Chapter 12
Not-for-Profit Organizations
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Life’s Lessons : Chapter 12
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Learning Objectives
Identify the authoritative standards-setting bodies for establishing GAAP for
Not-For-Profits (NFPs).
Division of Resources into:
-Unrestricted
-Temporarily restricted
-Permanently
Reporting of Cash Flows by NFPs
Explain financial reporting and accounting for NFPs:
-Contributions, contributions of services, pass through
contributions
-Pledges
-Collection Items
-Gains and losses on Investments
-Fixed Assets
Special problems of determining the cost of fund-raising activities
Assessing the financial conditions of NFPs’
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How to determine whether it is a
‘Nongovernmental NFP’ or ‘Governmental Entity’
 It was not created by a government, but rather by individuals.
 It does not have the power to levy taxes.
 It may not have the power to levy tax-exempt debt.
 FASB is the authoritative standards-setting body for financial
reporting, not the GASB.
 Examples of not-for-profit organizations: March of Dimes,
American Red Cross, etc.
-March of Dimes’ mission is to improve the health of babies by
preventing birth defects, premature birth, and infant mortality.
-American Red Cross works to provide relief to victims of disasters
and help people prevent, prepare for, and respond to emergencies.
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Governments Vs. Non-profits
 GASB: sets standards for all state
and local governments.
 FASB: sets standards for non
governmental non-profits except
federal government.
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Types (forms) of Not-for-Profits
 Some not-for-profits are like governments.
--Funding derived from non-exchange transactions
 Some not-for-profits are comparable to business.
--Funding derived from exchange transactions.
Lack of power to tax
Not-for-profits are private rather than public
institutions.
 Some non-profits are hybrids:
--Funding derived from both exchange &
non-exchange transactions.
Ex: colleges and universities.
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Importance of Not-For-Profit Accounting
 Accounting is where the nonprofit buck stops.
Accounting gives the nonprofit a key tool to run its
business, plan its future, and show donors and
regulators it is spending and tracking its funds the
way it should (management tool for protection and
efficient use of assets to accomplish mission)
 Tax/regulatory compliance
o Maintain tax exempt status
o Reporting (Form 990, 990-PF, 990-T as well as state and
local compliance)
o Payroll
 Grant compliance
 Transparency
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What are the benefits of sound
accounting policies and procedures?
Accountant and attorney fees saved . . .
Thousands of dollars
Avoiding sanctions on officers . . .
Penalty up to 200% of excess benefit plus
Repayment
Keeping exempt status so you can
accomplish your mission . . .
Priceless!
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GAAP for Nongovernmental NFPs
FASB Statement (SFAS) No. 93 — Depreciation
FASB Statement (SFAS) No. 95 — Stmt of cash flows
FASB Statement (SFAS) No. 116 — Contributions
FASB Statement (SFAS) No. 117 — Financial statement
display
FASB Statement (SFAS) No. 124 — Investments
FASB Statement (SFAS) No. 136---Transfers of assets
FASB Statement (SFAS) No. 164 – NFP entities: Mergers &
Acquisitions
AICPA Audit and Accounting Guide Not-for-Profit
Organizations (AAG-NPO, revised March 2009)
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SFAS 117: Financial Statements of
Not-for-Profit Organizations
Required
–
–
–
–
Statement of financial position
Statement of activities (change in net assets)
Statement of cash flows
Amounts of each of three classes of net assets permanently restricted, temporarily restricted, and
unrestricted – be displayed in statement of
financial position
– Amounts of change in each of the three classes of
net assets be displayed in the statement of
activities
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Financial Statements for NFPs
I) Statement of Financial Position (Table 12-1)
II) Statement of Activities (Table 12-2)
III) Statement of Functional Expenses for VHWOs
(Table 12-3)
IV) Statement of Cash Flows (Table 12-4 and 12-5)
Notes to the Financial Statements
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FASB and GASB standards differ
on these issues:
 Financial statement display
 Reporting entity
 Investments
 Cash flows
 Pensions
 Compensated absences
 Operating leases
 Risks and uncertainties
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I) Statement of Financial Position
FASB Statement No.117
 Reports on an aggregate view of the entity as a
whole, rather than on disaggregated funds, as of a
point in time.
 Net Assets (assets less liabilities) must be
classified as either:
1) unrestricted OR
2) temporarily restricted OR
3) permanently restricted
Classifications are based on the existence or
absence of donor-imposed restrictions.
 As long as net assets are classified, there is considerable
flexibility in displaying information including showing
disaggregated fund-based data
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March of Dimes
Statement of Financial Position
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Investments GAAP
FASB Statement No. 124
 Mark equity investments that have readily
determinable values and all debt securities
to fair value.
 Similar to SFAS No. 115 for businesses
and GASB Statement No. 31 for
governments, but simpler.
 SFAS No. 124 requires extensive
disclosures regarding investments and
related income.
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American Red Cross
Investments Footnotes
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II) Statement of Activities
FASB Statement No.117
Reports on changes in all classes of net assets for
a period of time. Changes take the form of:
a) Revenues
b) Expenses
c) Gains/losses
d) Contributions (Support)
When net assets are released from restrictions (as
restrictions are met), both
1) Decrease temporarily restricted net assets AND
2) Increase unrestricted net assets
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II) Statement of Activities
FASB Statement No.117
SFAS No. 117 allows:
 Considerable flexibility in presenting Statement of
Activities information
--Most commonly used presentations include:
1) A single column (March of Dimes) OR
2) Three columns (Red Cross)
Additional classifications to be used in addition to
unrestricted, temporarily restricted, & permanently
restricted. Examples include:
 operating and non operating
 expendable and nonexpendable
 earned and unearned
 recurring and nonrecurring
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March of Dimes
Statement of Activities – SINGLE Column
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Red Cross
Statement of Activities – THREE Columns
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a) Revenues
 Revenues are increases in unrestricted net
assets that arise from bilateral exchange
transactions in which the other party receives
direct tangible benefits commensurate with
the resources provided.
o Examples include:
-membership dues
-program service fees
-sales of supplies and services
-investment income
-some grants
 Revenues should be reported as increases in
one of the 3 categories of net assets.
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b) Expenses
 Use accrual accounting.
 All should be reported as decreases in
unrestricted net assets.
 Should be reported by functional
categories (i.e. program vs. support)
 Record depreciation expense for all capital
assets, except collections.
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Joint Costs with a Fund-raising Appeal
AICPA SOP 98-2.
 Reported as fund-raising support
expenses, rather than allocate to
functional programs, such as education
or advocacy
 Criteria to be applied includes
considering
1) Purpose
2) Audience
3) Content
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c) Investment Gains/Losses

Should be included separately from Revenues & Expenses.

Report realized and unrealized investment gains/losses.

Examples include:

realized GAINS/LOSSES on investment transactions

GAINS/LOSSES on sale or disposal of equipment

Report income and GAINS and LOSSES as changes in unrestricted net
assets, unless their use is restricted by the donor or state law.

Donors may stipulate that a portion of appreciation is to be permanently restricted to
maintain the purchasing power of the endowment.
If a donor is silent as to LOSSES:

A) they reduce unrestricted net assets if the net appreciation requirement has been
reached OR
B) Otherwise they reduce temporarily restricted net assets.

GAINS:
--Relate to peripheral or incidental transactions of the entity
--Often are beyond the control of management
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SFAS 116: Accounting for Contributions
Received and Contributions Made
– Applies to all entities receiving or making
charitable contributions
– Generally, contributions received, including
unconditional promises to give, are recognized as
revenues in period received at their fair values.
– Generally, contributions made, including
unconditional promises to give, are recognized as
expenses in the period made at their fair values.
– Conditional promises to give are recognized when
they become unconditional, i.e. when conditions
met.
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SFAS 116, Continued
 Contributions received increase
o Permanently restricted net assets
o Temporarily restricted net assets
o Unrestricted net assets
 Recognition of expiration of donorimposed restrictions in the period they
expire.
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d) Contributions
FASB Stmt. No 116
 Contributions are the main means of support in
NFP’s
 Contributions are increase in net assets arising
from contributions of resources in non
exchange transactions in which the donor
derives no tangible benefit from the recipient
agency.
(i.e. Nonreciprocal Receipts of Assets/Services)
--Compare this definition to “Revenue” on earlier Slide
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d) Contributions (cont’d)
FASB Stmt. No 116
Contributions Increase:
 Unrestricted net assets when no donor restrictions
exist or the restrictions have expired.
 Temporarily restricted net assets when the donor
imposes restrictions as to purpose (how the asset is
used) or time (when the asset is used).
 Permanently restricted net assets when the donor
stipulates that the assets must be held in perpetuity,
but the organization can spend the income.
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d) Contributions (cont’d)
FASB Stmt. No 116
Unconditional promises (“Pledges”):
 Depend only on the passage of time or demand by the promisee for
performance.
 Record these as support in the period made.
Conditional promises:
 Depend on the occurrence of a specified future and uncertain event
to bind the promissor, such as obtaining matching gifts by the
recipient.
 Do not record these as support until the conditions are substantially
met.
Donated material (gifts-in-kind):
 should be recorded as contributions and as expenses (supplies expense or
cost of goods sold)
 at fair value on the date of the gift
 if an object, clearly measurable basis for fair value can be established.
Purpose-Restricted Contributions:
 Equivalent to government’s restricted grants.
 Used only for donor-specified purposes.
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d) Contributions (cont’d)
Unconditional Promises (“Pledges”)
 Definition:
 Promises to make donations of cash or other assets.
 FASB Stmt. #116:
 PRIOR to Statement released:
 Revenue recognized when pledges received
 AFTER Statement released:
 Revenue not recognized until cash has been collected
 More conservative approach
 Legally enforceable if donor reneges?
 Pledges are enforceable when the organization has
relied on the pledge and thereby incurred costs.
 However, from a practical standpoint, legal action will
rarely be taken by a NFP.
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d) Contributions (cont’d)
Conditional Promises
 Definition:
-Specific conditions have to be
satisfied for the donor to provide the
resources.
 FASB Stmt. # 116:
-conditional promise shall be
recognized when the specified
conditions are met
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d) Contributions (cont’d)
Contributed Services
Contributed services should be recorded as contributions
and expense (salaries expense) at fair value if the
services:
A) create or enhance non financial assets (such as a
carpenter constructing a building), OR
B) are provided by individuals possessing specialized
skills that typically would need to be purchased if not
provided by donation (e.g., secretaries or accountants).
FASB Stmt. # 116:
 Contributed Services recognized only if they are of:
-professional nature
-the entity would have paid for it if it had not been
donated.
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d) Contributions (cont’d)
American Red Cross
American Red Cross:
 The organization recognizes contributions, which include
unconditional promises as revenues in the period received or
promised.
 The organization reports contributions in the temporarily or
permanently restricted net asset class if they are received with
donor stipulations.
 When the stipulated time ends, then it is reclassified from restricted
to unrestricted net assets in the consolidated statement of activities.
 Products and services revenue, which arises from sales of whole
blood and components, and plasma derivative products, and health
and safety course fees, is generally recognized upon delivery of
products and services to the customer.
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III) Statement of Functional Expenses
Voluntary health and welfare organizations (VHWOs) must
present this statement showing both functional
expenses and natural (object or line item) expenses
(Table 12-3).
Natural
Expenses
Functional Expenses
Program
Salaries
Adoption
Supplies
Counseling
Support
Mgt and General
Fund-raising
Depreciation
Education
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IV) Statement of Cash flows
FASB Statement No. 95
 SFAS No. 95 was amended to extend
coverage to not-for-profit organizations as
well as for-profit entities (Table 12-4).
 Cash flows are reported as changes in
operating, financing and investing activities
(Table 12-5).
 The indirect method or direct method (with
reconciliation) may be used.
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IV) Statement of Cash flows
FASB Statement No. 95
 FASB requires that cash flow statements includes:
I) Operating activities
II) Financing activities
III) Investing activities
 REMEMBER: GASB requires that cash flow
statements be categorized into:
I) Operating activities
II a) Non capital financing activities
II b) Capital and financing activities
III) Investing activities
 It also mandates that governments use direct
method to report cash flows.
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IV) Statement of Cash flows
Miscellaneous Accounting Reminders
 Unrestricted gifts are included with operating
activities.
 Restricted contributions given for long-term
purposes are included with financing activities
along with the related income.
 Noncash gifts or in-kind contributions are
disclosed as noncash investing and financing
activities in a separate section.
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Additional Topics-Financial Indicators

Liquidity:
--Quick ratio
--Current ratio

Burden of debt: Total debt/Total assets

Adequacy of available resources: shows extent of organization’s reserves.

Current fiscal performance: extent of operating surpluses or deficits.

Reliability of budgetary projections

Proportion of revenues directed to the organization’s mission

4 important ratios:
o
o
o
o
Fund raising ratio: fund-raising expense measured as a % of total related revenues.
Program ratio: compares expenses of mission-oriented programs to administrative costs.
Contributions and grant ratio
Revenue from services ratio
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Optional Fund Accounting
 NFPs may use fund accounting for internal
purposes to facilitate reporting back to
grantors or funding agencies.
 FASB Stmt. No. 117
Permits NFPs to present disaggregated data
classified by fund groups, as long as the
aggregated net asset statements are also
presented.
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Optional Fund Accounting
AICPA AAG-NPO pars. 16.01 -16.20
 Unrestricted current funds (or unrestricted operating or general
funds)
 Restricted current funds (or restricted operating or specific
purpose funds)
 Plant funds (or land, building, and equipment funds)
 Loan funds (most often in private universities)
 Endowment funds.
 Annuity and life income funds (or split-interest funds)
 Agency funds or (custodian funds).
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Summary
 FASB sets accounting standards for Not-for-Profits (NFPs) other
than governments. Thus they follow the full accrual basis of
accounting.
 NFPs should classify their resources into three categories:
unrestricted, temporarily restricted and permanently restricted.
 NFPs should recognize as revenue all unconditional contributions
including both pledges and restricted donations when they are
received.
 NFPs should recognize contributed services only if they are of a
professional nature and would be required by the NFP if not
donated.
 NFPs are not required to recognize and capitalize works of art.
 NFPs like governments face special problems of accounting for
pass-through grants and contributions.
 NFPs follow AICPA’s SOP 98-2 to allocate joint costs that have a
fund-raising appeal.
 The Fiscal health of an NFP can be assessed using traditional
financial
ratios.
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