Chapter 10
Accounting for Not-For-Profit Organizations
Copyright © 2008 by The McGraw-Hill Companies, Inc. All rights reserved.
McGraw-Hill/Irwin

 This chapter focuses on how the Financial
Accounting Standards Board and AICPA
Audit Guides apply to private not-for-profits, generally.
 Who has standard setting authority?
 Accounting and reporting for Voluntary Health and Welfare and Other Not-for-Profits
 Not-for-profits and performance evaluation
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 GASB
 Authority over government related not-for-profits

GASB 34 Special Purpose Entity requirements may apply

GASB 35 for Public Colleges and Universities
 FASB


Private not-for-profits
AICPA audit guides also applicable
 Major SFASs 93, 116, 117, 124, 136
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 FASBs 116 & 117 were written in order to bring comparability between the financial reports of Private
Colleges, Hospitals, Voluntary Health and Welfare
Organizations and Other Not-for-Profits.
 However, because of unique features of the college and hospital settings, these entities are covered in greater detail in separate chapters.
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 The remainder of this chapter focuses on
Voluntary Health and Welfare
Organizations and Other Not-for-Profits.
 What are the characteristics of a VHWO?

Promotes general health and well-being of the public.

Tends to operate mainly from grants and gifts.
 Examples: United Way, American Cancer Society, Girl
Scouts, YMCA.
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The three required statements are:
 Statement of Financial Position
 Statement of Activities
 Statement of Cash Flows
Voluntary Health and Welfare Organizations must also prepare a Statement of Functional Expenses

This statement is recommended but not required for other not-forprofits but may have to include similar info in notes.
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 Accrual Basis: The accrual basis is required.


This includes calculation and recording of depreciation expense.
The financial statements report expenses, not expenditures or encumbrances.
 Funds: Many Private Notfor profit organizations use fund designations internally for bookkeeping purposes, but the financial statements are on an overall basis and do not make reference to funds except in footnotes or supplemental schedules
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 Assets and liabilities are not required to be classified as current and non-current, but may be.
 Long-term assets and debt are reported.
 Net Assets (equities) are classified as:
 Unrestricted
 Temporarily restricted time or purpose restrictions
 Permanently restricted
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 The statement must distinguish changes in net assets that are permanently restricted, temporarily restricted, and unrestricted. Restrictions must be outside donorimposed
 Can use three separate statements, columns or other formats
 Revenues vs support:


Support: is a class of revenues limited to gifts such as contributions
Exchange transaction, such as sales of service, are labeled
“revenues”
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Expenses
 All expenses are reported in the unrestricted column
 Classify expenses as program or supporting services.
Restrictions
 Temporarily restricted resources must be
‘released’ or moved from the temporary column to the unrestricted column as restrictions are satisfied.
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 The most commonly used ratio for not-for-profit is the Program Expense Ratio:
Program Service Expenses / Total Expenses
 Program Services include expenses associated with performing the mission of the organization
 Supporting Services include management and general; fund raising and membership development
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 A high ratio of program expense will assure donors that the organization spends the bulk of dollars donated for its mission oriented activities rather than for overhead
 The organization may need to keep detailed time records to properly report costs (e.g. salary) associated with both program and supporting activities.
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 FASB uses 3 categories
 Operating – Interest expense, interest revenue, and gains and losses are classified as operating
 Investing – Purchases or sales of fixed assets as well as purchases or sales of long-term investments
 Financing – Issuance of debt; repayments of principal of debt
 Not-for-profits have the option of using either the indirect approach or the direct approach plus reconciliation.
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 This is a matrix (spreadsheet) of expenses where the columns are the program or supporting activities and the rows are the type of expense (salaries, supplies, depreciation, etc.)
 This statement shows more detail than the Activity Statement on how the expenses were allocated to programs and supporting services.

The purpose of this statement is to show the details of the entity’s spending on direct programs activities versus overhead
(supporting services).
 It helps donors assess entity efficiency.
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 FASB Statement 116 requires contributions, including unconditional promises of support, to be recognized as contribution revenue in the period received at their fair market value.
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
SFAS 116 does not change the accounting for exchange transactions (earned revenues). Care should be taken to identify whether membership dues are contributions or exchanges.

Not-for-profit organizations must distinguish between contributions that are permanently restricted, temporarily restricted, and unrestricted. Such restrictions are donor-imposed .
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Under accrual basis, unconditional pledges can be recorded even before the cash is received.

Record the Receivable at the present value, net of an allowance for estimated uncollectibles
If there is expected to be an extended time period before the gift is received record the receivable at its present value:

The present value will increase as the expected date of receipt approaches. The change in present value is recorded as additional contribution revenue rather than interest.
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 Should contributed services be recorded?
 Only if they

Create or enhance a nonfinancial asset OR

Require specialized skills, were provided by someone possessing those skills, and would have been purchased if not donated.
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 If recorded, how should they be recorded?
 If a nonfinancial asset is enhanced:
Dr. Asset (for the value of the services).
Cr. Contribution revenues
 Otherwise:
Dr. Expense (for the value of the services).
Cr. Contribution revenues
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 Contributions are considered as revenues as soon as received (or pledged) even if the use is restricted.
But depending on the terms of the contribution, may later be reclassified from temporarily restricted to unrestricted.
 If money is received in advance of providing the service on an exchange-like transaction, the amount received is considered Deferred Revenue.
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 Pledges are recorded if unconditional.
 Intentions to give (oral promises, wills) are often not legally enforceable, as the donors retain legal right to change their mind.
 Intentions to give are not recorded until the actual gift materializes.
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 Fixed assets, whether purchased or donated, can be recorded either as


Unrestricted assets, or
As temporarily restricted.

If initially recorded as temporarily restricted an amount equal to depreciation must be released each year to unrestricted assets .
 NOTE: Some not-for-profits may prefer the later approach because readers of the financial statements may think ‘unrestricted net assets’ means expendable funds -listing the long-term assets as temporarily restricted decreases requests to spend reserves that are not really available in a liquid form.
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 FASB 117 presents not-for-profit statements in a format similar to business statements.
 Although revenues and expenses are measured on the accrual basis, the “bottom line” (Change in net assets) is not directly comparable to that of a business.
 Since many of the revenues are non-exchange, Change in
Net Assets is not a measure of organizational effectiveness.
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 Legitimate reasons for a not-for-profit to have a profit are:
 To replace and expand equipment and facilities.


To provide working capital.
To retire debt.
 To continue programs beyond the time frame when seed money grants are available.
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 Because of the importance of the program expense ratio, care must be taken in the allocation of joint costs between program and supporting services.
 Salaries and depreciation must be allocated to the two functions on an equitable basis.
 Fund raising appeals sometimes also include program elements
 and not-for-profits would like to allocate some of these costs to programs to improve the program expense ratio
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 The criteria to determine whether part of the cost of a fund raising campaign applies to program expense are:



Purpose: Does the communication help meet program goals and functions?
Audience: General audience, not just sent to last year’s donors.
Content: Calls for specific action directed at program goals.
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FASB requires investments with readily determinable market values to be recorded at fair market values and gains and losses be recognized
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 Assume a not-for-profit receives assets from a donor for distribution to a beneficiary:
 ISSUE: If cash or other assets are held by a notfor-profit with instructions to release this money for specified parties, is this a revenue or is it an agency relationship (liability)?
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 If the not-for-profit agrees to transfer the assets to a specified beneficiary, the not-for-profit is deemed to merely be acting as an agent and a liability, rather than a contribution, is recorded.
 If the not-for-profit has the ability to redirect the assets to another beneficiary, or if the not-for-profit and beneficiary are related, the assets are recorded as a contribution .
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CENTRAL CONCEPT: It is a revenue if the not-for-profit can
‘control’ who gets the money, otherwise it is credited to a liability account because the not-for-profit is only acting as an agent on behalf of the donor.
 EXCEPTION: If the party receiving the money and the not-for-profit are financially interrelated, then this may be a revenue to the not-for-profit.
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