Chapter 18 Accounting for Nonprofit Organizations including Voluntary

Chapter 18 Accounting for Nonprofit Organizations including Voluntary Health and Welfare Organizations C 18

Standards for all private not-forprofits u FASB 93: all private not-for-profits will record depreciation expense u FASB 116: defines contributions, exchange transactions, and agency transactions u FASB 117: requires "entity-wide" financial statements separate funds not needed for external financial reporting – funds use is OPTIONAL - may still be used for internal management or to supplement external financial statements – C 18 2

Additional standards u FASB 124 – investments in marketable equity securities are to be at fair market value u FASB 136 – asset/liability recorded when intermediary (fund-raising agencies, foundations) C 18 3

Additional standards, continued u AICPA – Affiliated Entities – if controlling financial interest in a for-profit – consolidate – if controlling financial interest and an economic interest in another npo – consolidate – if both not met, then disclose nature of relationship C 18 4

The new financial statements (FASB 117) u Sets minimum display requirements for three required statements – – – Statement of Financial Position Statement of Activities Statement of Cash Flows u Very flexible with formats - FASB suggests several in standard u Additional statement required for VHWOs C 18 – Statement of Functional Expense 5

Statement of Financial Position (Balance Sheet) u Assets in order of liquidity, except – restricted assets are classified as to liquidity based on asset to be acquired – assets to be used to acquire plant go next to plant and endowment assets are last u Alternative formats acceptable but – must have total assets, total liabilities, total net assets for entire entity, – plus a breakdown into three net asset categories C 18 6

Fund balance is replaced by three "net asset" categories assets unrestricted by donors, assets formerly temporarily restricted by donors & have become unrestricted, may include board-designated assets u Temporarily restricted: donor-imposed restriction that will lapse when restriction is met u Permanently restricted: a donor-impose restriction, e. g. , principal of a permanent endowment u Unrestricted: C 18 7

Statement of Activities (Operating Statement) u Reports changes in the three net asset classifications and reports reclassifications from temporarily restricted net assets to unrestricted net assets u Revenues, expenses, gains, and losses are classified into the three net asset classifications u Subtotals required for income from continuing operations and DEC C 18 8

Statement of Activities, continued u Minimum disclosure requirements include increase/decrease in the three net asset classifications, and increase/decrease for the organization as a whole – – net assets: beginning of year net assets: end of year u Revenue by source u Expenses by function or program C 18 9

Unrestricted net assets Expenses, including: • Functional programs • Supporting programs • Bad debts expense • Depreciation • Student aid (university only) Auxiliary expenses (university only) Revenue (exchange transactions) Revenue from endowments Revenue from gov. grants Revenue from investments Contributions Reclassification in (net assets released from restriction): Satisfy program restrictions Fixed asset purchase or use Passage of time restrictions Auxiliary revenues (university only) C 18 10

Temporarily restricted net assets Reclassification out (net assets Contributions released from restriction): Investment income – Satisfy program restrictions Realized gains (loss) on – Fixed asset purchase or use investments – Passage of time restrictions Actuarial adjustment for interest on annuity funds Life income payments C 18 11

Permanently restricted net assets Contributions Possible non-distributable gains(loss) C 18 12

Statement of Cash Flows u Categories (operating, financing, investing) similar to business u Donor-restricted cash contributions that must be used for long-term purposes part of financing activities C 18 13

Statement of Functional Expense u Required only for Voluntary Health and Welfare Organizations (VHWOs) C 18 14

Defining and Recording Contributions (FASB 116) u FASB 116 separates transactions into exchange, nonexchange, and agency – – – C 18 exchange transaction - both parties benefit contributions - only one party benefits agency - acting as intermediary 15

Contributions are defined as nonexchange u Donated assets (cash, investments or property) are recorded at FMV when received as unrestricted, temporarily restricted or permanently restricted depending on donor stipulation u Restrictions are used for those not spendable in current period, or donor-specified for specific operating purpose, purchase of fixed assets, or future time period, or permanently C 18 16

Exceptions to revenue recognition guidelines u Recording of donations of art work and treasures is optional if going into collection that will be held for research or public exhibition and if sold, proceeds will be used to acquire other collectibles u Donated services are recorded at FMV only if they create or enhance non-financial assets or require specialized skills that would have been purchased C 18 17

Pledges u Recorded in the period made if unconditional or when conditions lapse there is an allowance for uncollectible, and present value is used if beyond a year – footnote disclosures are required on when collection is expected – C 18 18

Pledges, continued u Unrestricted pledges are reported as unrestricted revenue u Restricted pledges are reported as either temporarily or permanently restricted revenue u If pledge is to be applied in the future, report as restricted revenue u A pledge to give in the future has an implied restriction for future use C 18 19

Conditional donations u Conditional donations of cash or property are credits to "refundable advances" u Conditional pledges are not recorded until condition is met C 18 20

Reclassifications are used to release restrictions u Donor restrictions lapse when first dollar is spent on donor-specified operating purpose, fixed asset purchase, or passage of time u Contributions for fixed assets may be released when asset is placed in service or over the useful life (as depreciated) u If restriction is going to be released in the same period okay to record as unrestricted upon receipt C 18 21

Other Concepts u Marketable Securities – reported at FMV – “mark to market” – applies to all investments (no categories) u Depreciation – C 18 all private nonprofit organizations record depreciation, except for works of art` 22

Other Concepts, continued u Fund raising and support services costs – allocated to programs – issue of joint cost allocation u Government – – C 18 grants considered to be exchange transactions, not contributions. treat as refundable deposits (a liability) until work/service is performed, then they become revenue 23

Other Concepts, continued u Agency – – – C 18 relationships government grants for student support are not revenue. they are recorded as "assets held on behalf of others" and are directly distributed also applies to other intermediary transactions test for agency vs. contribution is on degree of discretion over assets 24

Other Concepts, continued u Donated assets held by outside trustee for a nonprofit organization – – C 18 not reported in financial statements only disclosed in the notes 25

Other Concepts, continued u Related – – C 18 organizations relationship must be disclosed in the notes if nonprofit organization controls the separate organization (foundation, auxiliary, guild) or is the sole beneficiary of the organization or is liable for any deficit upon liquidation of the organization if both control and sole beneficiary, then must either consolidate or disclose summarized financial information in notes 26

Voluntary Health and Welfare Organizations u United Way u Red Cross u Boy and Girl Scouts u American Heart Association u most social service agencies C 18

Qualifications u Primary source of revenue is from donors who do not directly benefit for the organization’s programs u Program must be in the area of health, welfare, or community service C 18 28

Types of Funds u Current unrestricted fund u Current restricted fund u Land, building, and equipment fund u Endowment u Agency C 18 fund (custodian) fund 29

Principles and Procedures u Use full accrual accounting u Major resource categories – public support – revenues C 18 30

Public Support u Contributions u Special Events Support u Legacies and Bequests u Received from Federated and Nonfederated Campaigns Recognize as unrestricted, temporarily restricted or permanently restricted support in the period received. C 18 31

Volunteers - Materials - Rent-Free u Volunteers - recognize at fair market value both an expense and unrestricted contribution if meet FASB No. 116 criteria u Donated Materials - recognize at fair market value both inventory and unrestricted contributions when received u Free Rent - recognize at fair market value both rent expense and unrestricted contributions when received C 18 32

Revenues u Unrestricted Revenues – membership dues revenue – program services fees – sales of Publications and Supplies C 18 33

Other Revenues u Investment Revenues – investment revenue for interest, dividends, and other earnings – realized gain on investment transactions – net increase (decrease) in carrying value of investments Each item is recorded as unrestricted or unrestricted depending on donor stipulations C 18 34

Releases of Donor Restrictions u Temporarily restricted donor contributions are released from restriction when the organization spends for the purpose the donor specified or when the specified time period occurs u Release is done by reclassifying the net assets C 18 35

Expenses u Expenses reduce unrestricted net assets u Direct and indirect natural (object) expenses are allocated to functional and support classifications – – C 18 program expenses: actual programs conducted by the voluntary health and welfare organization support expenses: management and general, fundraising, membership development 36

FASB No. 124 u Requires VHWOs to carry their investment at market value u Unrealized appreciation (or depreciation) is shown separately in net increase (or decrease) in carrying value of investments u Gain/Loss on investments are considered increases or decreases in unrestricted net assets C 18 37

Financial Statements u Statement of Financial Position u Statement of Activities u Statement of Cash Flows u Statement of Functional Expenses – required for all Voluntary Health and Welfare Organizations – matrix providing detail of how natural expenses have been allocated to program and support classifications C 18 38

Other Not-for-Profits u religious organizations u libraries and museums u cemeteries u labor unions u zoos u social and country clubs u performing arts centers u political parties C 18

Accounting for Other NFPs u May use fund accounting for internal control u Financial statements report organization-wide totals – Statement of Financial Position – Statement of Activities – Statement of Cash Flows u Net assets are classified as unrestricted, temporarily restricted, or permanently restricted C 18 40