Chapter 16D Final

Non-SLG Not-for-Profit Organizations
Chapter 16
Learning Objectives
Understand the sources of GAAP for
nongovernment not-for-profit organizations

Explain basis of accounting and the financial
statements required for nongovernment notfor-profit organizations
Distinguish between and among the three net
asset classes
Understand the timing of recognition and the
classification of revenues and expenses of
nongovernment not-for-profit organizations
2013 Pearson Education, Inc. All rights reserved.
Learning Objectives (continued)

Understand the reporting of restricted
contributions and restricted investment

income
Account for and report the satisfaction of
donor-imposed temporary restrictions on the
use of resources
Prepare journal entries for common
transactions of nongovernmental not-for-profit
organizations
Prepare nongovernment not-for-profit
organization financial statements
The Nonprofit GAAP Problem

Private sector (nongovernmental)
nonprofit organizations (NPOs) look to

the FASB for GAAP
Public sector (governmental) NPOs
look to the GASB for GAAP
Focus of this chapter is on
nongovernmental NPOs
Interested in Two Groups

Voluntary health and welfare
organizations (VHWOs)
Other not-for-profit organizations
(ONPOs)which exclude
Colleges
and Universities (Chapter 17)

Health care organizations (Chapter 18)
VHWOs
Evolution of NPO GAAP

Industry organizations started developing
accounting standards
AICPA started playing role in mid-1960s
FASB assumes responsibility in 1979FASB
#32 adopted AICPA Statements of Position
(SOPs), audit guides, and accounting guides
FASB NFP Advisory Committee began
advisory activities in 2010
Current Primary Authoritative Guidance

FASB #116Accounting for Contributions
Received and Contributions Made

FASB #117Financial Statements for Notfor-Profit Organizations
AICPA Audit and Accounting Guide, Not-forProfit Organizations, adopts all this guidance
Governmental NFP Organizations

GASB sets standards for governmental
VHWOs, colleges and universities,

hospitals, and other NFP organizations
GASB #29 prohibits governmental NFP
organizations from following FASB
standards
How to Distinguish between Governmental

and Nongovernmental NFP Organizations
See Chapter 1definition of a
government
GASB standards apply to all NFP
entities that meet definition
FASB standards apply to all NFP
entities that do not meet definition
How to Distinguish between a

VHWO and an ONPO
ONPOs defined as all NFP organizations
other than:
Hospitals (and similar health care
institutions)
Colleges and universities
VHWOs
10
Distinguishing Features of VHWOs

Purposeto meet a community health,
welfare, or other social service need

Voluntary natureno fee is charged,
or only a very small fee in proportion to
the service provided is charged
Relationship to resource providers
not the primary recipients of services or
benefits
11
Examples of VHWOs
United Way
Boy Scouts and Girl Scouts
American Heart Association
YMCA and YWCA
12
Services Provided by VHWOs

Child care for working mothers
Family counseling
Nutritious means and recreation for the elderly
Care and treatment of persons with mental/
physical handicaps
Protection of children from abuse
Halfway houses for criminal or drug offenders
Sheltered workshops for citizens who are impaired
physically or mentally
13
Examples of ONPOs
Cemetery organizations
Civic organizations
Fraternal organizations
Libraries
Museums
Other cultural
institutions
Performing arts
organizations
Political parties
Private and community
foundations
Private elementary and
secondary schools
Professional
associations
Religious organizations
Research and scientific
organizations
Zoological and botanical
societies
14
Classes of Net Assets

Unrestricted Net Assets
Temporarily Restricted Net Assets
Permanently Restricted Net Assets
Examine in reverse order
15
Permanently Restricted Net Assets

Donor-imposed restrictions are
permanent in naturenot capable of

being satisfied or removed by
organization
Examples
Assets
that were donated as permanent

endowments
Assets that are restricted for a certain
purpose and must be preserved
16

Donor imposed restrictions will be met
(satisfied) by passage of time or by use of

resources for required purpose
Examples
Assets restricted to certain useresearch, capital
asset acquisition, etc.
Assets restricted for use in certain time period
Pledges receivable due in future years
Assets with implied time restriction based on
organizations policy
17

No donor-imposed restrictions
Examplesall other assets, including
board-designated resources that are

not donor-restricted, even if restricted
by bond indentures or other contracts
not involving donors or grantors
18
Non-GAAP Accounting and Reporting

Requirements
IRS requirement for annual filing of
Form 990
Donors and grantors may require
special reports to ensure funding is
properly spent
Fund accounting may be used for
tracking large grants or because it has
been used successfully in the past
19
MFBA
Measurement focus in on economic
resources
Basis of accounting is accrual
20
Required Financial Statements

Statement of Financial Position
(Balance Sheet)
Statement of Activities
Statement of Cash Flows
VHWOs must also present Statement
of Functional Expenses
21
Statement of Financial Position

No specific format required
Fund reporting not prohibited
Aggregated totals for assets, liabilities,
and net assets is required, as is

reporting the three classes of net assets
Some accounts do have specific
requirements
22
Investments
Investments initially recorded at cost (if
donated, at fair value at time of gift)

At report date
Investments in debt and equity securities reported

at fair value
Other investments reported at cost, lower of cost
or market, or at market value
Change in fair value reported as unrestricted
unless restricted by donor stipulation or law

23
PledgesUnconditional Promises to Give

Recognize receivable if pledges are
unconditional promises to give
Does not have provisions that release donor

based on future and uncertain event
Conditional promise may be unconditional if
occurrence of event is remote
Revenue recognized for net amount expected
to be collected within one year

Revenue for collections to be made in more
than one year recognized at present value
24
PledgesConditional Promises to Give

Not reported as receivables
Note disclosure only
Support from conditional promises to
give recognized when conditions are

met
25
Fixed Assets
Recognized at cost (or fair value if donated)
use of estimates allowed but must be

disclosed in the notes
Donated fixed assets reported as unrestricted
unless temporarily restricted required
Depreciation expense recorded on fixed
assets used in operations or in production of
income
Assets held for sale not depreciated
26
Collections
Defined as works of art, historical treasures,
or similar assets that are

Held for public exhibition
Protected, cared for, and preserved
Subject to policy that requires proceeds from sale
of items to acquire other items for collection
NPOs must capitalize works of art, historical
treasures, or similar assets that do not meet

above requirements
27
Collections (continued)
Accounting options for collections
Not capitalizing any collections
Capitalize collections after adopting
FASB #116 but not those acquired prior
to that date
Capitalize all collections regardless of
when acquired
28
Collections (continued)
Capitalized collections
Assets reported at fair value and as
contributions
Increase appropriate net asset
classification
Collections not capitalized are
disclosed only in notes to financial

statements
29
Trusts and Similar Agreements

May be held by a third party
Should be recognized as assets and
contributions unless third part has discretion

to provide resources to others
If such discretion is allowed, recognize as
assets and contributions when resources
provided
Revocable trusts are treated as conditional
promises
30
Trusts and Similar Agreements (continued)

Irrevocable perpetual trusts established
for sole benefit of NPO increase

permanently restricted net assets
Term endowments increase temporarily
restricted net assets
31
Statement of Activities (Page 651)

Revenues and gains reported by
source
Expenses
Reported
by function
Classified as either
Program services
Support services
Changes in classes of net assets
reported separately
32
Reporting Revenues and Expenses

Must be reported at gross
Result from ongoing major or central
activities
Revenues reported in appropriate net
asset category
All expenses reported in unrestricted
net asset category
33
Reporting Gains and Losses

May be reported as net or gross
Result from transactions that are
considered peripheral or incidental to

organization
Reported in appropriate net asset
category
34
Contributions
Significant source of revenue for most
NPOs
Defined as: an unconditional transfer of
cash or other assets to an entity or a
settlement or cancellation of its
liabilities in a voluntary nonreciprocal
transfer by another entity acting other
than as owner
35
Key Features of Contributions

Unconditionalnot subject to future and
uncertain events that could require return of

assets or reinstatement of liabilities
Nonreciprocalnothing of significant value is
given in return for the contribution
Voluntary
Not an ownership investment
36
Recognizing Contribution Revenue

In period received or unconditionally
promised
Must analyze grants, memberships
dues, and sponsorships
Part
may be contributions
Part may be exchange transaction
Reported in appropriate net asset
category
37
Options for Use Restriction Contributions

Report as temporarily restricted net
assetssatisfaction of restrictions
reported as decrease to temporarily
restricted net assets and increase to
unrestricted net assets
Report satisfied portions as changes in
unrestricted net assets
38
Contributions and Intermediary

Organization
Recognize revenues if holder has right to
redirect use of assets to party other than

designated beneficiary
If power not explicitly granted, liability
recognized instead of revenue
39
Pledges
Revenues recognized when unconditional
pledge is received
Conditional pledges and transfers recognized
as revenues when conditions are met
Unconditional pledges due in future years
reported as restricted support unless donor
specifies it is for current operations
40
Membership DuesCan Take

Many Forms
Membership dues that are exchange transactions
recognize revenue over the period(s) that benefits

are provided
Contributionsrecognized as revenues when
received
Lifetime membership dues and nonrefundable
initiation fees
Recognized
as revenues when received if future fees

are assessed to cover costs of future services
Recognized over future periods if not future fees
41
Special Fund-Raising Events

Revenues reported at gross unless event is
incidental or peripheral
Options for reporting expense direct costs
Expense deduction from related revenue
Separate line in expense section
Gain reported if event is incidental or
peripheral (expenses reported

parenthetically)
42
Investment Income and Gains/Losses

Determined partly by the investment valuation
method used
For most investments, changes in fair value,
interest, and dividends are reported as
changes in appropriate net asset category
Restricted income, gains, and losses reported
as changes in temporarily restricted or
permanently restricted net assets
43
Investment Losses That Reduce

Principal of Permanent Endowments
In absence of donor stipulations or law to
the contrary, losses reduce temporarily

restricted net assets to the extent that a
donor-imposed temporary restrictions on
net appreciation of the fund have not
been met before the loss occurs
Any remaining loss reduces unrestricted
net assets
44
Investment Losses (continued)

If losses reduce the assets below the
level required by donor stipulations or law,
gains that restore the fair value of the
assets to the required level are classified
as increases in unrestricted net assets
45
Donated Materials, Facilities,

and Services
Materials
Contribution
revenue when received

Expense recognized when materials used
or sold
Donated services reported as
contributions and assets or expenses if

services created or nonfinancial assets
enhanced
46
Other Criteria for Recognizing Donated

Services
Require specialized skills (accounting,
medicine, plumbing),
Provided by individuals with those skills,
and
Would typically have been purchased if
they are not donated
47
Net Assets Released from Restrictions

Reported when donor restrictions on
resource use are met

Reported as both an increase to
unrestricted net assets (but are not
revenues) and decrease to temporarily
restricted net assets (but not as
expenses)
48
Overview for Restricted Contributions

and Investment Income (Page 648)
Illustration 16-3 provides
comprehensive overview of reported

restricted contributions and investment
income
Meant to summarize much of chapter
49
Expense Classifications
Program Servicesrelate directly to the
primary missions of the organization

Supporting Servicesnot directly related to
primary missions; include:
General administration
Membership development
Fund-raising
Both classifications reported by program or
function
50
Fund-Raising CostsExamples
Mailing lists
Printing
Mailing
Personnel
Occupancy
Newspaper and
other media
advertising
Costs of unsolicited
merchandise sent to
encourage
contributions
51
Fund-Raising Costs as Joint Activities

Costs of joint activities must be reported
as fund-raising expenses unless
The activity meets three conditions
related to the purpose of the activity
The audience to whom the activity is
addressed
Actions that the audience is asked to
take
52
Conditions Related to Purpose of Activity

At least one purpose of joint activity must be
to accomplish some program function that is

part of the NPOs mission or to fulfill
management and general responsibilities
Audience for the activity must not be selected
based on ability or likelihood to make
contributions
Activity must motivate the audience to take
specific actions (other than making
contributions) that support program goals or
fulfill a management and general
responsibility
53
Statement of Cash Flows:

Unique Aspects
Reporting contributions and investment
earnings that are restricted for capital assetrelated, endowment, or other long-term
purposes as financing activities
Reporting changes in cash restricted for longterm purposes as investing activities
Reconciliation of the total changes in net
assets from the statement of activities to the
net cash flows from operating activities
54
Statement of Functional Expenses

VHWOs must present statement;
optional for ONPOs

Provides detail of expenses section of
Statement of Activities by object class
or type of expense
55
Nongovernment VHWO and ONPO

Accounting and
Reporting Illustration
#1 Prior Year Donation (Page 650)

Reclassifications Out
Reclassifications In
22,000
22,000
Entry is made because the implied (or expressed) time restriction has been
met. Reclassification is reported as Net assets released from restrictions.
57
#2 Gifts for Current and Future

Years (Page 651)
Cash
Unrestricted SupportContributions
Temporarily Restricted Support
Contributions
15,000
5,000
10,000
5,000 was for current year; 10,000 for next year. Restricted support
account is used to record temporarily restricted contributions. This example
is of a time restriction.
58
#3 Unrestricted Pledges (Page 651)

Pledges Receivable
Allowance for Uncollectible Pledges
Unrestricted Support
Contributions
Contributions
250,000
25,000
180,000
45,000
50,000 restricted for next year; 200,000 designated to support current year
operations; 10% of pledges expected to be uncollectible.
59
#4 Collections of Pledges (Page 652)

Cash
Pledges Receivable
205,000
18,000
223,000
205,000 in pledges were collected; 18,000 were written off.
60
Donation and Subsequent Sale

(Page 652)
#5 Donation
Land and Building Held for Resale
Contributions
#6 Subsequent sale
Cash
Land and Building Held for
Resale
150,000
150,000
150,000
150,000
Land and building donated in current year and held for resale. No
restrictions on donated property or its sale proceeds.
61
#7 Investment Income (Page 652)

Cash
Accrued Interest Receivable
Unrestricted Revenues
Investment Income
36,000
2,000
34,000
Investment income of 20,000 on unrestricted investments and 14,000 of

unrestricted income from endowments was received. Interest accrued at
the end of the previous year was also received.
62
#8 Fund-raising banquet held

Cash
Special Events
ExpensesDirect Cost of Special
Events
Cash
(Page 652)
75,000
75,000
25,000
25,000
Ticket sales for banquet totaled $75,000. Related direct costs of $25,000
for meals and gratuities were paid.
63
#9 Donated Materials and Facilities

(Page 652)
Inventory of Materials
ExpensesFund-Raising
Unrestricted SupportDonated
Materials
4,000
6,000
ExpensesResearch
ExpensesManagement and
General
Services
4,800
3,200
10,000
8,000
Materials, 10,00040% unused at year-end; 60% used for fund-raising

Facilities, 8,00060% for research offices; 40% for recordkeeping
64
#10 Recordable Donated Services

(Pages 652653)
General
ExpensesResearch
Services
7,000
3,000
10,000
65
#11 Annual Memberships (Page 653)

Cash
Unrestricted Revenues
Membership Dues
17,300
17,300
66
#12 Salaries and Wages Paid or

Accrued (Page 653)
General
ExpensesFund-raising
ExpensesEducation
ExpensesResearch
Cash
Accrued Salaries Payable
30,000
15,000
27,000
16,000
85,000
3,000
67
#13 Other Expenses and Accruals

(Page 653)
Vouchers Payable
Inventory of Materials
General
ExpensesEducation
ExpensesResearch
Cash
Vouchers Payable
17,000
800
98,000
67,000
85,000
50,000
303,800
14,000
68
#14 Board Designation (Page 653)

Designated for Endowment
50,000
50,000
Endowment earnings will be used to finance research. Since this is only a

Board designation, it does not change the classification from unrestricted
to restricted.
69
#15 Restricted Gifts Meet Time

Requirements (Page 654)
No entry and time restriction has been
met but there is another restriction: that
resources be used to for certain
research programs. Resources will not
be reclassified until use restriction is
also fulfilled.
70
#16 Restricted Gifts and Pledges

Received (Page 654)
Cash
Pledges Receivable
Contributions
30,000
100,000
10,000
120,000
Pledges are collectible over the next year. Both gifts and pledges restricted
for certain education efforts. 10% of pledges estimated to be uncollectible.
71
#17 Pledges Collected or Written Off

(Page 654)
Cash
Pledges Receivable
80,000
7,000
87,000
72
#18 Investment Income (Page 654)

Cash
Temporarily Restricted Revenues
Investment Income
20,500
20,500
Income on investments of restricted contributions. Income is also restricted

by donors.
73
#19 Expenses Financed by Temporarily

Restricted Net Assets Incurred and Paid
(Page 654)
Expenses incurred
ExpensesEducation
ExpensesResearch
Cash
70,000
18,000
Reclassification of Net Assets

88,000
88,000
88,000
74
#20 Gift of a Permanent Endowment

(Page 655)
Cash Restricted for Endowment
Permanently Restricted
SupportContributions
55,000
55,000
75
#21 Endowment Fund Earnings

(Page 655)
Permanently Restricted
SupportInvestment Income
10,500
10,500
Restricted by donor stipulation to increasing permanent endowment base.
76
#22 Sale of Endowment Investment

(Page 655)
Investments Restricted for
Endowment
Permanently Restricted Gain
Gain on Sale of Investments
14,400
13,000
1,400
Cost of investments was 13,000. By donor stipulation, realized gains

(losses) on endowment must be added (deducted) from permanent
endowment principal.
77
#23 Cash for Fixed Asset Acquisition

(Page 655)
Cash Restricted for Plant Purposes
Contributions
100,000
100,000
78
#24 Purchase of Equipment (Page 655)

Purchase
Equipment
140,000

Reclassification Out
Reclassification In
140,000
140,000
140,000
79
#25 Record Depreciation (Pages 655656)

General
ExpensesEducation
ExpensesResearch
Accumulated Depreciation
Buildings and Improvements
Accumulated Depreciation
Equipment
13,000
12,000
2,000
3,000
14,000
16,000
80
#26 Investment Income on Restricted

Investments (Page 656)
Interest Receivable Restricted for
Plant Purposes
Temporarily Restricted Revenues
Investment Income
12,000
3,000
15,000
Income restricted by donors for fixed asset purchases.
81
#27 Mortgage Principal and Interest

Payments (Page 656)
Payment
Mortgage Payable
ExpenseInterest
Cash Restricted for Plant
Purposes
40,000
20,000
60,000
60,000
60,000
82
#28 Building Addition Completed

(Page 656)
Purchase
Buildings and Improvements
Cash
200,000
100,000
100,000
100,000
100,000
83
#29 Sale of Equipment (Page 656)

Cash
Accumulated DepreciationEquipment
Equipment
Unrestricted GainGain on Sale
of Equipment
40,000
45,000
75,000
10,000
Equipment had been used in operations. Proceeds from sale are not
restricted.
84
#30 10-Year Endowment Expired

(Page 657)
Reclassification of Cash
Cash
65,000
35,000

35,000
100,000
35,000
Endowment was for 100,000, but 65,000 still restricted for plant purposes.
85
Financial Statement Examples

Balance Sheet (Page 659)
Statement of Activities (Page 661)
Statement of Cash Flows (Page 663)
Statement of Functional Expenses
(Page 664)
86
Balance Sheet Comments

Financial resources restricted for long-
term purposes are not reported as cash

and cash equivalentsshould be
reported as noncurrent assets if
classified Balance Sheet presented
Restricted financial resources
Assets
restricted for plant purposes

Assets restricted for endowment
87
Balance Sheet (continued)

Classes of net assets
classified by nature of restriction

Unrestricted Net Assets are
subclassified to disclose amounts
designated by organizations governing
board (optional)
88
Operating Statement Comments

Amount reported for contributions under
Changes in Unrestricted Net Assets is
sum of the balances of the Unrestricted
Support accounts for contributions,
donated materials, donates facilities, and
donated services
89
Operating Statement (continued)

Special events reported as revenues with
immediate deduction of direct costs

All expenses reported as changes in unrestricted
net assets
Program services and support services expenses
reported by function
Net assets released from restrictions are reported
as an increase in unrestricted net assets and a
corresponding decrease in net assetsnet effect
on total net assets is zero
90
Alternate Operating Statement

Presents total amount of revenues from
each revenue source

Emphasizes that expenses are reported
in unrestricted net assets
Highlights offsetting relationship
between increase in unrestricted net
assets and decrease in temporarily
restricted net assets
91
Statement of Cash Flows Comments

Contributions and earnings that are
restricted for plant or endowment purposes

are classified as financing activities
Decrease in cash restricted for long-term
purposes is classified as investing activity
Operating cash flows are reconciled with
changes in net assets
92

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Non-SLG Not-for-Profit Organizations

nongovernment not-for-profit organizations

Learning Objectives (continued)

contributions and restricted investment

The Nonprofit GAAP Problem

nonprofit organizations (NPOs) look to

Interested in Two Groups

and Universities (Chapter 17)

Evolution of NPO GAAP

Current Primary Authoritative Guidance

Received and Contributions Made

2013 Pearson Education, Inc. All rights reserved.

Governmental NFP Organizations

VHWOs, colleges and universities,

2013 Pearson Education, Inc. All rights reserved.

How to Distinguish between Governmental

2013 Pearson Education, Inc. All rights reserved.

How to Distinguish between a

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Distinguishing Features of VHWOs

welfare, or other social service need

2013 Pearson Education, Inc. All rights reserved.

Services Provided by VHWOs

Private and community

2013 Pearson Education, Inc. All rights reserved.

Classes of Net Assets

Examine in reverse order

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Permanently Restricted Net Assets

permanent in naturenot capable of

that were donated as permanent

Temporarily Restricted Net Assets

(satisfied) by passage of time or by use of

2013 Pearson Education, Inc. All rights reserved.

Unrestricted Net Assets

board-designated resources that are

2013 Pearson Education, Inc. All rights reserved.

Non-GAAP Accounting and Reporting

2013 Pearson Education, Inc. All rights reserved.

Required Financial Statements

Statement of Financial Position

and net assets is required, as is

donated, at fair value at time of gift)

Investments in debt and equity securities reported

Change in fair value reported as unrestricted

unless restricted by donor stipulation or law

PledgesUnconditional Promises to Give

unconditional promises to give

Does not have provisions that release donor

Revenue recognized for net amount expected

to be collected within one year

PledgesConditional Promises to Give

give recognized when conditions are

2013 Pearson Education, Inc. All rights reserved.

use of estimates allowed but must be

or similar assets that are

NPOs must capitalize works of art, historical

treasures, or similar assets that do not meet

disclosed only in notes to financial

Trusts and Similar Agreements

contributions unless third part has discretion

Trusts and Similar Agreements (continued)

for sole benefit of NPO increase

2013 Pearson Education, Inc. All rights reserved.