. Supporters need and want evidence that their contributions are being
used judiciously and not wasted or misappropriated. Users of financial information who rely
on the financial reporting provided by GAAP for profit-oriented companies demand a similar
type of reporting for NFPOs.
The scope of section 1540, Cash flow statements, was recently expanded to include NFPOs.
The practical effect of this is that NFPOs are now required to prepare a statement of cash
flows that includes separate information pertaining to investing and financing activities.
Also, the "out" clause for non-inclusion of a statement of cash flows is narrower than
before. Specifically, paragraph 1540.03 now provides that
A cash flow statement should be presented as an integral part of the financial
statements for each period for which financial statements are presented,
unless the reporting entity is not a public enterprise and the required cash flow
information is readily apparent from the other financial statements or is
adequately disclosed in the notes to the financial statements. When a cash
flow statement is not presented, the reason should be disclosed.
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9.2: Not-for-profit reporting issues
9.2 Not-for-profit reporting issues
Learning objective
●
Explain the major financial reporting issues in not-for-profit organizations. (Level 1)
Required textbook reading
●
Chapter 13, pages 618-627, up to "Accounting for Contributions"
LEVEL 1
Historical development
Although many NFPOs have been audited for years, they were not subject to CICA Handbook
recommendations until January 1, 1989. Prior to that time, many such organizations had developed
accounting and reporting practices specific to the needs of their users.
CICA Handbook Section 4230, Non-profit organizations — Specific items, included recommendations to be
followed by NFPOs requiring an audit opinion. The Handbook recommended the following:
●
●
NFPOs should use the accrual basis of accounting, rather than the cash basis (which many were
using).
Donations of property, plant and equipment should be initially recorded at their fair value when this
amount is reasonably determinable.
In the 1990s, additional Handbook sections containing more substantive recommendations on accounting
policies for NFPOs replaced section 4230 for fiscal periods beginning on or after April 1, 1997: These are
sections 4400, 4410, 4420, 4430, 4440, 4450, and 4460.
Although governments and other public sector organizations are similar to not-for-profit organizations with
respect to accounting objectives and procedures, sections 4400 to 4460 apply only to not-for-profit
organizations (paragraph 4400.01). Governments have different reporting and disclosure requirements and
are guided by the recommendations of the CICA's Public Sector Accounting Board (PSAB), studied later in
this module.
Reporting issues
This topic focuses on the reporting requirements of NFPOs. Before you study these requirements, consider
two fundamental recording issues: cash versus accrual accounting and expenditure versus expense
accounting.
Cash and accrual accounting
Some NFPOs have used the cash basis of accounting whereby cash received and cash spent appeared in the
statement of operations but no receivables or payables were accrued.
Other NFPOs have preferred a modified accrual basis whereby the cash basis is used for inflows but
payables are accrued for outflows. Another common version of the modified accrual basis is to use accruals
for inflows and outflows but not to record amortization on capital assets.
Some of the arguments for and against cash basis accounting for NFPOs are as follows:
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9.2: Not-for-profit reporting issues
For
●
●
●
●
It is simple to use.
It is not misleading when receivables and payables are insignificant.
Pledges are not legally collectible and should not be accrued.
Benefits of accrual accounting do not outweigh the costs.
Against
●
●
●
It misstates the financial position of the NFPO.
Revenues and expenses are mismatched.
It complicates rather than expedites future cash flow estimates.
Expenditure and expense accounting
Expenditures are recognized when goods or services are acquired by the organization, regardless of
when they are used. Expenses, on the other hand, are recognized when goods or services are used or
consumed by the organization, regardless of when they are acquired.
Exhibit 9.2-1: Transaction example
The organization spent $10,000 in 20X2 for fundraising literature to be used in the 20X3 funding campaign.
Expenditure accounting
●
●
●
●
$10,000 expenditure in the 20X2 Statement of
Operations
Nothing reported in 20X3
Similar to cash basis accounting but accruals
are made for purchases not paid for at year
end
For NFPOs whose expenses do not directly
relate to their revenues, capitalization and
amortization may not be meaningful.
Expense accounting
●
●
●
●
$10,000 prepaid expenses on the 20X2
Statement of Financial Position
$10,000 expenses on the 20X3 Statement of
Operations; prepaid expenses removed from
the 20X3 Statement of Financial Position
Same basis of accounting as used for profitoriented enterprises
Expense accounting provides a truer measure
of the cost of providing goods and services
because amortization expense is included.
In the past, many NFPOs used a cash basis that measured monies received against expenditures incurred
without regard for accrual concepts such as capitalization or prepayment. Expenditure accounting is similar
to the cash basis but does allow for accrual concepts such as payables at year end.
Several sections of the CICA Handbook establish that NFPOs should use the accrual basis of accounting.
Sections 4400 through 4460 establish the reporting requirements for NFPOs. Paragraph .04 of "Introduction
to accounting standards" mentions that accounting Handbook sections are intended to apply to all types of
profit-oriented enterprises and to not-for-profit organizations as defined in "Financial statements
presentation by not-for-profit organizations" (Paragraph 4400.02). Section 1000, Financial statement
concepts, fully applies to NFPOs. Paragraph 1000.46 stipulates that items recognized in financial statements
are accounted for in accordance with the accrual basis of accounting.
Similarly, although many NFPOs have used expenditure accounting in the past, the Handbook sections are
written with the assumption that expense accounting is used. Throughout Sections 1000 and 4400, the term
"expense" is used consistently with reference to NFPOs.
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9.2: Not-for-profit reporting issues
CICA Handbook recommendations
Financial reporting standards for NFPOs have been in a state of flux historically, governed more by an
association's or organization's policy and by generally accepted practice than by Handbook
recommendations. Because the structure and operational objectives for an NFPO are different from those of
a profit-oriented organization, creating standards that adequately addressed the specific issues of a not-forprofit organization was a difficult task. For example, the recommendations of section 4450 were considerably
influenced by the for-profit recommendations of what was then section 1581, Business combinations.
Significant controversy arose, however, in the area of reporting controlled and related entities.
Accounting professionals considered that the criteria for determining control for an NFPO, with very different
equity positions than profit-oriented firms, were vague and subjective. Even if control could be determined,
many accountants considered that consolidation was not appropriate for organizations that had different
funds, many of which were restricted in use. They were concerned that donors and other funding agencies
would be reluctant to fund operations of a parent organization if the consolidated financial statements
reported surpluses in other controlled entities or funds.
The Handbook recommendations contained in sections 4400 to 4460 were designed to close the reporting
gaps in the not-for-profit sector. However, as mentioned above, for many issues, the proposed reporting
recommendations resulted in great controversy. As a result, many of the reporting recommendations for
NFPOs are flexible, allowing NFPOs considerable choice in reporting and disclosing their operational activities.
The following exhibit summarizes the provisions described in the CICA Accounting Handbook and in the
assigned textbook reading.
Exhibit 9.2-2: Overview of financial reporting standards for NFPs
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9.2: Not-for-profit reporting issues
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9.2: Not-for-profit reporting issues
New strategic directions were approved in January 2006, after deliberation and discussion on the
responses to the draft plan Accounting Standards in Canada: Future Directions. The result is that "for
not-for-profit organizations, the AcSB will continue to apply those elements of GAAP for profit-oriented
enterprises that are applicable to their circumstances, and develop other standards dealing with the
special circumstances of the not-for-profit sector."
NFPOs face many recording and reporting issues that would not be of concern for profit-oriented
organizations. The Handbook provides recommendations on how to report donated materials and
services, donated capital assets and how to disclose these items. However, on other issues, such as
programs reporting, budgets, and supplementary information, the Handbook is silent; in these cases,
NFPOs must decide the best course of action to take. The following examines how NFPOs might address
these issues.
Additional NFP reporting
Programmatic reporting
Although not itself an accounting policy, programmatic reporting (also called reporting by program)
is a disclosure format for organizations that offer several distinct programs. Its purpose is to provide
information by significant operating sectors, similar to the purpose of segment disclosures (studied in
Module 8). Often, only a statement of operations is reported for each program and the statement of
financial position is presented for the organization as a whole.
Budgets
For an NFPO, the budget is a primary control mechanism. Annual budgets approved by a finance
committee and a board of directors or their equivalent establish the spending parameters and,
implicitly, program priorities. Comparing actual figures to budget as the year progresses provides a
measure of control and feedback on the activity level of the organization.
There are no requirements for an NFPO to disclose budgetary information but it is common financial
reporting practice to include budget-to-actual comparisons. For example, the statement of operations
may include actual and budget amounts for the current year. Users may use such information for the
purpose of stewardship assessment. Often, the budget for the coming year is included as well.
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9.2: Not-for-profit reporting issues
Supplementary information
Although the Handbook provides no guidance on what types of qualitative supplemental information
should be presented by NFPOs, funding agencies and donors require NFPOs to provide a wide variety of
supplemental non-financial information such as services offered, membership numbers, recent
accomplishments, significant events, and future plans. The board of directors can play a significant
leadership role in identifying the types of information — descriptive, statistical, and so on — that users
will analyze to determine the success of the NFPO. The following exhibit provides examples of such
information.
Exhibit 9.2-3: Examples of information used to evaluate the success of NFPOs
NFPO activity
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Soup kitchen
Useful information
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Counselling for recently released prisoners
●
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Assistance for families with mentally or
physically challenged children
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●
●
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Meals served
Individuals turned away due to insufficient
food
Contact hours per client
Number of parole violations
Contact hours per client
Attendance per activity
Range of services provided
Percentage of needy families assisted
This information is rarely audited, as auditors find it difficult to comment on data not generated by the
recordkeeping system. However, auditors are responsible for reading all supplemental information in
annual reports that contain financial statements on which they have reported to ensure that the
information is consistent with the statements.
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9.3: Introduction to fund accounting
9.3 Introduction to fund accounting
Learning objective
●
Explain the basics of accounting for, and reporting of, contributions under the restricted fund
and deferred contribution methods. (Level 1)
Required textbook reading
●
Chapter 13, pages 615-618, up to "Not-for-Profit Reporting Today," pages 627-635, up to
"Budgetary Control and Encumbrances," and pages 637-653, up to "August 2007 Exposure
Draft"
LEVEL 1
A significant difference between profit-oriented organizations and NFPOs is the use of fund accounting
by NFPOs. Nonprofits must carefully track and report on segregated accounts in the form of "funds"
as they navigate their various projects and programs. These funds must be treated as separate
entities with their own general ledger and must provide individual income statements and balance
sheet reports. They must then report in total for the entire organization. Commercial accounting
systems can maintain separate revenue and expense accounts, but they co-mingle balance sheet
accounts. This is not permitted in fund accounting.
It is important to emphasize that NFPOs are not required by GAAP to use fund accounting. They may,
however, be required to do so by specific donors or other funding agencies (such as government
agencies providing grants).
Exhibit 13.1 on page 617 provides an example of fund accounting in which Helpful Society has set up
two funds, one for day-to-day operations, the General fund, and one for the specific purpose of
accumulating funds to build a building, the Building fund. This allows readers to differentiate between
the use of unrestricted funds (General fund) and restricted funds (those designated for the building).
An NFPO would usually prepare a Statement of Financial Position, (called a Balance Sheet in the
textbook), a Statement of Operations, and a Statement of Changes in Fund Balance
(statement of changes in net assets) for each fund.
While Helpful Society's financial statements have been provided at this point to illustrate the basic
concepts of fund accounting, Helpful Society's financial statements are not consistent with the
Handbook recommendations for NFPOs because the society uses expenditure accounting —
recognizing capital assets as expenditures in the year they were purchased — rather than expense
accounting. To conform to the Handbook’s requirements, Helpful Society would have to capitalize and
amortize future capital assets since the organization’s average annual gross revenues are over
$500,000. Helpful Society cannot therefore limit the application of the section [4430.03] to the
recommendation set out in paragraph 4430.40. Also, Helpful Society should retroactively re-state
past purchases for capital assets it still owns along with accumulated amortization thereon.
Specifics of NFPOs’ financial statements
Referring to the Helpful Society example, note the following items that are specific to NFPO financial
statements.
Statement of Financial Position (Balance Sheet)
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9.3: Introduction to fund accounting
●
●
Assets: Pledges receivable — This represents the amounts that supporters have promised to
pay Helpful Society and that have a reasonable certainty of being collected.
Liabilities and fund balance: Fund balance — This is not a cash measure but represents the
net assets of Helpful Society.
Statement of Revenue and Expenditure and Changes in Fund Balance
Note: The Statement of Revenue and Expenditure is frequently referred to as the Operating
Statement or Statement of Operations.
●
●
●
●
The title of this statement reflects the fact that this society is not operating to earn income or
profit but simply wants to report the sources and amount of revenues compared to the types
and amounts of expenditures.
Most of Helpful Society's revenue comes from donations (contributions).
Expenditures are grouped by program, which represent the various activities undertaken by
Helpful Society. This is an illustration of the concept of programmatic reporting (explained in
Topic 9.2). The statement of revenue and expenditure in Exhibit 13.1 on page 617 provides
details of expenditures grouped by Programs A, B, and C. It is likely that further detail of these
programs would be provided in the notes.
The excess of revenue over expenditure is accumulated in the Fund balance whose December
31 balance is carried onto the statement of financial position.
The Building fund statements are much simpler since there is less activity in this area of the
organization. Note that in this case, the fund balance represents net cash and investments since the
building has not yet been built.
As noted in the required reading from the CICA Handbook, not-for-profit organizations also must
provide a cash flow statement which is similar in construction to that required by for-profit
organizations.
Accounting for contributions
Section 4410 provides recommendations that deal with cash and physical assets contributed or
promised to the NFPO from a variety of sources, including government and private donors.
Restricted contributions are subject to externally imposed stipulations regarding their use. Note
that only contributions can be restricted externally since contributions are, by definition, from an
external source. However, an internal restriction can be imposed upon net assets.
Endowments are similarly restricted in use; however, the intent of an endowment is that the
resources contributed are maintained permanently, while any interest or return earned should be
used as specified by the contributor.
Unrestricted contributions may be used by the NFPO for any purpose.
The following decision tree provides the accounting and reporting methods for contributions.
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9.3: Introduction to fund accounting
Source: Adapted from the CICA Handbook, section 4400, Illustrative examples
NFPOs can recognize contributions using either the deferral method or the restricted fund method.
Both limit the NFPO's ability to manipulate the funds, and both highlight external restrictions. Even if
an NFPO has restricted contributions, it may choose either the deferral method or the restricted fund
method.
Deferral method and restricted fund method
Section 4410 provides two decision trees that summarize the accounting for contributions under both
methods. For easy reference, they are reproduced in the following exhibit.
Exhibit 9.3-1: Accounting for contributions — Decision trees
Decision tree 1
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9.3: Introduction to fund accounting
Decision tree 2
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9.3: Introduction to fund accounting
Source: CICA Handbook, section 4410, Decision trees
It is important to remember that the restricted fund method can be applied only when funds are
established on the basis of external restrictions. Funds set up based on programs or internally
imposed restrictions can be presented using separate financial statements, but their fund balances
must be reported as part of the general or operating fund. Externally restricted funds are not
reported as part of the general fund.
How would the information in Helpful Society's financial statements (as shown on page 617) be
presented using the deferral method and using the restricted fund method?
If Helpful Society had used the deferral method, the funds for the building would appear as deferred
contributions on the statement of financial position, in the liability section. This is because none of
the funds would have been spent at this point. After the building is acquired, an amount equal to the
amortization expense would be recognized as revenue, thereby decreasing the deferred liability.
Helpful Society reported a separate fund for building, although the organization could have chosen
not to report separate funds.
If Helpful Society had used the restricted fund method, the financial statement presentation would
depend on the nature of the restricted fund. For externally restricted funds, a total of externally
restricted funds and General fund is presented to give readers a picture of all resources under the
control of the organization. This is the method illustrated in the Helpful example. The total column
provides a picture of all the resources Helpful Society is entrusted with.
If we assumed that the building was set up based on an internal restriction created by the board of
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9.3: Introduction to fund accounting
directors, Helpful Society's presentation would show the fund balance in the Building fund as being
internally restricted.
Illustrative examples (Situation I and Situation II) of section 4400 illustrate the presentation required
under the deferral and restricted fund methods in more detail. In addition, paragraphs 4410.26
and .28 describe additional disclosures required for external restrictions under the deferral and
restricted methods.
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9.4: Application of NFPO standards
9.4 Application of NFPO standards
Learning objective
●
Determine appropriate accounting policies for not-for-profit organizations.
(Levels 1 and 2)
Required reading
●
Reading 9.4-1: CGA-Canada 2008 Audited Financial Statements
LEVEL 1
The following comprehensive cases give you the opportunity to practise the application
of reporting standards for NFPOs and to practise the case analysis approach to problem
solving (introduced in Module 1).
Case 9.4-1 illustrates accounting for an externally restricted contribution and related
expenditures under both the deferral and restricted fund methods.
Case 9.4-1: The Petfinders Association
The Petfinders Association is a not-for-profit organization dedicated to reuniting stray
pets with their owners. Pet owners who register their pets with Petfinders are listed in a
database that is available throughout North America.
On May 1, 20X7, the beginning of its fiscal year, Petfinders received a donation of
$1,000,000 from a wealthy and grateful benefactor who had recently had a pet
returned through the organization's system. At the donor's request, the money was to
be used exclusively for purchasing and maintaining a property to house the
administrative offices and operating facility. As well, if the funds were invested for any
length of time, the interest earned was to be used for the same purpose as the original
donation. Petfinders has never had a restricted contribution before. The organization's
only sources of revenue have been user fees and donations received from an annual
door-to-door canvassing campaign.
Petfinders immediately invested the $1,000,000 in a rolling 30-day term deposit that
earned $35,000 in interest during the year. On February 1, 20X8, the following items
were purchased, in cash:
Land
Office building (estimated life of 40 years)
Operating facility (estimated life of 20 years)
$ 200,000
100,000
300,000
$600,000
In addition, $10,000 was spent during the year on maintenance costs for the operating
facility.
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9.4: Application of NFPO standards
It is now May of 20X8. You are an independent CGA who has worked extensively in the
not-for-profit area. Based on your reputation as a CGA, Petfinders' controller,
Rayanne O'Connor, has come to you for advice on how to apply the CICA Handbook's
standards to the $1,000,000 contribution for the upcoming year end. Ms. O'Connor is
anxious to comply with Handbook requirements as the organization is required by
provincial legislation to have an audit. (For the purpose of introducing the differences
between the deferred and restricted fund methods, no data has been provided for the
General fund statements.)
Required
1. Prepare a report to Petfinders' controller that addresses the $1,000,000
contribution and related expenditures.
Solution 1
2. Prepare a complete set of financial statements excluding the statement of cash
flows but including notes for the year ended April 30, 20X8, under the deferral
method.
Solution 2
3. Prepare a complete set of financial statements excluding the statement of cash
flows but including notes for the year ended April 30, 20X8, under the restricted
fund method.
Solution 3
The following case illustrates an NFPO with financial statements that do not conform to
GAAP. This case requires that you recommend accounting policies in accordance with
GAAP and revise the financial statements accordingly.
Case 9.4-2: The Lakewood Theatre Company
LEVEL 1
The purpose of this case is to help you develop skills in identifying the recording
and reporting issues that face NFPOs. Read the following case, then spend a few
minutes drafting a response to the Required before continuing to the suggested
solution. By doing so, you will achieve a better understanding of the issues.
The Lakewood Theatre Company (Lakewood) is a small, not-for-profit repertory
company in Watermere, British Columbia. Its original and primary goal is to
provide live theatre performances for the residents of Watermere. A second
program, providing drama lessons and performance opportunities to the children of
Watermere, is in its first year. This program operates through a cost-recovery
agreement with the city's school board.
You have been a patron of the theatre for several years, and recently you were
elected to the board of directors. The board consists of dedicated volunteers, many
of whom are business and professional people in the community. Board members
serve on various committees. As you are a newly qualified CGA with many
accounting and administrative skills, you volunteered to serve on the finance
committee.
The first meeting of the finance committee that you attended was at the beginning
of June 20X8. The main item on the agenda was the preparation of financial
information for the company's first audit for the year ended May 31, 20X8. Until
this year, the organization did not need an audit because all funds donated were
raised privately. This year, however, with the receipt of school board funding for
the Drama in the Schools program, an audit is necessary. The purpose of the
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9.4: Application of NFPO standards
finance committee meeting was to establish which accounting policies practised by
the organization were acceptable according to generally accepted accounting
principles and to discuss alternatives for any that were not generally accepted.
The meeting developed into a heated discussion about the proper accounting
treatment of the newly acquired van. In the past, Lakewood rented trucks or vans
as required to move stage props and costumes. In June of 20X7, the organization
launched a fundraising campaign directed at the five largest employers in the city,
raising enough for Lakewood to purchase its own van. The campaign's promotional
materials had specifically mentioned that funds raised would be used for the
purchase and maintenance of vehicles. It was hoped that this campaign would be
run in a scaled-down form each year to ensure Lakewood could purchase a total of
four vans and have funds available for repairs or future additional van purchases
or replacements. The first van was purchased in December, even though some
pledges remained outstanding at the year end.
The finance committee is considering several options for reporting the van. One
member of the committee insists that the van be capitalized and amortized over its
useful life, which is expected to be five years. It is expected that the van could be
sold for $5,000 at the end of its five-year life. This approach would be a major
change for the organization since it is currently reporting on a cash basis. Up until
now, assets purchased have been expensed as soon as they were paid for. A
second member disagrees with the capitalizing approach; he has worked with
other not-for-profit organizations, and they used the expenditure basis for capital
assets. He supports the idea of writing the van off entirely in the current year.
A third committee member, although unsure about which approach is best, is
concerned that the current financial statements may not provide the information
required by the donors of the funds used to purchase the van. She considers that
the method selected should satisfy the expectations of the donors that the funds
be spent on purchasing and repairing or replacing vehicles, rather than on
operating items. She is not certain how to handle this situation. She is also
concerned because the second largest pledge received in the fundraising
campaign, which was collected on June 3, 20X8, after year end, was not intended
for the van at all; the donor requested that it be used for the proposed new
theatre building. This amount is included in pledges receivable in the year-end
statements.
The operating deficit was also cause for concern at the meeting as Lakewood has
never before had such a large operating deficit. In the middle of the debate, the
chairperson of the finance committee halted the discussion, turned to you, and
said, "I know that you are very knowledgeable about accounting standards. We
need to understand what alternative accounting practices exist, the advantages of
each, and which ones you recommend. Since this is the first year we will be
audited, the recommendations you make will have to comply with GAAP. Also,
since we will be asking the bank for a loan to build our own theatre soon, the
auditors will be looking closely at our statements.
Take a look at the statements and see if we'll have to make any changes. Oh, one
other thing has been bothering me. Is it true that we have to record the value of
all donated materials and services to meet the requirements of GAAP? Could you
prepare a report for next week's meeting that would address these issues?"
Required
1. Using the case analysis approach, prepare the report to the finance committee,
addressing each of the members' concerns. Evaluate the relevant alternatives,
giving consideration to current standards, and present your recommendations.
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9.4: Application of NFPO standards
Solution 1
2. Prepare a revised set of financial statements using the restricted fund method
based on your recommendations. The draft statement of receipts and
expenditures for the year ended May 31, 20X8, prepared by Lakewood's
bookkeeper, is shown below.
Solution 2
THE LAKEWOOD THEATRE COMPANY
Statement of Receipts and Expenditures
for the year ended May 31, 20X8
Receipts
Mainstage production
Drama in the Schools
Fundraising
$
Expenditures
Wages and salaries
Other production expenses
Administration and amortization
Van
Fundraising
363,067
207,965
103,885
674,917
423,100
108,866
129,730
25,500
22,805
710,001
Excess (deficit) of receipts over expenditures
(35,084)
Cash and term deposits at the beginning of the year
93,633
$ 58,549
Cash and term deposits at the end of the year
Notes
1. The school board owes Lakewood $105,000 for services delivered in the schools up
to May 20X8; payment is expected within 60 days.
2. Outstanding payables at the year end:
Wages for actors and staff
Travel costs
Rent for May 20X8
$
6,700
4,500
2,500
$ 13,700
3. There is $25,000 in pledges outstanding at the end of the year, and it is expected all
will be collected in June of 20X8. Individuals who made the pledges have been called
and reminded of their commitment. Of the $25,000 of pledges outstanding, $15,000
has been specifically designated for the new theatre building.
4. The van was purchased December 1, 20X7, for $25,500.
5. The following expenses (included above) are related to the Drama in the Schools
program:
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9.4: Application of NFPO standards
Wages and salaries
Other production expenses
Administration and amortization
Total
$ 200,000
52,500
60,465
$ 312,965
LEVEL 2
Reading 9.4-1 presents the 2008 audited financial statements for CGA-Canada, which has
adopted the recommendations of sections 4400-4460. Note the following points from these
statements:
●
●
●
●
●
●
●
●
Four financial statements are provided: Statement of financial position, statement of
operations, statement of changes in net assets, and statement of cash flows. These
parallel respectively the balance sheet, income statement, statement of retained
earnings, and statement of cash flows for a profit-oriented company.
Assets include the Insurance Retention fund. Referring to the statement of changes
in net assets, you can see that this is an internally restricted fund and, therefore,
does not meet the requirements for restricted fund accounting. The net assets
available for this fund are included in general operations.
The internally restricted Insurance Retention fund is disclosed in the Net assets
section along with the unrestricted fund balances.
The Net assets section also discloses the amount invested in Capital assets, as
required by paragraph 4400.19. These assets are not available for other purposes
and, for this reason, are disclosed separately (paragraph 4400.23).
The statement of operations provides an example of programs reporting. Expenses
are grouped by services to affiliates and members, standards development,
recognition, international recognition, education, corporate, and administration
programs.
The net insurance fund deficit is transferred from the unrestricted fund. Note 6
provides more details of the revenues and expenses for this internal fund.
The statement of changes in net assets reconciles beginning and ending balances in
each of the three net asset amounts reported on the statement of financial position:
capital assets, insurance fund, and unrestricted.
The statement of cash flows is presented in the format that you are familiar with
from your previous study.
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9.5: Budgetary control
9.5 Budgetary control
Learning objective
●
Explain how formal recording of a budget helps NFPO managers control operations.
(Level 1)
Required textbook reading
●
Chapter 13, pages 636-637, up to "Encumbrance Accounting"
LEVEL 1
Budgets in non-profit and public sector organizations are more than guidelines that assist in
the achievement of financial and operational goals; budgets can provide authority for and
an upper limit to spending. A fund accounting system that uses budgetary accounts and
encumbrances can provide managers with up-to-date information on amounts that are
available, committed, and/or already spent from a specific fund or for a specific purpose.
Since managers are expected to operate within their budgets, it is important that the
budget become part of the accounting and control system. Hence, the budget also serves in
part as an ethical framework for management decisions and in part as a tool for assessing
management’s performance.
Budgetary accounts
To ensure that the budget is followed, many NFPO managers record budget amounts in
control accounts. This allows day-to-day monitoring of budget-to-actual figures and
provides a quick source of information for decision making. Budget amounts for the year are
recorded in self-balancing memorandum accounts, which supplement the normal general
ledger accounts.
When the recorded revenue from the budgeted account balance is offset, the difference
represents the amount of additional revenue required to attain the budget. Similarly, the
remaining unspent budgeted amount is obtained by offsetting the expenses to date against
the budgeted expense balance.
The following example illustrates how an NFPO would incorporate a budgetary system into
its record keeping system.
Exhibit 9.5-1: Recording budgetary amounts in an NFPO
Jarma Boys and Girls Club (JBAGC) was organized on January 1, 20X8. The club received a
grant from the City of Jarma to open an after-school drop-in centre for local children from
ages 6 to 18. During the first week of January 20X8, the board of directors for the club
approved the following budget:
Revenues
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9.5: Budgetary control
City grant
Fund raising
Other donations
$ 500,000
100,000
100,000
700,000
Expenses
Equipment rental
Facilities rental
Food and beverages
Supplies
Wages and benefits
Budgeted surplus
50,000
150,000
25,000
125,000
320,000
670,000
$ 30,000
During the year, the following events took place:
1. The grant from the City of Jarma was received.
2. The fund-raising campaign raised a total of $176,000.
3. The United Way donated $75,000 and the March of Dimes donated supplies that the
club would otherwise have purchased for $15,000, had they not been donated. These
supplies were all used.
4. Equipment and facilities rental were paid in cash respectively for $50,000 and
$150,000. Both equipment and the facilities were long-term leases that would remain
the same each year. The leases were not capital in nature.
5. $23,500 worth of food and beverages was purchased for cash and used.
6. Supplies (not including those donated by the March of Dimes) purchased for cash
and used totalled $95,000.
7. Wages and benefits paid for the year were $365,000.
Due to the success of the centre, on June 30, 20X8, the board approved another $40,000
for wages for part-time employees.
Required
1. Prepare the journal entries required to record the budgeted amounts and actual
operating results in the records of JBAGC.
Solution 1
2. Prepare a budget to actual statement for JBAGC with budget variances.
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9.5: Budgetary control
Solution 2
3. Prepare the closing entry for the budgeted amounts
Solution 3
Budgetary information is not required to appear in NFPO financial statements, although
many provide it for comparative purposes. Disclosure of budget-to-actual amounts is
required for governments under the recommendations of the CICA Public Sector Accounting
Handbook.
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9.6: Financial instruments and not-for-profits
9.6 Financial instruments and not-for-profits
Learning objective
●
Apply the requirements for financial instruments as they pertain to not-for-profit organizations. (Level 2).
No required textbook reading
Note: CICA Handbook Release 52, issued in December 2008, provided that not-for-profit organizations may elect
to continue to use section 3861 governing the presentation and disclosure of financial instruments, rather than
adopt sections 3862 and 3863.
For assignment, quiz, and examination purposes, unless the question specifically states otherwise, you are
to assume that the company has adopted sections 3862 and 3863.
LEVEL 2
There are three1 variations on the special circumstances under which financial instruments are accounted in not-forprofit organizations. Those requirements are applied in the examples below:
●
●
●
In Example 9.6-1, the not-for-profit follows the deferral method of accounting for contributions.
Example 9.6-2 shows the differences if the organization followed the deferral method and also used fund accounting.
The last illustration (Example 9.6-3) follows the restricted fund method.
Example 9.6-1: NFPO A — Accounting for contributions using the deferral method
●
●
●
●
NFPO A follows the deferral method of accounting for contributions.
NFPO A receives core operating funding every year from the federal government. The amount of the funding is based
on an approved operating budget. For 20X4 and 20X5, this funding amounted to $100,000 and $105,000,
respectively. Funding is received just prior to the year to which it relates. $110,000, representing the funding for
20X6, was received at the end of 20X5.
NFPO A also receives funding for research every year from the federal government. This funding amounted to
$25,000 and $30,000 for 20X4 and 20X5, respectively. This funding is not received until after the fiscal year
being funded.
From time to time, NFPO A receives contributions for endowment. By the end of 20X4, NFPO A had
accumulated contributions for endowment amounting to $100,000. The investment income on the $100,000 is subject
to restrictions imposed by the contributor stipulating that it be spent on research activities. Dividend and interest
income earned on these restricted endowment contributions was $10,000 in 20X4 and $10,000 in 20X5. Changes
in unrealized gains on the investments were $2,000 in 20X4 and a loss of $400 in 20X5. In 20X5, NFPO A received
an additional contribution for endowment amounting to $50,000. The income earned on this contribution is
unrestricted. Dividend and interest income earned on this unrestricted endowment was $4,000 in 20X5. Unrealized
gains on the investments were $1,000 in 20X5.
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9.6: Financial instruments and not-for-profits
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Investments are classified as "available-for-sale" financial assets.
NFPO A has annual materials and services expenses of $10,000 that are payable in U.S. dollars over the next year.
On December 1, 20X5, it enters into a U.S./Canadian dollar swap to hedge the exposure to variable cash flow
payments attributable to foreign currency risk from January 1, 20X6 to December 31, 20X6. At inception (December
1, 20X5), the fair value of the swap is zero. By December 31, 20X5, there is an increase of $50 in the fair value of
the swap, resulting from a change in the U.S./Canadian dollar exchange rate. NFPO A determines that the
hedge relationship is effective throughout the period, and credits the effective portion of the change in fair value of
the swap to unrestricted net assets.
NFPO A has land and a building that were purchased eleven years ago using funds restricted for that purpose and
that cost $50,000 and $140,000, respectively. The estimated useful life of the building is 20 years.
Part way through 20X5, NFPO A purchased another parcel of land and a building that cost $100,000 and
$400,000 respectively. This purchase was financed using unrestricted funds of $50,000 and mortgage financing
of $450,000. By the end of 20X5, $3,000 of the principal amount of the mortgage had been repaid. The estimated
useful life of the building is 20 years
Over the years, NFPO A has purchased equipment. By the end of 20X4, equipment with an original cost of $25,000
had been purchased out of unrestricted resources. Equipment with a fair value of $5,000 was contributed to NFPO A
at the beginning of 20X5. At the end of 20X5, equipment costing $10,000 was purchased using unrestricted funds.
During 20X5, NFPO A launched a building campaign to raise $500,000 for a major expansion to NFPO A’s older
building. Contributions to this campaign amounted to $78,000 in 20X5. Contributors to the building campaign do so
with the understanding that resources contributed will be invested and that the accumulated investment income will
be spent on the building expansion. Dividend and interest Investment income earned on amounts contributed was
$2,000 in 20X5. Unrealized gains on the investments were $1,400 in 20X5.
●
NFPO A runs seminars for which it charges fees.
●
NFPO A also receives contributions from XYZ Foundation, which is not related to NFPO A.
●
These statements are for an NFPO organization that uses the deferral method but not fund accounting
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9.6: Financial instruments and not-for-profits
NFPO A
Notes to financial statements
December 31, 20X5
1. Purpose of the organization
NFPO A is a national organization operating programs and performing research aimed at helping those who have
lost family members in automobile accidents. NFPO A is incorporated under the Canada Corporations Actas a notfor-profit organization and is a registered charity under the Income Tax Act.
2. Significant accounting policies
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9.6: Financial instruments and not-for-profits
Revenue recognition
NFPO A follows the deferral method of accounting for contributions. Restricted contributions are recognized as revenue
in the year in which the related expenses are incurred. Unrestricted contributions are recognized as revenue
when received or receivable if the amount to be received can be reasonably estimated and collection is
reasonably assured. Endowment contributions are recognized as direct increases in net assets.
Investment income includes dividend and interest income, and realized and unrealized investment gains and
losses. Unrealized gains and losses on available-for-sale financial assets are included directly in net assets or
deferred contributions as appropriate, until the asset is removed from the Statement of Financial Position.
Unrealized gains and losses on held-for-trading financial assets are included in investment income and recognized
as revenue in the Statement of Operations, deferred or reported directly in net assets, depending on the nature of
any external restrictions imposed on the investment income. Restricted investment income is recognized as revenue
in the year in which the related expenses are incurred. Other unrestricted investment income is recognized as
revenue when earned.
Seminar fees are recognized as revenue when the seminars are held.
Investments
Investments classified as available-for-sale or held-for-trading are recorded at the lower of cost and market
value. Investments classified as held-to-maturity are recorded at amortized cost.
Derivative financial instruments
NFPO A uses forward foreign exchange contracts to manage foreign exchange risk in future expenses for materials
and services. Derivative instruments are recorded on the Statement of Financial Position as assets and liabilities and
are measured at fair value. Changes in the derivative instruments’ fair value are recognized in the Statement
of Operations unless specific hedge accounting criteria are met. Changes in the fair value of effective cash flow
hedges are included directly in net assets or deferred as appropriate, until the resultant asset, liability or
anticipated transaction affects the Statement of Operations or the Statement of Changes in Net Assets, as appropriate.
5. Deferred contributions
Deferred contributions represent unspent resources externally restricted for research purposes and restricted
operating funding received in the current period that is related to the subsequent period. Changes in the
deferred contributions balance are as follows:
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9.6: Financial instruments and not-for-profits
7. Building campaign
In 20X5, NFPO A launched a building campaign to raise $500,000 by 20X8 for a major expansion to one of NFPO
A’s buildings. The $81,400 Deferred building campaign contributions balance comprises $78,000 contributed to date
and related dividend and interest income earned of $2,000 and unrealized gains of $1,400, which is also
externally restricted for the building expansion.
10. Investment income
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9.6: Financial instruments and not-for-profits
Example 9.6-2 shows what the difference would be if the organization followed the deferral method but also used
fund accounting.
Example 9.6-2: Using the deferral method with fund accounting
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9.6: Financial instruments and not-for-profits
NFPO A
Statement of Financial Position
as at December 31, 20X5
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9.6: Financial instruments and not-for-profits
NFPO A
Statement of Operations and Changes in Fund Balances
for the year ended December 31, 20X5
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9.6: Financial instruments and not-for-profits
NFPO A
Notes to financial statements
December 31, 20X5
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9.6: Financial instruments and not-for-profits
1. Purpose of the organization
NFPO A is a national organization operating programs and performing research aimed at helping those who have
lost family members in automobile accidents. NFPO A is incorporated under the Canada Corporations Actas a notfor-profit organization and is a registered charity under the Income Tax Act.
2. Significant accounting policies
NFPO A follows the deferral method of accounting for contributions.
Fund accounting
Revenues and expenses related to program delivery and administrative activities are reported in the Operating
fund. Revenues and expenses related to research activities are reported in the Research fund. The Capital asset
fund reports the assets, liabilities, revenues and expenses related to NFPO A’s capital assets and building
expansion campaign. Endowment contributions are reported in the Endowment fund. Dividend and interest
income earned on resources of the Endowment fund is reported in the Research or Operating fund depending on
the nature of any restrictions imposed by contributors of funds for endowment. Realized and unrealized investment
gains and losses on resources of the Endowment fund are reported in the Endowment fund.
Revenue recognition
Restricted contributions are recognized as revenue of the appropriate fund in the year in which the related expenses
are incurred. Unrestricted contributions are recognized as revenue of the appropriate fund when received or receivable
if the amount to be received can be reasonably estimated and collection is reasonably assured.
Endowment contributions are recognized as direct increases in the Endowment fund balance.
Investment income includes dividend and interest income, and realized and unrealized investment gains and
losses. Unrealized gains and losses on available-for-sale financial assets are included directly in the fund balances
or deferred contributions, as appropriate, until the asset is removed from the Statement of Financial Position.
Unrealized gains and losses on held-for-trading financial assets are included in investment income and recognized
as revenue in the Statement of Operations, deferred or reported directly in the fund balances, depending on the nature
of any external restrictions imposed on the investment income. Restricted investment income is recognized as revenue
of the appropriate fund in the year in which the related expenses are incurred.
Other unrestricted investment income is recognized as revenue when earned.
Seminar fees are recognized as revenue of the Operating fund when the seminars are held.
Investments
Investments classified as available-for-sale or held-for-trading are recorded at the lower of cost and market
value. Investments classified as held-to-maturity are recorded at amortized cost.
Derivative financial instruments
NFPO A uses forward foreign exchange contracts to manage foreign exchange risk in future expenses for materials
and services. Derivative instruments are recorded on the Statement of Financial Position as assets and liabilities and
are measured at fair value. Changes in the derivative instruments’ fair value are recognized in the Statement
of Operations unless specific hedge accounting criteria are met. Changes in the fair value of effective cash flow
hedges are included directly in the fund balances or deferred as appropriate, until the resultant asset, liability
or anticipated transaction affects the Statement of Operations or the fund balances directly, as appropriate.
5. Deferred contributions
Deferred contributions reported in the Operating fund relate to restricted operating funding received in the current
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period that is related to the subsequent period. Changes in the deferred contributions balance reported in the
Operating fund are as follows:
20X5
Beginning balance
Less amount recognized as revenue in the year
Add amount received related to the following year
Ending balance
$105,000
(105,000)
110,000
$110,000
In addition, deferred contributions of $8,000 (20X4 –$0) are reported in the Research fund and $1,600 (20X4 –
$2,000) are reported in the Endowment fund. These deferred contributions relate to the unspent portion of dividend
and interest income earned, restricted for research purposes of $8,000 (20X4 –$0) and the unrealized gains
on Endowment fund resources restricted for research purposes of $1,600 (20X4 –$2,000).
6. Deferred contributions related to capital assets
Deferred contributions reported in the Capital asset fund include the unamortized portions of contributed capital
assets and restricted contributions with which one of NFPO A’s buildings was originally purchased. In 20X5, NFPO
A launched a building campaign to raise $500,000 by 20X8 for a major expansion to NFPO A’s existing
building. Externally restricted contributions, dividend and interest income earned and realized and unrealized gains
and losses related to the building campaign are also included in deferred contributions reported in the Capital asset fund.
The changes for the year in the deferred contributions balance reported in the Capital asset fund are as follows:
Finally, Example 9.6-3 illustrates the situation where the organization follows the restricted fund method.
Example 9.6-3: Accounting for contributions using the restricted fund method
NFPO A
Statement of Financial Position
as at December 31, 20X5
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20X4
$100,000
(100,000)
105,000
$105,000
9.6: Financial instruments and not-for-profits
NFPO A
Statement of Operations and Changes in Fund Balances
for the year ended December 31, 20X5
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9.6: Financial instruments and not-for-profits
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9.6: Financial instruments and not-for-profits
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9.6: Financial instruments and not-for-profits
NFPO A
Notes to financial statements
December 31, 20X5
1. Purpose of the organization
NFPO A is a national organization operating programs and performing research aimed at helping those who have
lost family members in automobile accidents. NFPO A is incorporated under the Canada Corporations Actas a notfor-profit organization and is a registered charity under the Income Tax Act.
2. Significant accounting policies
Fund accounting
NFPO A follows the restricted fund method of accounting for contributions.
The General fund accounts for the organization’s program delivery and administrative activities. This fund
reports unrestricted resources and restricted operating grants. The Research fund reports only restricted resources
that are to be used for research purposes. The Capital asset fund reports the assets, liabilities, revenues and
expenses related to NFPO A’s capital assets and building expansion campaign. The Endowment fund reports
resources contributed for endowment. Dividend and interest Investment income earned on resources of the
Endowment fund is reported in the Research or General fund depending on the nature of any restrictions imposed
by contributors of funds for endowment. Realized and unrealized investment gains and losses on resources of
the Endowment fund are reported in the Endowment fund.
Investments
Investments classified as available-for-sale or held-for-trading are recorded at the lower of cost and market
value. Investments classified as held-to-maturity are recorded at amortized cost.
Derivative financial instruments
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9.6: Financial instruments and not-for-profits
NFPO A uses forward foreign exchange contracts to manage foreign exchange risk in future expenses for materials
and services. Derivative instruments are recorded on the Statement of Financial Position as assets and liabilities and
are measured at fair value. Changes in the derivative instruments’ fair value are recognized in the Statement
of Operations unless specific hedge accounting criteria are met. Changes in the fair value of effective cash flow
hedges are included directly in the fund balances or deferred as appropriate, until the resultant asset, liability
or anticipated transaction affects the Statement of Operations or the fund balances directly, as appropriate.
Revenue recognition
Investment income includes dividend and interest income, and realized and unrealized investment gains and
losses. Dividend and interest income earned on Endowment fund resources that must be spent on research activities
is recognized as revenue of the Research fund. Unrestricted dividend and interest investment income earned
on Endowment fund resources is recognized as revenue of the General fund. Realized gains and losses on
Endowment fund resources are recognized as revenue of the Endowment fund. Dividend and interest income earned
and realized gains and losses on building campaign resources are recognized as revenue of the Capital asset fund.
Other investment income is recognized as revenue of the General fund when earned.
Unrealized gains and losses on available-for-sale financial assets are included directly in the fund balances or deferred,
as appropriate, until the asset is removed from the Statement of Financial Position. Unrealized gains and losses on
held-for-trading financial assets are included in investment income and recognized as revenue in the Statement
of Operations, or deferred as appropriate.
Seminar fees are recognized as revenue of the General fund when the seminars are held.
6. Externally restricted net assets
Major categories of externally imposed restrictions on net assets are as follows:
In 20X5, NFPO A launched a building campaign to raise $500,000 by 20X8 for a major expansion to NFPO A’s
existing building. The campaign has raised contributions of $78,000 to date, which have been invested in
marketable securities. Related dividend and interest income of $2,000 and unrealized gains of $1,400, restricted for
the building expansion, are also reported in the Capital asset fund.
10. Investment income
Investment income includes dividend and interest income earned on resources held for endowment, which is reported
in the following funds:
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9.6: Financial instruments and not-for-profits
11. Unrealized gains and losses recorded directly in fund balances
Changes in unrealized gains and losses on available-for-sale financial assets recorded directly in fund balances are
as follows:
1These illustrations are based on the material released by the Accounting Standards Board when the original
exposure drafts were issued in 2003. The original data for the illustrations is based on the material in Handbook
section 4400.
2This
line item is included for illustrative purposes as to where it appears; it is not applicable in the example provided.
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9.7: Financial reporting for government
9.7 Financial reporting for government
Learning objective
●
Explain the reporting implications of governments’ unique characteristics (Level 1), and
describe the key messages the financial statements should convey (Level 2).
Required reading
●
●
Reading 9.7-1: Government of New Brunswick 2008 Summary Financial Statements
Reading 9.7-2: Government of Canada Treasury Board Accounting Standard
LEVEL 1
The federal government is somewhat unique in that it uses Treasury Board Accounting Standards
(TSAB) to prepare its financial statements. Review the standards, paying particular attention to the
Illustrative Financial Statement package section. You should download the illustrative statements and
compare and contrast them to those of the Government of New Brunswick set out below. In what
aspects are they similar? How are they different?
As you will see in Topic 9.8, other governments are required to prepare their financial statements in
accordance with the Public Sector Accounting Handbook.
We will use the Government of New Brunswick’s fiscal 2008 financial statements as an example to
demonstrate the unique characteristics of governments. Open the province’s financial statements and
note that they consist of the following consolidated statements:
●
●
●
●
●
Financial Position
Operations
Cash Flow
Change in Net Debt
Change in Accumulated Deficit
Each statement reflects the unique characteristics of governments, as follows:
●
●
●
●
●
●
●
●
●
Government's goal is not to make a profit but to provide services and redistribute resources.
Most government tangible capital assets do not represent future cash inflows to the
government but rather service capability.
Government capital spending may not focus on maximizing financial return.
The principal source of revenue for governments is taxation.
The value and use of the assets held by governments outweigh the value and use of
recognized assets.
The benefits of government services cannot be measured solely by a bottom line that shows
net revenues or expenses.
A government's budget portrays public policy and is an important part of the government
accountability cycle. A comparison of actual-to-budget amounts demonstrates public
accountability for government finances.
The debt capacities of senior governments remain distinctive and unequaled by most
organizations.
Governments are held to a higher standard of accountability than other organizations.
LEVEL 2
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9.7: Financial reporting for government
Consistent with these unique characteristics, governments should provide the following key
messages:
In the Statement of Financial Position
●
●
●
Financial assets separated from non-financial assets, the former being used namely to
discharge liabilities and the latter includes namely capital assets representing service capability
The net financial resources/net debt of the government
The accumulated surplus/(deficit) that represents the net economic resources (net assets)
available to use in providing future services and measures the extent of future revenue
required to pay for past transactions and events
In the Statement of Operations
●
●
The annual surplus/(deficit), which represents the net cost of services and affordability of
services and the ability to maintain net assets in the year, and is also a measure of
effectiveness and efficiency
The accumulated surplus/(deficit)
In the Statement of Cash Flow
●
Capital transactions separately highlighted
In the Statement of Change in Net Debt
●
●
●
●
Capital spending and its effect on net debt must be highlighted in the financial statements.
The increase/decrease in net debt indicates the need for more or less future revenue to pay
for past transactions and events.
Net debt is an indication of the affordability of additional spending.
Change in net carrying value of capital assets shows capital spending and its effect on net
debt.
For the Statements of Operations and Change in Net Debt, actual-to-budget comparisons are
provided as an effectiveness indicator.
Government assets not recognized due to difficulty in measurement should be disclosed, and
financial reporting should include performance measurement and non-financial performance
measures.
Each of these statements is schematically illustrated in the following tables and key messages that
they should convey to the public are emphasized.
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9.7: Financial reporting for government
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9.7: Financial reporting for government
Source: Figures taken from PS 1200, Appendix A.
Notes and schedules
Note X: Tangible capital and other non-financial assets are accounted for as assets by the
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9.7: Financial reporting for government
government because they can be used to provide government services in future periods. These
assets do not normally provide resources to discharge the liabilities of the government unless they
are sold.
Government financial statements — Illustration
Reading 9.7-1, Government of New Brunswick 2008 Summary Financial Statements, provides an
example of government financial reporting. As you review these documents, notice the similarities
and differences between these statements and those required for profit-oriented companies under
GAAP.
The following exhibit includes comments that deal with the key messages that the statements should
convey to the public and also provides a brief summary of the similarities and differences that you
should note.
Exhibit 9.7-1: Comments on the New Brunswick financial statements
Reading 9.7-1 presents the summary financial statements for the Government of New Brunswick for
the year ended March 31, 2008. These statements are audited, and the Provincial Auditor
acknowledges that the statements are the responsibility of the government.
The following points about these statements are consistent with the requirements of Section PS 1200.
1. Comparative financial data from the year 2004 to 2008 as presented on pages 4 – 6. The
following should be highlighted:
❍
The surplus significantly declined from $236.8 million in 2007 to $86.7 million in 2008.
❍
Net debt, which had been steadily decreasing, increased $367.8 million in 2008.
2. With regard to the indicators of the government’s effectiveness, an extensive variance analysis
was conducted (see "Major variance analysis" on pages 8 through 12).
3. The inclusion of an "indicators of financial health" section on pages 13-200
4. Financial statements
Note 1c makes it clear that the financial statements of the government of New Brunswick are
prepared on an accrual basis.
●
Statement of Financial Position (similar to a balance sheet).
■
■
■
Financial assets that can be used to discharge liabilities or provide services are
disclosed separately from non-financial assets which are normally used for service
provision. Among the non-financial assets, the tangible capital assets item is supported
by note 9 that provides a detailed description of the tangible capital assets.
The accumulated deficit has decreased from $1,449.2 million in 2007 to $1,404.6
million in 2008, showing an improvement in the government’s net assets. In other
words, the requirement of future revenues to pay for past transactions and events has
decreased.
Statement of Operations (similar to an income statement). The statement displays
the revenue and expense with the latter reported by programs. The 2008 budget is also
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9.7: Financial reporting for government
recorded, which permits the users to compare the actual results to those initially
forecast. While the 2008 surplus ($86.7 million) was substantially less than that
recorded in 2007 ($236.8 million), it did exceed that budgeted ($37.1 million).
■
■
Statement of Cash Flow. Note the presence of a specific category of activities —
Capital transactions — that is absent in a profit-oriented organization’s statement. The
capital transactions show that the government has spent more in capital assets in 2008
($820.0 million) than in 2007 ($365.0 million). Note also the significant deterioration in
cash position, which declined to $532.2 million in 2008.
Statement of Change in Net Debt (similar to a statement of retained earnings).
There was a decrease in net debt of $131.5 million in 2005 compared to an increase of
$88.3 million in 2004. This indicates an improvement in that less future revenue is
needed to pay for past transactions and events. As a result, the net debt at the end of
the year has decreased from 2004 ($6,967.5 million) to 2005 ($6,836.0 million).
Additional information is presented in the notes to the financial statements and includes the following:
●
●
●
●
●
Significant accounting policies (note 1)
The Provincial reporting entity with the list of entities that are consolidated (note 1b)
Pension plans obligations (note 14)
Contingencies (note 15), and commitments (note 16)
Environmental responsibility in note 15(e)
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9.8: GAAP for public sector organizations
9.8 GAAP for public sector organizations
Learning objective
●
Explain the concept of the public sector, determine the Handbook applicable to each
component of the public sector, and describe the objectives of public sector financial
statements. (Level 1)
Required reading
●
Reading 9.8-1: CICA Public Sector Accounting Handbook, selected paragraphs
Note: Throughout this topic, numbers in square brackets refer to the "Introduction to public
sector accounting standards" in the CICA Public Sector Accounting Handbook.
LEVEL 1
The concept of public sector includes several different categories of entities; the term refers to
federal, provincial, territorial and local governments, government organizations, government
partnerships, and school boards [.03]. The category to which an entity belongs determines which
CICA standards are to be used: the CICA Handbook — Accounting or the CICA Public Sector
Accounting Handbook (CICA PSAH), which has developed unique standards for the public sector
under the auspices of the Public Sector Accounting Board (PSAB).
Government organizations are entities controlled by government. This category includes
government business enterprises and government business-type organizations defined in the
Introduction to public sector accounting standards [.10] and in PS 1300.28. These government
businesses operate much like private sector companies.
Unlike government business enterprises, government business-type organizations may sell goods
and services within the government reporting entity or they may rely on subsidies from the
government or other organizations in the government reporting entity to maintain their
operations or meet their liabilities [.11]
A government not-for-profit organization is a not-for-profit organization controlled by
government. Other government organizations are organizations controlled by the government
other than those defined above.
Applicable standards
The following chart provides guidance on determining the standards applicable to a given entity.
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9.8: GAAP for public sector organizations
Source: CICA Public Sector Accounting Handbook, “Introduction to public sector accounting
standards”
This chart shows how the Handbooks are applicable to government business enterprises,
government business-type organizations, government not-for-profit organizations, and other
government organizations.
●
●
Unless otherwise directed to specific public sector standards, for purposes of their financial
reporting:
a. government business enterprises and government business-type organizations are
deemed to be publicly accountable enterprises and should adhere to the standards
applicable to publicly accountable enterprises in the CICA Handbook — Accounting;
and
b. government not-for-profit organizations should adhere to the standards for not-forprofit organizations in the CICA Handbook — Accounting. [.06]
For purposes of financial reporting, other government organizations may base their
accounting policies either on CICA Public Sector Accounting Handbook or on the CICA
Handbook — Accounting unless otherwise directed to specific public sector standards. Such
organizations should select the basis that is most appropriate to their objectives and
circumstances. The basis chosen should be disclosed and consistently applied [.07].
Accounting recommendations for governments
The Public Sector Accounting Board has issued numerous sections devoted to public sector. The
following exhibit provides a list of these sections and gives an idea of the efforts made in public
sector accounting.
In order to improve government financial statements and enhance their comparability, PS 1100
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9.8: GAAP for public sector organizations
establishes four objectives of financial statements of the federal, provincial and territorial
governments that are generally acceptable to the users and preparers of the statements.
In brief, the four objectives attempt to
●
●
●
●
account for the full scope of government’s resources, including consolidating related
enterprises (PS 1100.16)
measure the financial position of the government (PS 1100.20)
measure the changes in financial position of the government including sources and uses of
funds and the change in the net debt (PS 1100.36), and
measure the government’s stewardship over its resources and compliance with parliament
(PS 1100.61).
Accounting recommendations for local governments
Until recently, accounting by local governments was governed by PS 1700 and PS 1800. For years
beginning on or after January 1, 2009, however, local governments were required to adopt the
full accrual basis of accounting and now fall within the scope of PS 1100.
Exhibit 9.8-1: Public Sector Accounting Handbook, Table of Contents
This table provides the list of PSHA sections that are specific to the public sector in order to give
an idea about the efforts made by the PSAB. Only some of these standards will be studied in this
module.
Introduction to public sector accounting standards
Concepts and principles
PS
PS
PS
PS
PS
1000
1100
1150
1200
1300
Federal, provincial, territorial, and local governments
Financial statement concepts
Financial statement objectives
Generally accepted accounting principles
Financial statement presentation
Government reporting entity
Specific Items
PS
PS
PS
PS
PS
PS
PS
PS
2100
2120
2130
2400
2500
2510
2600
2700
Financial reporting
Disclosure of accounting policies
Accounting changes
Measurement uncertainty
Subsequent events
Basic principles of consolidation
Additional areas of consolidation
Foreign currency translation
Segment disclosures
Financial statement items
PS 3030
Temporary investments
PS 3040
PS 3050
Portfolio investments
Loans receivable
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9.8: GAAP for public sector organizations
PS
PS
PS
PS
PS
3060
3070
3100
3150
3200
PS 3230
PS 3250
PS 3255
Government partnerships
Investments in government business enterprises
Restricted assets and revenues
Tangible capital assets
Liabilities
PS 3300
Long-term debt
Retirement benefits
Post-employment benefits, compensated absences, and
termination benefits
Solid waste landfill closure and post-closure liability
Contingent liabilities
PS 3310
PS 3390
PS 3410
Loan guarantees
Contractual obligations
Government transfers
PS 3800
Government organizations
Government assistance — application of CICA Handbook
Section 3800
PS 3270
Source: Reproduced with permission from the Public Sector Accounting Handbook, January 2006,
The Canadian Institute of Chartered Accountants, Toronto, Canada. Any changes to the original
material are the sole responsibility of CGA-Canada and have not been reviewedby or endorsed by
the CICA.
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Module 9 summary
Module 9 summary
This module describes the major reporting issues and accounting approaches of not-forprofit organizations (NFPOs) and the public sector
Define not-for-profit organizations and compare their financial reporting
objectives with those of profit-oriented organizations.
Not-for-profit organizations — governmental and non-governmental — often exist to
provide a service that is beneficial to society as a whole. They have no transferable
ownership and may operate without concern for generating wealth.
The objectives of financial reporting for NFPOs and profit-oriented companies are very
similar. Both require information that will assist users in
●
●
●
making resource allocation decisions
assessing management performance, and
assessing stewardship.
There is a difference in how resource allocation decisions are made. For an NFP, users want
to assess the efficiency and effectiveness of the NFP (that is, whether the entity is achieving
its objectives at the lowest possible cost). For a profit-oriented company, the users want to
assess profitability and return on investment.
The fundamental difference between NFPs and profit-oriented companies is that, while both
the preparers and users of profit-oriented companies are interested in the ability of the
company to earn a profit, the preparers and users of NFPs generally do not aim to make a
profit. However, both types of organizations want to provide information that is reliable,
timely, and useful to readers.
Explain the major financial reporting issues in not-for-profit organizations.
The accrual basis of accounting is used to better present the financial position and results of
operations.
Expense accounting should be used instead of expenditure accounting. Expenditure
accounting can result in expensing items that have been acquired but not yet used (for
example, capital assets)
In a profit-oriented organization, revenue is recognized when earned and then expenses are
matched to revenues. In an NFPO, expenses are recognized when goods or services are
used or consumed and, under the deferral method, revenues are matched to expenses.
Contributions receivable should be recognized as an asset when the amount to be received
can be reasonably estimated and ultimate collection is reasonably assured. The credit side
of the entry would follow the rules for revenue recognition. This applies to pledges (whose
claim is not legally enforceable) and bequests.
There is usually a greater flexibility for reporting when an NFPO has control, joint control,
significant influence, or economic interest in a profit-oriented company or NFPO. For
example, when an NFPO controls another NFPO, consolidated financial statements should be
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Module 9 summary
prepared or summarized financial information for the controlled entity should be disclosed.
Related-party transactions should be disclosed.
NFPOs with two-year average annual revenues of $500,000 or more should capitalize their
capital assets and amortize them over their useful lives. This practice will present a better
measure of the total cost of operating the NFPO on a year-by-year basis.
Collections held by NFPOs need not be capitalized and amortized since they have unlimited
lives. Details of the collections should be disclosed in the notes.
An NFPO may report donated materials and services if their fair value can be reasonably
determined and if they would have been purchased had they not been donated. Donated
capital assets should be reported at fair value (if reasonably determinable) or at a nominal
value and amortized over their estimated useful lives.
Disclosure recommendations include description and scope of the organization, external
restrictions on contributions, and inter-fund transfers.
Explain the basics of accounting for, and reporting of, contributions under
the restricted fund and deferred contribution methods.
Fund accounting is commonly used in NFPOs. Fund accounting is a procedure that allows
organizations to separately monitor different sources of revenue, diverse activities, and
specific resources. Reporting by programs is also frequently used in practice.
When the restricted fund method is used, unrestricted contributions are recognized under
General fund when received and contributions to a restricted fund should be recognized as
revenue of the restricted fund when the contribution is received. When no restricted fund is
set up, contributions are deferred under General fund until expensed. Endowments are
recognized immediately as revenue in the endowment fund.
Under the deferral method, revenues are matched to expenses as follows:
●
●
●
●
If the contribution is for expenses of the current year or is unrestricted, revenue is
recognized in the current year.
If the contribution is for expenses of a future year, then revenue is deferred and
recognized in the future year when the expenses are incurred.
If the contribution is for capital assets that will be amortized, then revenue is
deferred and recognized over time as the capital assets are amortized.
If the contribution is for an endowment or for non-amortizable capital assets, the
contribution is not shown as revenue but is credited directly to net assets/fund
balance (surplus).
Determine appropriate accounting policies for not-for-profit organizations.
It is important to understand the logic of the Handbook recommendations in terms of basic
accounting principles of financial statement elements, recognition, and measurement.
Accountants should be able to
●
explain to a client the fundamental differences between the deferral and restricted
fund method, what the accounting procedures to be implemented would be, and how
the results of their operations would be presented in the financial statements under
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Module 9 summary
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the deferral method or the restricted fund method of recognizing contributions, and
determine who the users of the statements will be, what their needs are, and the
extent to which recommendations provide relevant and reliable information for these
users.
For an NFPO that receives recurring restricted contributions, the restricted fund method
may provide donors with simple but robust information on how their donations are being
used. The revenues and expenses of each fund are set out. Segregating restricted funds
from general funds shows donors which funds have been set aside for restricted purposes.
The deferred contribution method may be more difficult for users to understand.
Contributions for future periods are deferred and not reported until used.
Explain how formal recording of a budget helps NFPO managers to control
operations.
Budgets provide an ethical framework for management decisions and a tool for assessing
management’s performance.
Budgetary accounts used as part of a fund accounting framework, can provide managers
with up-to-date information regarding amounts available, amounts committed, and amounts
spent from a specific fund or for a specific purpose.
Budgets are incorporated into an NFPO control system through the use of self-balancing
memorandum accounts, which supplement the normal general ledger accounts.
Budgeted revenue is set up as a debit in the control account and budget expenses are
recorded as an offsetting credit. These accounts are set up as the reverse of their real
counterparts (revenue accounts; expenses accounts). Management can quickly obtain
information on remaining available resources by offsetting actual revenues and expenses
with these budgeted amounts.
Apply the requirements for financial instruments as they pertain to not-forprofit organizations.
There are special circumstances under which financial instruments are accounted in not-forprofit organizations.
The application of the underlying principles will depend on which of the following accounting
methods the NFPO employs:
●
●
●
the deferral method of accounting for contributions
the deferral method of accounting for contributions and fund accounting
the restricted fund method of accounting for contributions
Explain the reporting implications of governments’ unique characteristics,
and describe the key messages the financial statements should convey.
Governments must publish the following four financial statements:
●
●
Consolidated statement of financial position
Consolidated statement of operations
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Module 9 summary
●
●
Consolidated statement of change in net debt
Consolidated statement of cash flows
Each financial statement should convey clear key messages about government finances:
●
●
●
●
Statement of Operations
❍
net cost of services and affordability of services
❍
ability to maintain net assets in the year
Statement of Changes in Net Debt
❍
actual to budget comparisons
❍
capital spending and its effect on net debt
❍
An increase in net debt sends a signal that there is a need for future revenue
to pay for past transactions.
❍
Net debt at the end of the year indicates whether additional spending is
affordable.
Statement of Financial Position
❍
availability of economic resources to meet future needs or need for future
revenues to pay for past transactions and events
Statement of Cash Flow
❍
capital transactions are highlighted separately
Explain the concept of the public sector, determine the Handbook
applicable to each component of the public sector, and describe the
objectives of public sector financial statements.
The concept of public sector includes several categories of entities, as follows:
●
Government organizations — organizations that are controlled by the government.
This category includes government business enterprises and government businesstypes, and government not-for-profit organizations.
●
Governments
●
Other government organizations
The CICA Handbook — Accounting applies to government business enterprises, government
business-types, and not-for-profit organizations. The CICA Public Sector Accounting
Handbook governs accounting for all levels of government.
Section PS 1100 sets out four objectives for government financial statements. These
objectives attempt to
●
●
●
●
account for the full scope of government’s resources, including consolidating related
enterprises
measure the financial position of the government
measure the changes in financial position of the government including sources and
uses of funds and the change in the net debt, and
measure the government’s stewardship over its resources and compliance with
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Module 9 summary
parliament.
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Module 9: Selftest
Module 9 self-test
Question 1 — Multiple choice
a. Which of the following describes all of the recommended bases of accounting for
not-for-profit organizations under GAAP?
1.
2.
3.
4.
Cash
Cash and accrual
Cash, modified cash, and accrual
Accrual only
b. Georgia Corporation, a not-for-profit museum located in Whetherby, Ontario,
has received a contribution from the estate of a wealthy benefactor. The
stipulations on the estate are that the cash is to be invested and only the
interest is to be used for new acquisitions for the museum. What type of
contribution is this, according to the CICA Handbook?
1.
2.
3.
4.
Restricted
Endowment
Deferred
Unrestricted
c. Under the deferral method, how should endowment contributions be recognized?
1.
2.
3.
4.
As revenue in the year they are received
As revenue in a systematic and rational manner over a period of time
According to the terms of the endowment agreement
As direct increases in net assets in the period they are received
d. An NFP received cash donations of $120,000 and pledges of $40,000, similar to
last year, when all but $4,500 was eventually collected. Which of the following
best describes GAAP for the contributions receivable?
1. Contributions receivable of $40,000 should be accrued at year end and an
allowance provided for possible uncollectibility.
2. They should not be recognized until received due to the uncertainty
regarding collectibility.
3. They should be recognized for the full $40,000 amount.
4. They should be recognized using either the deferral or restricted fund
method.
e. Which of the following describes the financial statements that will be issued by
governments, according to the CICA Public Sector Accounting Handbook?
1. Statement of financial position, statement of operations, statement of
change in net debt, and statement of fund balances
2. Statement of operations, statement of change in net debt, and statement
of fund balances
3. Statement of financial position, statement of operations, statement of
change in net debt, statement of change in accumulated deficit, and
statement of cash flow
4. Statement of financial position, statement of change in net debt,
statement of tangible capital assets, and statement of fund balances
f. Which of the following is not a correct way of treating donations of goods and
services received?
1. Recognize these donations as an increase in net assets.
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Module 9: Selftest
2. Recognize the fair value of these donations as both a revenue and an
expense if they have been used up in the period.
3. Recognize the fair value of these donations as both a revenue and an
expense for the amounts that have been used up in the period and as
revenue and an asset for the amounts not yet used up.
4. Do not recognize them at all.
g. Which of the following best describes the contributions received from a
fundraiser held in February to cover the current year’s operating expenses?
1.
2.
3.
4.
Endowment
Restricted
Unrestricted
Deferred
h. Which of the following is not a recommended accounting policy for financial
statement presentation and disclosure for governmental units?
1.
2.
3.
4.
Cash accounting
Accrual accounting
Consolidation accounting
Budget disclosure
i. Eastern Historical Society (EHS) is an audited not-for-profit organization that
maintains historical sites across eastern Ontario. EHS uses fund accounting. In
20X7, a donation of $2,500,000 was restricted for use in erecting historical
markers. Which of the following is included in the journal entry used to set up a
restricted fund for this donation under the restricted fund method?
1.
2.
3.
4.
A
A
A
A
debit to Historical Marker fund balance, restricted for $2,500,000
credit to Cash for $2,500,000
debit to General fund balance for $2,500,000
credit to revenue in the Historical Marker fund
j. Which of the following is the best definition of the term fund as used in fund
accounting?
1.
2.
3.
4.
Cash segregated for a specific purpose
Net assets segregated for a specific purpose
Restricted assets disclosed separately
Cash and marketable securities available for use in the next year
Solution
Question 2
Prior to the release of Handbook sections on not-for-profit organizations, many NFPs
used the cash basis of accounting. The main reasons for this were simplicity and
budgetary control. Although the cash basis was widely accepted, the standards
recommended that accrual accounting be used for all NFPs. Explain why the accrual
basis was recommended over the cash basis.
Solution
Question 3
What are the main differences between expenses and expenditures? Are either used
under the cash basis of accounting?
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Module 9: Selftest
Solution
Question 4
a. Chapter 13, Review Question 3, page 662
b. Describe two types of restrictions that are imposed on resources.
Solution
Question 5
Chapter 13, Problem 2, pages 674-675
Solution
Question 6
Chapter 13, Problem 3, pages 675-676 (ignore part c)
Solution
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Module 9 test your knowledge
Question 1
Describe how the sources of revenue in a not-for-profit organization can differ from the
sources of revenue in a profit-oriented business. Provide examples of revenue sources
that are different for not-for-profit organizations and profit-oriented businesses.
Solution
Question 2
Does a not-for-profit organization recover its costs of providing goods and services in
the same way that a profit-oriented business does? Explain why or why not.
Solution
Question 3
Chapter 13, Review Question 6, page 662
Solution
Question 4
Explain the difference between the primary users of not-for-profit financial statements
and the primary users of a government’s financial statements.
Solution
Question 5
Why does the Public Sector Accounting Handbook specifically recommend that
government financial statements should report a comparison of actual to budgeted
results for the period when this is not a requirement of profit-oriented companies?
Solution
Question 6
When a not-for-profit organization records budget amounts in the accounts, budgeted
revenues are debited and budgeted expenses are credited. Explain in your own words
why this is so.
Solution
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Question 7
Under what circumstances would an organization be required to use certain aspects of
the deferral method even though it reports using the restricted fund method? Explain
why this might be so.
Solution
Question 8
Describe how NFPs currently handle interfund transfers according to GAAP and explain
how this is an improvement on the previous method.
Solution
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Case 9.4-1 solution 1
Case 9.4-1
Solution 1
This solution is based on the case analysis approach introduced in Module 1. It begins at
step 2 and covers all of the steps except for step 4 (analyze the data) as there are no data
requiring analysis in this case.
Report to Petfinders' controller
To:
From:
Re:
Rayanne O'Connor
Controller, The Petfinders Association
(Your Name), CGA
Deferral and restricted fund methods of accounting for restricted contributions
Background information, including the environment, organization, and statement
uses
The Petfinders Association is a not-for-profit organization dedicated to reuniting stray pets
with their owners and providing service across the continent. Until the May 1, 20X7,
$1,000,000 donation, Petfinders had never received a restricted contribution. Prior to this
time, the organization's sources of revenue were user fees and donations received through
the annual door-to-door canvassing campaign. The financial statements will be used by
contributors and management to assess stewardship and performance, respectively.
Identify problem, issues
For the first time, the organization has received a restricted contribution. It is of a
significant amount. At issue is how the organization should report this restricted
contribution and the expenditures related to it. Interest earned on the funds is to be used
for the same purpose as the original contribution. Upon receipt, the funds were invested to
earn interest until the moment when the use of the funds occurs.
Generate alternatives
Two methods are acceptable for dealing with restricted contributions under CICA Accounting
Handbook section 4410:
●
●
Deferral method
Restricted fund method
Select the decision criteria
●
●
●
Conformity with the conditions attached to the benefactor's contribution should be
demonstrated.
The accounting must comply with GAAP to meet the requirements of the provincial
legislation for an audit.
Useful information should be provided for Petfinders' financial statement readers.
Analyze and evaluate alternative revenue recognition policies
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Case 9.4-1 solution 1
Deferral method
Under the deferral method, revenue is recognized as the related expenses (that is, the
expenses meeting the restrictions of the contribution) are incurred. Interest earned on the
invested funds is accumulated and recognized as revenue only when spent in accordance
with the restrictions. Any amount of the contribution not used in a particular fiscal period is
deferred and carried on the NFPO's statement of financial position until future periods.
Under this method, the nature and amount of changes in deferred contribution balances
should be disclosed. This method complies with GAAP. Disclosure of conformity with the
benefactor's conditions would be made using a footnote.
Restricted-fund method
Under the restricted-fund method, the contribution is immediately recognized as revenue if
a fund is set up specifically for that purpose. Each fund set up has its own statement of
financial position, statement of operations, and statement of changes in fund balance (or
statement of changes in net assets). The statement of fund balance is similar to a
statement of retained earnings for a profit-oriented organization. As expenses meeting the
restrictions of the contribution are incurred, they are recorded in the statement of
operations for that period. That Petfinders is using the funds in conformity with the
benefactor's conditions would be evident from these financial statements.
When there are several different sources of contributions, use of the restricted-fund method
makes it easier to assess that each one is being used in accordance with the relevant
restrictions. However, more recordkeeping is involved as a result of the requirement to
produce three financial statements for every fund. This method complies with GAAP.
Recommendations
The recommended accounting treatment for donations depends on the extent to which
Petfinders believes it will receive restricted contributions in the future.
1. If Petfinders believes this donation to be a one-time event and future donations are
expected to be unrestricted, the deferral method of accounting for donations should
be used.
2. If more restricted contributions are anticipated in the future, Petfinders may be well
advised to select the restricted fund method as it discloses the details of each fund's
position and activity more clearly than does the deferral method.
If I can be of further assistance, please do not hesitate to contact me.
Note: A student is usually expected to take a definite position by recommending only one
of the alternatives identified in the Generate alternatives section in a case analysis and to
support this recommendation by marshalling the facts in the case. However, for the purpose
of teaching and learning the accounting involved in the deferral method and the restricted
fund method, the recommendation section here is conditional and deliberately left openended so that both accounting methods may be illustrated.
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Case 9.4-1 solution 2
Case 9.4-1
Solution 2
Deferral method: Financial statements
●
●
●
●
●
Interest is recognized as an increase in the deferred contribution on the
statement of financial position, not as revenue, as it has not been used by the
end of the 20X8 fiscal year.
The land purchased is capitalized as an asset. Since land is not amortized, there
is no expense to which revenues can be matched. Therefore, neither the
contribution for the land nor the cost of the land will appear on the statement of
operations as a revenue and expense. Instead it will be recorded as a direct
increase to net assets. Two journal entries are required. The first will debit Land
and credit Cash and investments and the second will debit Deferred
contributions and credit Fund balance (net assets invested in capital assets).
The office building and operating facility are capitalized and amortization
(calculated using any acceptable method) is recorded as expense. This solution
uses $8,750 as the appropriate amortization for the year.
The amount of the contribution recognized as revenue for the year is equal to
the eligible expenses incurred (the maintenance expense and the amortization
expense on the office building and operating facility).
The amount of the contribution not used at the end of the year is disclosed in
liabilities as deferred contributions.
THE PETFINDERS ASSOCIATION
Statement of Financial Position
at April 30, 20X8
Assets
Cash and investments
Capital assets
Land
Office building
Operating facility
Accumulated amortization
Liabilities
Deferred contribution (Note 3)
Net assets
Invested in capital assets
Unrestricted net assets
$
425,000
200,000
100,000
300,000
(8,750)
591,250
$1,016,250
$
816,250
200,000
—
$1,016,250
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Case 9.4-1 solution 2
THE PETFINDERS ASSOCIATION
Statement of Operations
for the year ended April 30, 20X8
Revenues
Fees and other
Contributions
$
—
18,750
18,750
Expenses
Maintenance
Amortization
10,000
8,750
18,750
—
$
Excess revenues over expenses
THE PETFINDERS ASSOCIATION
Statement of Changes in Net Assets
for the year ended April 30, 20X8
Unrestricted
funds
Nets assets at the beginning of
the year
$
Add: Investment in land
Excess revenues over
expenses
Net assets at end of the year
$
—
Investment
in capital assets
$
—
Total
$
—
—
200,000
200,000
—
—
—
$ 200,000
$ 200,000
—
Notes to Financial Statements
1. Purpose of the organization
Petfinders is an organization dedicated to reuniting stray pets with their owners.
The organization operates throughout North America.
2. Significant accounting policies
Revenue recognition
Petfinders follows the deferral method of accounting for contributions. Restricted
contributions are recognized as revenue in the year in which the related
expenses are incurred. Unrestricted contributions are recognized as revenue
when received or receivable, if the amount to be received can be reasonably
estimated and collection is reasonably assured.
Capital assets
Purchased capital assets are recorded at cost. Amortization is provided on a
straight-line basis over the assets' estimated useful lives, as follows:
Office building
Operating facility
40 years
20 years
3. Deferred contributions
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Case 9.4-1 solution 2
Petfinders has deferred contributions that arise from externally restricted
unspent contributions and unamortized restricted capital expenditures, excluding
land. The deferred contributions are for purchasing and maintaining an office
building and operating facility. Changes in deferred contributions for the period
are as follows:
Beginning balance
Contributions during the year
Less: Amount charged to net assets for land
Less: Amount spent during the year
Less: Amortization of capital assets
Add: Restricted investment income
$
—
1,000,000
(200,000)
(10,000)
(8,750)
35,000
$ 816,250
This completes the financial statement presentation. The following shows how the
deferred contribution is split between the deferred contribution invested in building and
facility (which are subject to recognition to match the amortization expense) and the
unspent balance of $425,000 which is available for purchase of capital assets or for
maintenance costs in the future.
Initial contribution
Restricted investment income earned
Invested in
Land
Office building
Operating facilities
$1,000,000
35,000
$200,000
100,000
300,000
Maintenance cost for operating facilities
Available for future purchase,
capital assets, or maintenance costs
$1,035,000
600,000
10,000
(610,000)
425,000
Deferred contribution invested in building and facility subject to recognition to
match the amortization expense
Office building
Operating facilities
100,000
300,000
400,000
Deferred contribution recognized as revenue
Total deferred contribution
(8,750)
$816,250
Note that another way to analyze the deferred contributions is to look at what they are
comprised of, similar to the deferred contribution section of the balance sheet on page
632 for the restricted contribution example. In this case, the deferred contribution
shown on the balance is as follows:
Unspent cash from the initial deferred contribution
($1,000,000 – 200,000 – 100,000 – 300,000)
Deferred contributions — Office building
Deferred contribution — Operating facility
Restricted investment income earned
Less: Accumulated amortization
$
400,000
100,000
300,000
35,000
(8,750)
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Case 9.4-1 solution 2
Less: Cash spent
Total Deferred contributions
(10,000)
$ 816,250
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Case 9.4-1 solution 3
Case 9.4-1
Solution 3
Restricted fund method: Financial statements with notes
●
●
●
●
The contribution and the interest earned are immediately recognized as revenue
in the restricted fund.
As with the deferral method, the land, office building, and operating facility are
capitalized, and the office building and operating facility are amortized.
A separate statement of financial position, statement of operations, and changes
in fund balance is prepared for the restricted contribution fund.
Total of the two funds is disclosed as shown by the Total column.
THE PETFINDERS ASSOCIATION
Statement of Financial Position
at April 30, 20X8
General fund
Assets
Cash and investments
$
—
$
—
—
—
—
—
—
$
$
Capital assets
Land
Office building
Operating facility
Accumulated amortization
Liabilities
Fund balances
Invested in capital assets
Externally restricted (Note 3)
Unrestricted
Restricted
fund
$
425,000
Total
$
425,000
200,000
100,000
300,000
(8,750)
591,250
$1,016,250
200,000
100,000
300,000
(8,750)
591,250
$1,016,250
—
$
$
—
—
—
—
—
591,250
425,000
—
1,016,250
$1,016,250
—
—
591,250
425,000
—
1,016,250
$1,016,250
Note: In the restricted fund method, the fund balance for Invested in capital assets is
always equal to the net capital assets amount.
THE PETFINDERS ASSOCIATION
Statement of Operations and Changes in Fund Balances
for the year ended April 30, 20X8
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Case 9.4-1 solution 3
Revenues
Fees and other
Contributions
Interest income
General
fund
Restricted
fund
Total
$
—
$
—
1,000,000
35,000
1,035,000
$
—
1,000,000
35,000
1,035,000
—
—
—
—
—
10,000
8,750
18,750
—
10,000
8,750
18,750
1,016,250
1,016,250
—
$1,016,250
—
$1,016,250
Expenses
Operating expenses
Maintenance
Amortization
—
—
—
Excess of revenues over expenses
Fund balance at May 1, 20X7
Fund balance at April 30, 20X8
$
—
—
Notes to Financial Statements
1. Purpose of the organization
Petfinders is an organization dedicated to reuniting stray pets with their owners.
The organization operates throughout North America.
2. Significant accounting policies
Fund accounting
Petfinders follows the restricted fund method of accounting for
contributions. General fund accounts for the organization's administration of
registering and reuniting pets. This fund reports unrestricted resources and
grants for its operating activities.
Restricted fund reports only restricted resources. In the current year, a
restricted fund was established for purchasing and maintaining an office building
and operating facility. Separate restricted funds are created for each type of
restricted contribution received.
Revenue recognition
Restricted contributions are recognized as revenue of Restricted fund.
Unrestricted contributions are recognized as revenue of General fund in the year
received or receivable. Investment income earned on Restricted fund resources
is recognized as revenue of Restricted fund. Other investment income is
recognized as revenue of General fund when earned.
Capital assets
Purchased capital assets are recorded at cost. Amortization is provided on a
straight-line basis over the assets' estimated useful lives, as follows:
Office building
40 years
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Case 9.4-1 solution 3
Operating facility
20 years
Amortization expense is reported in Restricted fund.
3. Restricted fund balance
The fund balance of $425,000 is externally restricted for the purpose of
maintaining the office building and operating facility. Interest earned on
amounts invested is also restricted and must be used for the same purpose.
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Case 9.4-2 solution 1
Case 9.4-2
Solution 1
The case analysis solution begins at step 2 and incorporates the remaining steps in the case
analysis approach.
Report to:
From:
Re:
The Lakewood Theatre Company Board of Directors
(Your Name), CGA
Financial statement accounting policy recommendations
I have reviewed the issues raised at the last meeting and the adequacy of the statement of
receipts and expenditures prepared for the year ended May 31, 20X8. My suggestions have
been made with two goals in mind: (1) ensuring that the statements comply with generally
accepted accounting principles and (2) providing information useful to internal users such as
board members and external users such as donors. I would be pleased to discuss my
suggestions further with you at the next board meeting and to participate in a plan for their
implementation.
Background information, including the environment, organization, and statement
uses
Lakewood Theatre Company is a small not-for-profit repertory organization offering two
programs. The primary goal is to provide live theatre performances to local citizens. A
secondary objective is to provide drama lessons and performance opportunities to local
children on a cost recovery basis.
In the past, Lakewood reported its financial results on a cash basis as audited financial
statements were not required. However, the school board will be providing funding for the
Drama in the Schools program and will require audited financial statements this year.
The main stakeholders are the Lakewood Theatre Company, its board of directors and
finance committee, donors, and the school board, which will provide funding for the Drama
in the Schools program. Financial statements that are being prepared will be relied on by
donors, the school board, and possibly the banker if a new theatre building is constructed.
The school board will be using the statements as confirmation of the amount of funding to
provide under the Drama in the Schools program. In addition, donors will see that their
restricted donations have been used properly.
Identify problem, issues
The finance committee has asked for information to help it prepare financial statements that
are useful to the committee members, the board, and funds providers and that, for the first
time, will be audited. Therefore, GAAP is a requirement.
Fundraising activities have increased. Some of the funds raised are for a specified purpose;
the finance committee needs to know if this causes new accounting and reporting issues.
For the first time Lakewood has entered into a cost-recovery program with the school
board. An ethical issue is to ensure that general costs for the live theatre performances by
Lakewood are not shifted to the Drama in the Schools program, which enjoys a costrecovery status from the school board.
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Case 9.4-2 solution 1
Analyze the data
The statement of receipts and expenditures as provided by the bookkeeper reveals an
operating deficit of $35,084. It has been prepared using cash-basis accounting, which does
not conform to a GAAP-oriented statement of operations. A statement of financial position
and statement of cash flows have not been provided.
It is not possible to tell from the provided statement whether funds donated for vans are
used for that purpose or whether revenues charged to the school board for the Drama in
the Schools program are derived from costs pertaining to that program. Similarly, the
statement provided does not allow for the segregation of funds donated for acquisition of a
new theatre building.
To conform to GAAP, accrual accounting should be used. Assets should be capitalized and
amortized. The restricted fund method of accounting for revenues and expenditures would
best fulfill the wishes of the finance committee to provide proper information to donors.
In 20X8, accruals are required for the following transactions:
●
●
●
●
●
Wages payable for $6,700
Travel costs payable for $4,500
Rent payable for $2,500
School board funding receivable for $105,000
Pledges receivable for $25,000
By correctly including the preceding amounts and using Lakewood terminology, the result is
not a deficit of receipts over expenditures. Instead, it is an overall surplus of $104,666 as
follows:
Reported deficit
Wages payable
Travel costs payable
Rent payable
School board funding receivables
Pledges receivable
Van
Van amortization
Excess of revenues over expenses
$(35,084)
(6,700)
(4,500)
(2,500)
105,000
25,000
25,500
(2,050)
$ 104,666
Even if the pledges receivable are excluded, there is still a surplus of nearly $80,000.
Generate alternatives
●
●
●
Basis of accounting
❍
cash basis accounting
❍
accrual basis accounting
Capital assets
❍
expenditure method
❍
capitalize and not amortize
❍
capitalize and amortize method
Contributions — Revenue recognition and restricted amounts
❍
deferral method
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Case 9.4-2 solution 1
❍
●
restricted fund method
Donated materials and services
❍
recognized at fair value
❍
not recognized at all
Select the decision criteria
●
●
●
●
●
GAAP is a constraint.
The financial statements must make clear that the board has executed its
stewardship duties in a responsible manner.
The financial statements must demonstrate that donated funds have been used for
the purposes intended.
Information on the cost of providing regular performances should be available to
readers to enable evaluation of performance objectives, cash flow prediction, and
adequacy of ticket prices.
The accounting method must enable accurate cost recovery from the school board of
the costs of the Drama in the Schools program.
Analyze and evaluate the alternatives
Basis of accounting
Cash basis
Lakewood's statements are prepared on a cash basis which does not comply with GAAP.
This method records only receipts and expenses that have occurred and reconciles them to
the organization's cash and term deposit balances. It provides information that is easy to
understand and allows for control of the organization's cash flow.
A key disadvantage is that it does not provide an accurate measure of the organization's
activities because of a mismatching of expenditures and receipts in any period. Expenses
that were incurred in the current year may not be recorded. Likewise, revenues earned in
the period such as those from the Drama in the Schools program, which have not yet been
received, are not recorded although the related costs are recorded.
Accrual basis
Under accrual accounting, amounts owing to but not yet received by Lakewood, such as the
school board funding and pledges not yet collected (net of any amounts deemed
uncollectible), would be recognized in the period to which they relate and be set up as
receivables. This treatment would require that a second statement, a statement of financial
position, be prepared to report the amounts accrued but not yet received or paid.
The use of accrual accounting will more accurately show whether Lakewood is operating at
a deficit or surplus. This method complies with GAAP.
Capital assets
Expenditure method
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Case 9.4-2 solution 1
The expenditure method reports the entire cost of the asset as an expense in the year of
acquisition. This method creates a larger deficit than capitalizing and amortizing. The
expenditure method is no longer permitted for NFPOs with two-year-average-annual
earnings of $500,000 or more. With revenues for 20X8 exceeding $800,000 (see Statement
of Operations and Changes in Fund Balance in Solution 2), the expenditure method does not
appear to be appropriate for Lakewood.
Capitalize without amortization
Capitalization facilitates stewardship reporting for the donors who contributed funds
restricted to spending on capital items. All donors will be able to identify the use of funds if
they are disclosed separately under the relevant funds. Capitalizing the van would reduce
the deficit shown on the statement of receipts and expenditures draft.
Capitalization of the organization's assets will not entail an extensive bookkeeping effort at
the outset. However, the effort required to convert to this approach will increase in the
future as additional assets are acquired. Capitalization without amortization does not
comply with GAAP.
Capitalize and amortize
In addition to facilitating stewardship reporting, capitalization and amortization allows the
acquisition and operating costs of the van, or other assets, to be calculated and allocated
between the theatre productions and the Drama in the Schools program. This results in a
more accurate cost being charged to each program, more meaningful information provided
to the board on the van's annual operating costs, and more meaningful information to
facilitate decisions regarding ticket prices and higher cost recoveries.
Not-for-profit organizations with two-year-average-annual revenues of $500,000 or more
must capitalize and amortize capital assets over their useful life to ensure compliance with
GAAP. Thus, the van should be capitalized and amortized.
Contributions — revenue recognition and restricted amounts
During the year, funds were raised for two different causes: for the purchase and
maintenance of vehicles and for the proposed new theatre building. Both of these
contributions to Lakewood have externally imposed restrictions. Lakewood will need to
choose between the two methods allowed by the Handbook for accounting for restricted
contributions:
1. The deferral method requires the following:
❍
❍
All funds received are deferred and disclosed in a separate line on the
statement of financial position.
As expenses that comply with the externally imposed restrictions are incurred,
an equal amount of the deferral is recognized as revenue.
2. The restricted fund method requires the following:
❍
❍
A separate fund is maintained for the general fund, vehicle fund, and the
building fund, and all contributions are recognized as revenue to the fund in
the year they are received or they become receivable.
As expenses that meet the restrictions are incurred, they are disclosed on the
statement of operations for the appropriate restricted fund.
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Case 9.4-2 solution 1
❍
Restricted contributions for which no corresponding restricted fund statement
is presented should be recognized in the General fund in accordance with the
deferral method.
When there are recurring restricted fund donations each year, the restricted fund method is
more suitable than the deferral method.
Donated materials and services
Possible recognition at fair value
Unlike donated capital assets that should be recognized at fair value at the time of the
donation, Lakewood has the option of reporting or not reporting donated materials and
services. However, it should report these elements if fair value can be determined and if
they would normally be used in Lakewood’s operations and would have been purchased if
they had not been donated.
The choice to recognize donated materials and services at fair value would provide
Lakewood with accurate costs of running its current programs.
Recommendations
I recommend that Lakewood adopt the following accounting policies:
●
●
●
●
The statements should be prepared using accrual basis accounting — accruing
pledges receivable and matching revenues and expenses to the periods in which they
occur.
The van should be capitalized and amortized over its useful life.
Donated property, plant and equipment should be recorded at fair value. Other
donations of materials and services should be recorded at fair value but only if they
would otherwise have been purchased and paid for if they had not been donated.
Because of the recurring nature of the contributions for vehicles, the long-term
nature of the contributions for the building and the annual cost recovery agreement
with the city's school board for the Drama in the Schools program, the restricted
fund method should be used for revenue recognition and disclosure. The restricted
amounts recorded in the financial statements should be disclosed, including the
nature of the restriction.
These recommendations are based on generally accepted accounting principles, as
documented in the CICA Handbook. If implemented, they will ensure the auditor's opinion
will be without reservation.
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Case 9.4-2 solution 2
Case 9.4-2
Solution 2
Lakewood Theatre Company — Financial Statement
The following changes have been made:
●
●
●
●
The title of the statement of receipts and expenditures has been changed to
Statement of Operations and Changes in Fund Balances.
A Statement of Financial Position has been created.
A third statement, entitled Statement of Cash Flows has been added. This
statement is similar to the original cash-based statement provided by the
bookkeeper.
All three statements have segregated General fund from Restricted funds:
Drama in Schools, Vehicles, and Building.
In General fund, the following adjustments occur:
●
●
The $105,000 owing from the school board and the Drama in the Schools receipt
of $207,965, both totaling $312,965, have been recorded as revenue in Drama
in the Schools fund. A receivable of $105,000 has been recognized in Drama in
the Schools fund.
The accrual basis of accounting require the following adjustments to General
fund:
❍
❍
❍
❍
Wages and salaries to be increased by $6,700
Other production expenses to be increased by travel costs of $4,500
Administration expense to be increased by rent payable of $2,500
Current liabilities to be increased by $13,700 that represents the total of
these three accrued expenses ($6,700 + $4,500 + $2,500)
In Vehicles fund, the following are disclosed:
●
●
●
●
As shown on the statement of cash flows, the item cash and term deposits for
Vehicles fund represents what is left on the money raised ($103,885) after
deduction of fundraising expenses ($22,805) and purchase of the van ($25,500).
The van has been capitalized and is shown net of amortization [$25,500 –
$2,050 (see following calculation)].
The amortization expense is calculated using an acceptable method. This
solution uses $2,050.
The revenue of $113,885 represents the cash raised in the fundraising
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Case 9.4-2 solution 2
campaign plus $10,000 in pledges still outstanding at year end.
●
All of the fundraising expenses have been recorded in Vehicles Fund.
Alternatively, the board may choose to allocate some of these expenses to
Building fund).
In Building fund, the following are disclosed:
●
The $15,000 second largest pledge, which was collected on June 3, 20X8, is
recorded as a revenue and a receivable of the same amount is recognized since
collectability is certain.
In Drama in the Schools fund, the following are disclosed:
●
The draft Statement of Receipts and Expenditures shows that $105,000 has not
been collected yet from the school board. Thus, a receivable of this amount is
recognized on the statement of financial position for Drama in the Schools fund.
Also, in Drama in the Schools fund, the same amount is reported as payable to
General fund since the latter must have paid the related expenses during the
year.
On the Statement of Cash Flows
Note that the amount of $58,549 shown as the total for the item Cash and term
deposits at end of year matches the amount provided by the bookkeeper in the draft
Statement of Receipts and Expenditures for the same item.
The draft Statement of Receipts and Expenditures indicated that Lakewood had a deficit
of receipts over expenditures of $35,084 for the year ended May 31, 20X8. The
Statement of Cash Flows makes it clear that actually this figure represents the total net
decrease in cash caused by the decrease in cash from operating activities ($9,584) and
by the purchase of the van ($25,500).
On the Statement of Operations and Changes in Fund Balances, it is shown that
Lakewood had an excess of revenues over expenses of $104,666 during the year ended
May 31, 20X8. In particular, note that the activities of General fund (that was the only
fund reported by Lakewood) resulted in an excess of revenues over expenses of $636
instead of a deficit according to the draft Statement of Receipts and Expenditures.
The Fund Balances section discloses the net assets invested in capital assets, the
externally restricted, and unrestricted balances.
The financial statements prepared under GAAP will provide more complete information
that may assist the board in making decisions in the future. At the same time, these
statements will also be more informative to donors since they clearly disclose those
funds that have been set aside for restricted purposes.
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Case 9.4-2 solution 2
THE LAKEWOOD THEATRE COMPANY
Statement of Financial Position
at May 31, 20X8
Restricted funds
Current assets
Cash and term deposits
Accounts receivable
Receivable from Drama in the
Schools
Pledges receivable
Capital assets
(net of amortization)
Current liabilities
Bank overdraft
Accounts payable and accruals
Payable to General fund
Fund balances
Net assets invested in capital
assets
Externally restricted
Unrestricted
Drama
in the
Schools Vehicles
fund
fund
General
fund
$
—
105,000
$ 2,9691
—
105,000
—
$107,969
$107,969
—
—
$105,000
—
—
105,000
105,000
—
—
94,269
94,269
$107,969
—
—
—
Cash and term deposit year end
Cash and term deposits — Vehicle Fund
2
Fund raising — Receipts
Fund raising — Expenses
Van — Expenditure
$55,5802
—
$
—
10,000
$65,580
—
23,450
$105,000 $89,030
$
—
13,700
—
13,700
1
Building
fund
$
$
—
—
$ 58,549
105,000
—
15,000
$15,000
105,000
25,000
$293,549
—
23,450
$15,000 $316,999
—
—
—
—
$
23,450
65,580
—
89,030
$105,000 $89,030
—
—
—
—
Expenses
Wages and salaries
$363,067
—
—
$363,067
$
—
312,965
$
—
13,700
105,000
118,700
—
23,450
15,000
80,580
—
94,269
15,000
198,299
$15,000 $316,999
$58,549
(55,580)
$ 2,969
THE LAKEWOOD THEATRE COMPANY
Statement of Operations and Changes in Fund Balances
for the year ended May 31, 20X8
Restricted funds
Drama
in the
General
Schools Vehicles Building
fund
fund
fund
fund
Revenues
Mainstage productions
Drama in the Schools
Fundraising
Total
$103,885
(22,805)
(25,500)
$ 55,580
Total
$
—
$
— $363,067
—
—
312,965
113,885
15,000
128,885
$312,965 $113,885 $15,000 $804,917
$229,8003
$200,000
$
—
$
— $429,800
Other production expenses
60,8664
52,500
—
—
113,366
Administration and amortization
Fundraising
71,7655
—
60,465
—
2,050
22,805
—
—
134,280
22,805
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Case 9.4-2 solution 2
$362,431
$312,965 $24,855
Excess of revenues over
expenses
636
Fund balance at June 1, 20X2
93,633
Fund balance at May 31, 20X8
$94,269
3 Wages and salaries — Expenses
Wages and salaries — Drama in the Schools
Wages for actors and staff payable
$
$
— $700,251
—
89,030
15,000
104,666
—
—
—
93,633
— $89,030 $15,000 $198,299
$423,100
(200,000)
6,700
$229,800
4
Other production expenditures
Other production expenses — Drama in the Schools
Travel costs
$108,866
(52,500)
4,500
$ 60,866
5
Administration and amortization — Expenditures
Administration and amortization — Drama in the Schools
Rent payable
$129,730
(60,465)
2,500
$ 71,765
THE LAKEWOOD THEATRE COMPANY
Statement of Cash Flows
for the year ended May 31, 20X8
Mainstage productions
Drama in the Schools
Fundraising
$363,067
207,965
103,885
$674,917
Wages and salaries
$(423,100)6
Other production costs
Administration
Fundraising
(108,866)7
(129,730)8
(22,805)
$(684,501)
Cash increase (decrease) from operating activities
$(9,584)
Purchase of capital assets
Cash increase (decrease) from investing activities
$(25,500)
$(25,500)
Financing activities
0
Increase/(Decrease) in cash
Cash and term deposits at beginning of year
Cash and term deposits at end of year
(35,084)
93,633
$58,549
6
Wages and salaries — Expenditures
Wages and salaries — Drama in the Schools
$423,100
(200,000)
$223,100
7
$108,866
(52,500)
$ 56,366
Other production expenses — Expenditures
Other production expenses — Drama in the Schools
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Case 9.4-2 solution 2
8
Administration and amortization — Expenditures
Administration and amortization — Drama in the Schools
$129,730
(60,465)
$ 69,265
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Example 9.5-1 solution 1
Example 9.5-1
Solution 1
January, 20X8
Estimated revenues (control) — City grant
Estimated revenues (control) — Fund-raising
Estimated revenues (control) — Other donations
Appropriations — Equipment rental
Appropriations — Facilities rental
Appropriations — Food and beverages
Appropriations — Supplies
Appropriations — Wages and benefits
Budgetary fund balance
To record budgetary control accounts
June 30, 20X8
Budgetary fund balance
Appropriations — Wages and benefits
To record additional budget for wages and benefits
500,000
100,000
100,000
50,000
150,000
25,000
125,000
320,000
30,000
40,000
40,000
Throughout the year:
1.
Cash
500,000
Grant revenue — City of Jarma
To record receipt of operating grant from City
2.
Cash
500,000
176,000
Fund-raising revenue
To record fund-raising revenue
3.
4.
5.
Cash
Supplies expense
Other revenue — Donations
To record donations from United Way and March of Dimes
Equipment rental expense
Facilities rental expense
Cash
To record rent expenses
Food and beverages expense
Cash
To record purchase and use of food and beverages
176.000
75,000
15,000
90,000
50,000
150,000
200,000
23,500
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23,500
Example 9.5-1 solution 1
6.
Supplies expense
95,000
Cash
95,000
To record purchase and use of supplies
7.
Wages and benefits expense
Cash
365,000
365,000
The first two unnumbered entries illustrate how budgeted amounts are set up at the
beginning of the year and changed during the year based on board approval. The Budgetary
fund balance account provides a balancing credit amount in the first entry when the budget
predicts a surplus. In the second entry the Budgetary fund balance is debited for $40,000
and when combined with the first entry, the budget is a projected net deficit of $10,000.
Entries 1 through 7 are summary entries representing the operating activities of the JBAGC
during the year. These entries do not affect the budgetary accounts, which are selfcontained. An entry should never contain both real and budgetary accounts.
To determine how much is left in any particular budget account during the year, simply
offset the actual balance from the corresponding budget control account. To illustrate, at
the end of the year the Supplies account has the following remaining budget:
Appropriations — Supplies
Actual
Purchased supplies
Donated supplies
Remaining budget for supplies
$125,000 Cr
95,000
15,000
110,000
$15,000
Dr
Dr
Dr
Cr
The board might want to purchase more supplies to have on hand for next year with this
budget surplus. However, after reviewing the budget-to-actual operating statement, the
board may choose not to spend more money for supplies since the wages and benefits
budget was overspent. The board will also have to decide on how to allocate the overall
surplus — to launch another project or keep the surplus for future years when fund-raising
may not be as successful as in 20X8.
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Example 9.5-1 solution 2
Example 9.5-1
Solution 2
Budget-to-actual statement
As calculated in Solution 1
Wages and benefits initially budgeted
Change in wages and benefits budget on June 30
3 When the $10,000 deficit was budgeted, management would have been
aware of the additional revenue.
1
2
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$320,000
40,000
$360,000
Example 9.5-1 solution 3
Example 9.5-1
Solution 3
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Self-test 9
Solution 1
a.
1), 2), 3)
4)
Incorrect. Only accrual accounting is recommended.
Correct. The Handbook now recommends accrual accounting for all
NFPs.
b.
1), 3,) 4)
Incorrect. Since the contribution cannot be spent (it must be
invested and permanently maintained), it is an endowment.
Correct. This donation meets the criteria specified for an endowment
fund since it must be invested and permanently maintained.
2)
c.
1), 2), 3)
4)
d.
1)
2)
3)
4)
Incorrect. Handbook Paragraph 4410.29 requires endowment
contributions to be recognized as direct increases in net assets for
the current period.
Correct. See Handbook Paragraph 4410.29.
Correct. Contributions of $40,000 should be accrued and partially
offset by an allowance for estimated uncollectible pledges.
Incorrect. Contributions should be recognized if the amount can be
reasonably estimated and collectibility is reasonably assured.
Therefore, contributions of $40,000 should be accrued and partially
offset by an allowance for estimated uncollectible pledges.
Incorrect. $40,000 would overstate the amount expected to be
collected. Therefore, contributions of $40,000 should be accrued and
partially offset by an allowance for estimated uncollectible pledges.
Incorrect. The deferral and restricted fund methods relate to the
revenue being recognized, not the receivable. Therefore,
contributions of $40,000 should be accrued and partially offset by an
allowance for estimated uncollectible pledges.
e.
1), 2), 4)
3)
Incorrect. There is no requirement for a statement of fund balances.
Correct. Financial statements should include a statement of financial
position, a statement of operations that reports the surplus or deficit
in the accounting period, a statement of change in net debt, and a
statement of cash flow.
f.
1)
Correct. This describes endowment fund accounting, but it is not
acceptable for donations of goods and services.
Incorrect. This describes accounting for donations of goods and
services.
2), 3), 4)
g.
1)
2)
3)
4)
Incorrect. This is an unrestricted contribution.
Incorrect. This is an unrestricted contribution.
Correct.
Incorrect. This is an unrestricted contribution for the current year.
h.
1)
2)
Correct.
Incorrect. Cash accounting is not permitted, since accrual accounting
is assumed in all recommendations.
Incorrect. Consolidation accounting is required but cash accounting is
not, since accrual accounting is assumed in all recommendations.
Incorrect. Budget disclosure is required but cash accounting is not,
since accrual accounting is assumed in all recommendations.
3)
4)
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i.
1)
2)
3)
4)
j.
1)
2)
3)
4)
Incorrect. Under the restricted fund method, this must be recognized
as revenue, not as an increase in the fund balance.
Incorrect. Cash would be debited.
Incorrect. Under the restricted fund method, the amount cannot be
recognized in General fund.
Correct. The amount must be recognized immediately in the
appropriate restricted fund.
Incorrect. A fund does not necessarily represent cash.
Correct. The term net assets is used interchangeably with the term
fund in the Handbook.
Incorrect. The term fund is not only used for restricted assets.
Incorrect. A fund does not necessarily represent cash and
marketable securities.
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Self-test 9
Solution 2
Accrual accounting was recommended over the cash basis for NFPs because it provides
a more complete picture of the organization’s financial situation. The accrual basis of
accounting identifies and reports all of the organization’s assets, resulting in better
control than cash accounting. As well, it requires that liabilities be recorded and
reported, providing a better picture of the legal claims relating to the organization’s
resources. Finally, accrual accounting provides better information than the cash basis
regarding revenue earned and the cost of providing services in a period. As a result,
the accrual basis provides a better picture of the organization’s operations, resources,
and claims against those resources. Under an accrual accounting system, four financial
statements can be prepared, including a statement of cash flows. This statement
provides all of the information that would be available under the cash basis of
accounting.
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Self-test 9
Solution 3
Expenses are reported in the statement of operations only when the goods and services
have been acquired and used in operations, regardless of when they are paid for.
Expenditures are reported when the goods and services are acquired and the liability
incurred, regardless of when they are used or paid for. Both of these are used under an
accrual accounting system. Under the cash basis, items are reported on the statement
of operations only when they are paid for, regardless of when they are received or used.
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Self-test 9
Solution 4
a. Unrestricted resources are those that can be used to carry out any and all of the
activities of the organization, while restricted resources can only be used by the
NFP's board of directors to carry out certain activities or to purchase certain
goods in accordance with the specified restrictions imposed by donors.
b. There are two kinds of restrictions: internal and external. The board of directors
of the NFP imposes internal restrictions, while the donor of the resources
specifies external restrictions.
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Self-test 9
Solution 5
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Self-test 9
Solution 6
1. The $30,000 donation would be considered unrestricted and would be
recorded as revenue in the general fund in fiscal Year 5.
2. The $50,000 donation would be recorded as revenue in the capital fund,
assuming that the receivable of $15,000 is considered fully collectible.
3. The $600,000 donation would be recorded as revenue in the endowment fund.
Interest on the $600,000 of bonds would be recorded as revenue in the
general fund.
b. The $50,000 donation, considered restricted, would be recorded as a deferred
contribution in Year 5 (assuming that the receivable of $15,000 is considered fully
collectible). The contribution would be recognized in revenue on the same basis as
the related expense (that is, the amortization of the contribution would be recognized
in revenue on the same basis as the amortization of the building).
The $600,000 donation would be recorded in the statement of changes in net assets
(that is, as an increase in net assets, not as revenue). Interest on the $600,000 of
bonds would be recorded as revenue as it is earned.
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Solution 1
In a not-for-profit organization, revenue may be obtained from sources other than the
beneficiary of the organization’s goods and services. This is not as often the case for a
business enterprise. For example, a not-for-profit organization may obtain revenue
from a funding agency, from donors, or from donations of nonmonetary materials or
services, whereas none of these revenue sources is usual for a business organization.
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Solution 2
A business must provide goods and services at a selling price that covers its costs of
making or buying the item sold since making a return is its objective. A not-for-profit
organization can offer its goods and services at no cost or at a minimal cost to the end
consumer. There is less need for a not-for-profit organization to be concerned about
recovering its cost of providing a service or of making or buying the item provided
since funding is often provided by external sources that desire the service to be offered.
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Solution 3
Current accounting standards allow NFPOs to record donated materials and services if
their fair value is reasonably estimable and the items would have otherwise been
purchased and used in the normal course of the organization’s operations. This is a
choice for the NFPO, not a requirement. However, section 4430 requires that
contributed capital assets be recorded at fair value (or a nominal value if fair value
cannot be determined) and amortized in the same manner as other capital assets.
(Small NFPOs with average annual revenues of less than $500,000 are exempted from
this requirement.)
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Solution 4
The primary user group for NFP statements is the resource providers or contributors,
for example: organization members, government ministries, and granting agencies.
The primary user group for public sector organizations is the organization or legislative
body itself. Secondary users include taxpayers. Thus, whereas NFP statement users are
generally external to the organization, public sector statement users are primarily
internal to the governmental body.
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Solution 5
When a government’s budget is approved, it is used for setting taxation rates that are
necessary to fund operations and capital expenditures. A comparison of budget to
actual will assist users in determining whether resources raised were used as intended
and agreed upon. Since a government has no competition, this information can be
circulated publicly and used by political parties and the general public to assess the
effectiveness of the government. However, the budget of a profit-oriented business
contains information that could compromise the firm’s competitive advantage. Most
profit-oriented businesses object strongly to any suggestion that their budgets should
be available publicly.
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Solution 6
When the recorded revenue from the budgeted account balance is deducted, the difference
represents the amount of additional revenue required to attain the budget. Similarly, the
remaining unspent budgeted amount is obtained by offsetting the expenses to date against
the budgeted expense balance.
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Solution 7
If the organization receives a restricted contribution for which no restricted fund exists, and
it does not set up a separate fund, it would be necessary to account for that contribution
using the deferral method.
Under the deferral method of recognizing contributions, the contribution would be deferred
on the statement of financial position of the General fund until the related expense is
incurred. At that time, the deferred contribution would be recognized through the statement
of operations for the General fund in an amount equal to the related expense. For
amortizable capital assets, the deferred revenue would be transferred into revenue in an
amount equal to the amortization expense. Contributions in non-amortizable capital assets
are directly recognized as an increase in net assets.
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Solution 8
Interfund transfers must now be reported in the statement of changes in net assets rather
than in the statement of operations. The amount transferred is shown as a transfer out of
one fund into another fund. This is an improvement over previous practice in which
transfers among funds were not shown explicitly on the financial statements. Previous
practice left the books open to manipulation by management who could transfer surpluses
from one fund, to another (e.g., from General fund to Capital fund to create a lower balance
in General fund so that potential donors might consider that the organization was in need of
extra funding).
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