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Non-SLG Not-for-Profit Organizations: SFAS 116 and 117 Approach. 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 not-for-profit organizations

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learning objectives
Learning Objectives
  • Understand the sources of GAAP for nongovernment not-for-profit organizations
  • Explain basis of accounting and the financial statements required for nongovernment not-for-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
learning objectives continued
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
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
Interested in two groups
  • Voluntary health and welfare organizations (VHWOs)
  • Other not-for-profit organizations (ONPOs) – which exclude
    • Health care organizations (Chapter 18)
    • Colleges & Universities (Chapter 17)
    • VHWOs
evolution of npo gaap
Evolution of NPO GAAP
  • AICPA started playing role in mid-1960s
  • FASB assumes responsibility in 1979 – FASB #32 adopted AICPA Statements of Position (SOPs), audit guides, and accounting guides
primary authoritative guidance
Primary Authoritative Guidance
  • FASB #116 – Accounting for Contributions Received and Contributions Made
  • FASB #117 – Financial Statements for Not-for-Profit Organizations
  • FASB #124 – Accounting for Certain Investments Held by Not-for-Profit Organizations
  • AICPA Audit and Accounting Guide, Not-for-Profit Organizations, adopts all this guidance
distinguishing features of vhwos
Distinguishing Features of VHWOs
  • Purpose – to meet a community health, welfare, or other social service need
  • Voluntary nature – no 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
examples of vhwos
Examples of VHWOs
  • United Way
  • Boy Scouts and Girl Scouts
  • American Heart Association
  • YMCA and YWCA
examples of onpos
Cemetery organizations

Civic organizations

Fraternal organizations



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

Examples of ONPOs
classes of net assets x
Classes of Net Assets x
  • Unrestricted Net Assets
  • Temporarily Restricted Net Assets
  • Permanently Restricted Net Assets
non gaap accounting reporting requirements
Non-GAAP Accounting & 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
  • Measurement focus in on economic resources
  • Basis of accounting is accrual
required financial statements
Required Financial Statements
  • Statement of Financial Position (Balance Sheet)
  • Statement of Activities
  • Statement of Cash Flows
statement of financial position
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
  • FASB #124 provides guidance
  • 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
pledges unconditional promises to give
Pledges – Unconditional 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
pledges conditional promises to give
Pledges – Conditional Promises to Give
  • Not reported as receivables
  • Note disclosure only
  • Support from conditional promises to give recognized when conditions are met
fixed assets
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
  • 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
collections continued
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
collections continued22
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
trusts and similar agreements
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
trusts and similar agreements continued
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
statement of activities x
Statement of Activities x
  • 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
reporting revenues expenses
Reporting Revenues & 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
reporting gains and losses
Reporting Gains and Losses
  • May be reported at net or gross
  • Result from transactions that are considered peripheral or incidental to organization
  • Reported in appropriate net asset category
  • 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
key features of contributions
Key Features of Contributions
  • Unconditional – not subject to future and uncertain events that could require return of assets or reinstatement of liabilities
  • Nonreciprocal – nothing of significant value is given in return for the contribution
  • Voluntary
  • Not an ownership investment
recognizing contribution revenue
Recognizing Contribution Revenue
  • In period received or unconditionally promised
  • Must analyze grants, memberships dues, & sponsorships
    • Part may be contributions
    • Part may be exchange transaction
  • Reported in appropriate net asset category
options for use restriction contributions
Options for “Use Restriction” Contributions
  • Report as temporarily restricted net assets – satisfaction 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
still another fasb standard
Still Another FASB Standard

#136 – Transfers of Assets to a Not-for- Profit Organization or Charitable Trust that Raises or Holds Contributions for Others

  • 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
  • Revenues recognized when unconditional pledge is received
  • Conditional pledges & 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
membership dues can take many forms
Membership Dues – can take many forms
  • Exchange revenues for which benefits or services are made available – revenue recognized over period that benefits are provided
  • Contributions – recognized as revenues when received
  • A little bit of both
special fund raising events
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)
investment income and gains losses
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
donated materials facilities services
Donated Materials, Facilities, & 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
other criteria for recognizing donated services
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.
net assets released from restrictions
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)
overview for restricted contributions and investment income 646 647
Overview for Restricted Contributions and Investment Income (646 – 647)
  • Illustration 16-3 provides comprehensive overview of reported restricted contributions and investment income
  • Meant to summarize much of chapter
expense classifications
Expense Classifications
  • Program Services – relate directly to the primary missions of the organization
  • Supporting Services – not directly related to primary missions; include:
    • General administration
    • Membership development
    • Fund-raising
  • Both classifications classified by program or function
fund raising costs examples
Mailing lists





Newspaper and other media advertising

Costs of unsolicited merchandise sent to encourage contributions

Fund-Raising Costs – Examples
fund raising costs as joint activities
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
conditions related to purpose of activity
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 NPO’s mission or to fulfill management & 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 & general responsibility
statement of cash flows unique aspects
Statement of Cash Flows:Unique Aspects
  • Reporting contributions & investment earnings that are restricted for capital asset-related, endowment, or other long-term purposes as financing activities
  • Reporting changes in cash restricted for long-term 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
statement of functional expenses
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
prior year donation 651
Prior year donation (651)

Entry is made because the implied (or expressed) time restriction has been met. Reclassification is reported as “Net assets released from restrictions”.

gifts for current and future years 651
Gifts for current and future years (651)

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.

unrestricted pledges 651
Unrestricted Pledges (651)

50,000 restricted for next year; 200,000 designated to support current year operations; 10% of pledges expected to be uncollectible.

collections of pledges 651
Collections of pledges (651)

205,000 in pledges were collected; 18,000 were written off.

donation and subsequent sale 651
Donation and subsequent sale (651)

Land and building donated in current year and held for resale. No restrictions on donated property or its sale proceeds.

investment income 651
Investment income (651)

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.

fund raising banquet held 652
Fund-raising banquet held (652)

Ticket sales for banquet totaled 75,000. Related direct costs of $25,000 for meals and gratuities were paid.

donated materials and facilities 652
Donated materials and facilities (652)

Materials, 10,000 – 40% unused at year-end; 60% used for fund-raising

Facilities, 8,000 – 60% for research offices; 40% for recordkeeping

recordable donated services 652
Recordable donated services (652)

Recordable because they meet the 3 conditions.

annual memberships 652
Annual memberships (652)

Dues were billed and collected – considered an exchange transaction for this organization.

board designation 653
Board designation (653)

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.

restricted gifts meet time requirements 653
Restricted gifts meet time requirements(653)

No entry – 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.

restricted gifts pledges received 653
Restricted gifts & pledges received (653)

Pledges are collectible over the next year. Both gifts and pledges restricted for certain education efforts. 10% of pledges estimated to be uncollectible.

investment income 654
Investment income (654)

Income on investments of restricted contributions. Income is also restricted by donors.

gift of a permanent endowment 654
Gift of a permanent endowment (654)

Gift is permanently restricted for education programs.

endowment fund earnings 654
Endowment fund earnings (654)

Restricted by donor stipulation to increasing permanent endowment base.

sale of endowment investment 654
Sale of endowment investment (654)

Cost of investments was 13,000. By donor stipulation, realized gains (losses) on endowment must be added (deducted) from permanent endowment principal.

investment income on restricted investments 655
Investment income on restricted investments (655)

Income restricted by donors for fixed asset purchases.

sale of equipment 656
Sale of equipment (656)

Equipment had been used in operations. Proceeds from sale are not restricted.

10 year endowment expired 656
10-year Endowment expired (656)

Endowment was for 100,000, but 65,000 still restricted for plant purposes.

financial statement examples
Financial Statement examples
  • Balance Sheet (658)
  • Statement of Activities (659)
  • Statement of Cash Flows (660)
  • Statement of Functional Expenses (661)