Ch14_LN_517.pptx

Accounting for Not-for-Profit Organizations Financial Reporting for Not-for-Profit Organizations  Defining the Not-for-Profit Sector A not-for-profit organization is one whose goals involve something other than earning a profit for owners, usually the provision of services....

Accounting for Not-for-Profit Organizations Financial Reporting for Not-for-Profit Organizations  Defining the Not-for-Profit Sector A not-for-profit organization is one whose goals involve something other than earning a profit for owners, usually the provision of services. Rather than measuring success with profits, success is measured by how much the organization contributes to the public wellbeing with the resources available to it. Defining the Not-for-Profit Sector  Governmental or not? The not-for-profit audit and accounting guide of the AICPA, with the tacit approval of both the FASB and the GASB, has provided guidance on how to differentiate a governmental organization from a not-for-profit organization. Public corporations and bodies corporate and politic are governmental organizations. Other organizations are governmental organizations if they have one or more of the following characteristics: Popular election of officers or appointment (or approval) of a controlling majority of the members of the organization's governing body by officials of one or more state or local governments, The potential for unilateral dissolution by a government with the net assets reverting to a government, The power to enact and enforce a tax levy.  GAAP for Nongovernmental NFP Organizations The Financial Accounting Standards Board (FASB) has had responsibility for providing guidance on generally accepted accounting principles for not-for-profit organizations since 1979. The Governmental Accounting Standards Board (GASB) is responsible for governmental organizations including governmental not-for-profit organizations. Objectives of Financial Reporting for NFPs FASB’s objectives of financial reporting for not- for-profit organizations are to provide information useful in Assessing Making resource services and allocation ability to provide decisions services Assessing Assessing economic management resources, stewardship and obligations, net performance resources, and changes in them  Financial Reporting GAAP for not-for-profit organizations includes: Accrual basis accounting A statement of financial position A statement of activities A statement of cash flows Comparative statements are encouraged but not required  Statement of Financial Position FASB standards require (at a minimum) that the statement of financial position provide amounts for total assets, total liabilities, total net assets, and the totals for each of the net asset classifications. Net assets are required to be reported in two categories: Net assets with donor restrictions Net assets without donor restrictions Board-designated net assets.  Statement of Activities The statement of activities is an operating statement that presents, in aggregated fashion, all changes in net assets without donor restrictions, net assets with donor restrictions, and total net assets for the reporting period. In the common three-column format for presenting the changes in net assets, a column is used to show changes occurring in each net asset class during the reporting period.  Reclassification “Net Assets Released from Restrictions” indicates the reclassification of support with donor restrictions to support without donor restrictions in the year in which the donor stipulations were met. Reclassifications may be due to (1) satisfaction of program or purpose restrictions; (2) satisfaction of equipment acquisition restrictions; and (3) satisfaction of time restrictions, either actual donor or implied restrictions.  Statement of Cash Flows The classifications used on the statement of cash flows are the same as those used by investor owned entities: operating, investing, and financing. Either the direct or indirect method may be used to report operating cash flows. Statement of Cash Flows Classifications Classification on Activity or transaction Statement of Cash Flows Receipt of gifts without Operating activities donor restrictions Receipt of and earnings on net assets restricted for Financing activities long-term purposes Sale of donated financial Operating activities asset with no restrictions Acquisition of a building or equipment using restricted Investing activities net assets Noncash investing and Noncash or in-kind financing activities contributions (disclosed)  Reporting Expenses by Nature & Function Expenses must be reported by, Function: Program or Supporting AND Nature: Normal classification of expenses. These characteristics can be reported in the Statement of Activities, in the Notes, or as a separate financial statement.  Notes to the Financial Statements Disclosures in the notes include principles applicable to investor owned organizations. NFP organizations must disclose the nature and amounts of net assets without donor restrictions, and net assets with donor restrictions if not displayed on the face of the financial statements. Certain policy statements should also be included in the notes. Accounting Recognition for Not-for-Profit Organizations  Revenues, Gains and Support Increases in net assets arising from Revenu exchange transactions in which the other party to the transaction is presumed to es receive direct tangible benefit commensurate with the resources provided Increases in net assets that relate to peripheral or incidental transactions of the Gains entity and often are beyond the control of management A category of revenues arising from contributions of resources or nonexchange Support transactions and includes only amounts for which the donor derives no tangible benefits from the recipient agency  Contributions and Gifts A contribution is a voluntary, unconditional and nonreciprocal transfer of cash or other asset to a NFP (or a settlement or cancellation of its liabilities) by an entity external to the NFP. Contributions and gifts can be given with or without restrictions: Illustrative Transactions Contribution Revenue (Support) Illustrative Transactions Contribution Revenue (Support)  Pledges A pledge is a promise to give assets to an organization. A conditional promise to give depends on the occurrence of a specified future and uncertain event to bind the promissor, such as obtaining matching gifts by the recipient. A conditional promise to give is not recorded until the conditions upon which it depends have been substantially met.  Pledges An unconditional promise to give depends only on the passage of time or demand by the promisee for performance These promises are reported as support in the year the promise is made. Those made for future periods must be reported as net assets with donor restrictions. Unconditional pledges to be collected within a year are valued at net realizable value. Those that will not be collected within a  Gifts in Kind Gifts in Kind: Donations of materials or services. Unconditional gifts in kind should be reported at fair value, and the entry would include both contribution revenue and an expense or noncash asset. Donated materials used or consumed in providing services should be reported as part of the cost of the services.  Contributed Services FASB requires recognition of contributed services at their fair value if the services received (1)create or enhance nonfinancial assets OR (2)require specialized skills, are provided by individuals possessing those skills, and typically would need to be purchased if not provided by donation.  Land, Buildings and Equipment Land, buildings and equipment are recorded at fair value at the time of donation, and may be donor restricted or unrestricted. For buildings and equipment classified as with donor restrictions, donor restrictions are assumed to have expired when the asset is placed in service unless donor restrictions limit the use of the asset for a specific period of time or purpose.  Special Events Special events are fund-raising activities that provide a direct benefit to those attending. The contribution to attend the special event exceeds the cost (expense) of the direct benefit provided, resulting in contribution revenue for the entity sponsoring the event. Revenues from special events are reported gross with the direct expenses of providing the benefit reported separately. If the special event is peripheral to the NFP, the direct expenses can be netted against the revenues. Expenses related to promoting and conducting special events are reported as fund-raising expenses. Illustrative Transactions Special Events  Functional Expenses Program classifications result from the provision of goods or services that help achieve the major purposes or mission: Research Information Advocacy and public awareness Support activities assist the NFP in carrying out its mission: Fund-raising Management and general  Joint Costs of Fund-raising FASB guidelines : The total cost of activities that include a fund- raising appeal should be reported as fund-raising costs unless a bona fide program or management and general function has been conducted in conjunction with the appeal for funds. The joint costs of a bona fide program or management and general function should be allocated between the bona-fide function and fund- raising using an equitable allocation base. Criteria of purpose, audience, and content must be met in order to conclude that a bona fide program or management and general function has been conducted in conjunction with the appeal for funds.  Criteria Met If The joint activity helps Purpos accomplish a program purpose e or a management activity The audience was selected Audien primarily for a program or management purpose rather ce than ability to make a donation The joint activity motivates the audience to action in Content furtherance of the mission, or meets a management responsibility  Restricted Assets Assets that are not available for current operating purposes because donors have limited their use to a long-term purpose (e.g., capital asset acquisition) are considered restricted. FASB indicates that such assets should be classified separately from current assets on the face of the statement of financial position.  Investments Item or issue Treatment Purchase Acquisition price investments Donated Fair market value on date of investments donation Reporting periods, Fair market value at such as fiscal year measurement date end Category Not required classification Realized and Reported on current period’s unrealized gain or statement of activities loss Footnotes Detailed disclosures  Collections Collections are defined as works of art, historical treasures, or similar assets that are 1. Held for public exhibition, education, or research in furtherance of public service rather than financial gain. 2. Protected, kept unencumbered, cared for, and preserved. 3. Subject to an organizational policy that requires the proceeds of items that are sold to be used to acquire other items for collection. Collections may be recognized or not recognized as assets, but selective Illustrative Transactions Closing Issues Illustrative Transactions Closing Issues Illustrative Transactions Closing Issues Illustrative Transactions Closing Issues Illustrative Transactions Closing Issues Illustrative Transactions Closing Issues Questions?