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Chapter 12 Not-for-Profit Organizations
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Thoughts to Ponder
“We make a living by what we get. We make a life by what we give.”
Winston Churchill
“Service to others is the rent you pay for your room here on earth.”
Mohammed Ali
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Life’s Lessons : Chapter 12
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Learning ObjectivesIdentify the authoritative standards-setting bodies for establishing GAAP for Not-For-Profits (NFPs).
• Division of Resources into:o Unrestrictedo Temporarily restrictedo Permanently
• Reporting of Cash Flows by NFPs
• Explain financial reporting and accounting for NFPs:o Contributions, contributions of services, pass through
contributions o Pledgeso Collection Itemso Gains and losses on Investmentso Fixed Assets
• Special problems of determining the cost of fund-raising activities• Assessing the financial conditions of NFPs’
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How to determine whether it is a ‘Nongovernmental NFP’ or ‘Governmental Entity’
• It was not created by a government, but rather by individuals.
• It does not have the power to levy taxes.
• It may not have the power to levy tax-exempt debt.
• FASB is the authoritative standards-setting body for financial reporting, not the GASB.
• Examples of not-for-profit organizations: March of Dimes, American Red Cross, etc. o March of Dimes’ mission is to improve the health of babies by preventing birth defects, premature birth, and infant mortality. o American Red Cross works to provide relief to victims of
disasters and help people prevent, prepare for, and respond to emergencies.
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Governments Vs. Non-profits
•GASB: sets standards for all state and local governmental entities (including governmental nonprofits).
•FASB: sets standards for non governmental non-profits except federal government.
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A wide variety of entities!
• Some not-for-profits are like governments.o Funding derived from non-exchange
transactions.
• Some not-for-profits are comparable to business.o Funding derived from exchange
transactions. Ex. Hospitals, nursing homes, child care
centers.
• Some non-profits are hybrids: o Funding derived from both exchange & non-
exchange transactions.Ex. colleges and universities.
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Importance of Not-For-Profit Accounting
• Accounting is where the nonprofit buck stops.Accounting gives the nonprofit a key tool to run its business, plan its future, and show donors and regulators it is spending and tracking its funds the way it should (management tool for protection and efficient use of assets to accomplish mission)
• Tax/regulatory complianceoMaintain tax exempt statusoReporting (Form 990, 990-PF, 990-T as well as
state and local compliance)oPayroll
• Grant compliance• Transparency
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What are the benefits of sound accounting policies and procedures?
Accountant and attorney fees saved . . .Thousands of dollars
Avoiding sanctions on officers . . .Penalty up to 200% of excess benefit plus
RepaymentKeeping exempt status so you can accomplish your
mission . . .Priceless!
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GAAP for Nongovernmental NFPs
FASB Statement (SFAS) No. 93 — Depreciation
FASB Statement (SFAS) No. 95 — Stmt of cash flows
FASB Statement (SFAS) No. 116 — Contributions
FASB Statement (SFAS) No. 117 — Financial statement display
FASB Statement (SFAS) No. 124 — Investments
FASB Statement (SFAS) No. 136---Transfers of assets
FASB Statement (SFAS) No. 164 – NFP entities: Mergers & Acquisitions
AICPA Audit and Accounting Guide Not-for-Profit Organizations (AAG-NPO, revised 2012)
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SFAS 117: Financial Statements of Not-for-Profit Organizations
Required• Statement of financial position• Statement of activities (change in net assets)• Statement of cash flows• Amounts of each of three classes of net assets -
permanently restricted, temporarily restricted, and unrestricted – be displayed in statement of financial position
• Amounts of change in each of the three classes of net assets be displayed in the statement of activities
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Financial Statements for NFPs
1. Statement of Activities (Table 12-2)
2. Statement of Functional Expenses (Table 12-3)
3. Statement of Cash Flows (Table 12-4 and 12-5)
4. Notes to the Financial Statements
5. Statement of Financial Position (Table 12-1)
Example on next slides: Christopher Reeve Foundation
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Popular Reporting
Not all nonprofits include full financial statements in their annual report – Below are the condensed financial statements of March of Dimes Foundation C
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FASB and GASB standards differ on these issues:
• Financial statement display
• Reporting entity
• Investments
• Cash flows
• Pensions
• Compensated absences
• Operating leases
• Risks and uncertainties
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I) Statement of Financial Position FASB Statement No.117• Reports on an aggregate view of the entity as a whole,
rather than on disaggregated funds, as of a point in time.
• Net Assets (assets less liabilities) must be classified as either:1) unrestricted OR 2) temporarily restricted OR3) permanently restricted
Classifications are based on the existence or absence of donor-imposed restrictions.
• As long as net assets are classified, there is considerable flexibility in displaying information including showing disaggregated fund-based data
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March of Dimes
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Investments
• FAS125 (similar but simpler than FAS115)
More similar to GASB than to For-Profit rules!• Fair value accounting for all investments• Gains and losses always impact “bottom line”
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Investments GAAP: FASB Statement No. 124
•Mark equity investments that have readily determinable values and all debt securities to fair value.
•Similar to SFAS No. 115 for businesses and GASB Statement No. 31 for governments, but simpler.
•SFAS No. 124 requires extensive disclosures regarding investments and related income.
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II) Statement of Activities FASB Statement No.117
Reports on changes in all classes of net assets for a period of time. Changes take the form of:
a) Revenues
b) Expenses
c) Gains/losses
d) Contributions (Support)
When net assets are released from restrictions (as restrictions are met), it causes both,1) Decrease in temporarily restricted net assets
AND2) Increase in unrestricted net assets
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II) Statement of Activities (Cont’d) FASB Statement No.117SFAS No. 117 allows:Considerable flexibility in presenting Statement of
Activities informationMost commonly used presentations include:
1) A single column (March of Dimes) OR2) Three columns (Red Cross)
Additional classifications to be used in addition to unrestricted, temporarily restricted, & permanently restricted. Examples include:
• operating and non operating• expendable and nonexpendable • earned and unearned• recurring and nonrecurring
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a) Revenues• Revenues are increases in unrestricted net assets
that arise from bilateral exchange transactions in which the other party receives direct tangible benefits commensurate with the resources provided.oExamples include:
membership dues program service fees sales of supplies and services investment income some grants
• Revenues should be reported as increases in one of the 3 categories of net assets.
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b) Expenses• Use accrual accounting.• All should be reported as decreases in unrestricted
net assets.• Should be reported by functional
categories (i.e. program vs. support)• Record depreciation expense for all
capital assets, except collections.
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Each expense is coded two ways – “object” versus “function”
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Salaries
Progr
am A
Salaries
Depreciation
Utilities
M &
G
Fundr
aising
Progr
am B
Grants Made
Joint Costs with a Fund-raising AppealAICPA SOP 98-2.
•Reported as fund-raising support expenses, rather than allocate to functional programs, such as
education or
advocacy
• Criteria to be applied includes considering
1) Purpose
2) Audience
3) Content
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c) Investment Gains/Losses• Should be included separately from Revenues & Expenses.
• Report realized and unrealized investment gains/losses.
Examples include:
o realized GAINS/LOSSES on investment transactions
o GAINS/LOSSES on sale or disposal of equipment
• Report income and GAINS and LOSSES as changes in unrestricted net assets, unless their use is restricted by the donor or state law.
• Donors may stipulate that a portion of appreciation is to be permanently restricted to maintain the purchasing power of the endowment.
• If a donor is silent as to LOSSES:
A) they reduce unrestricted net assets if the net appreciation requirement has been reached OR
B) Otherwise they reduce temporarily restricted net assets.
• GAINS:o Relate to peripheral or incidental transactions of the entity o Often are beyond the control of management
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SFAS 116: Accounting for Contributions Received and Contributions Made
• Applies to all entities receiving or making charitable contributions
• Generally, contributions received, including unconditional promises to give, are recognized as revenues in period received at their fair values.
• Generally, contributions made, including unconditional promises to give, are recognized as expenses in the period made at their fair values.
• Conditional promises to give are recognized when they become unconditional, i.e. when conditions met.
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SFAS 116, Continued• Contributions received increase oPermanently restricted net assetsoTemporarily restricted net assetsoUnrestricted net assets
• Recognition of expiration of donor-imposed restrictions in the period they expire.
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d) ContributionsFASB Stmt. No 116 • Contributions are the main means of support in NFP’s
• Contributions are increase in net assets arising from contributions of resources in non exchange transactions in which the donor derives no tangible benefit from the recipient agency.(i.e. Nonreciprocal Receipts of Assets/Services)
--Compare this definition to “Revenue” on earlier Slide
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d) Contributions (cont’d)FASB Stmt. No 116 Contributions Increase:• Unrestricted net assets when no donor restrictions
exist or the restrictions have expired.
• Temporarily restricted net assets when the donor imposes restrictions as to purpose (how the asset is used) or time (when the asset is used).
• Permanently restricted net assets when the donor stipulates that the assets must be held in perpetuity, but the organization can spend the income.
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d) Contributions (cont’d)FASB Stmt. No 116
Unconditional promises (“Pledges”):• Depend only on the passage of time or demand by the promisee for
performance. • Record these as support in the period made.Conditional promises:
• Depend on the occurrence of a specified future and uncertain event to bind the promissor, such as obtaining matching gifts by the recipient.
• Do not record these as support until the conditions are substantially met.
Donated material (gifts-in-kind):• should be recorded as contributions and as expenses (supplies
expense or cost of goods sold) • at fair value on the date of the gift • if an object, clearly measurable basis for fair value can be
established.Purpose-Restricted Contributions: • Equivalent to government’s restricted grants. • Used only for donor-specified purposes.
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d) Contributions (cont’d)Unconditional Promises (“Pledges”)• Definition: o Promises to make donations of cash or other assets.
• FASB Stmt. #116:o PRIOR to Statement released:
Revenue recognized when pledges receivedo AFTER Statement released:
Revenue not recognized until cash has been collected More conservative approach
• Legally enforceable if donor reneges?o Pledges are enforceable when the organization has relied on
the pledge and thereby incurred costs. o However, from a practical standpoint, legal action will rarely
be taken by a NFP.
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d) Contributions (cont’d)Conditional Promises
• Definition: oSpecific conditions have to be satisfied
for the donor to provide the resources.
• FASB Stmt. # 116: o conditional promise shall be recognized
when the specified conditions are met
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d) Contributions (cont’d)Contributed Services
Contributed services should be recorded as contributions and expense (salaries expense) at fair value if the services:A) create or enhance non financial assets (such as a carpenter
constructing a building), OR
B) are provided by individuals possessing specialized skills that typically would need to be purchased if not provided by donation (e.g., secretaries or accountants).
FASB Stmt. # 116:• Contributed Services recognized only if they are of:oprofessional natureo the entity would have paid for it if it had not been
donated.
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d) Contributions (cont’d)American Red Cross
American Red Cross:• The organization recognizes contributions, which
include unconditional promises as revenues in the period received or promised.
• The organization reports contributions in the temporarily or permanently restricted net asset class if they are received with donor stipulations.
• When the stipulated time ends, then it is reclassified from restricted to unrestricted net assets in the consolidated statement of activities.
• Products and services revenue, which arises from sales of whole blood and components, and plasma derivative products, and health and safety course fees, is generally recognized upon delivery of products and services to the customer.
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III) Statement of Functional ExpensesVoluntary health and welfare organizations (VHWOs)
must present this statement showing both functional expenses and natural (object or line item) expenses (Table 12-3).
Salaries Adoption Mgmt and General
Supplies Counseling Fund-raising
Depreciation
Education
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Functional ExpensesNatural Expenses
Program Support
IV) Statement of Cash flowsFASB Statement No. 95• SFAS No. 95 was amended to extend coverage to
not-for-profit organizations as well as for-profit entities (Table 12-4).
• Cash flows are reported as changes in operating, financing and investing activities (Table 12-5).
• The indirect method or direct method (with reconciliation) may be used.
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IV) Statement of Cash flowsFASB Statement No. 95
• FASB requires that cash flow statements includes:I) Operating activitiesII) Financing activitiesIII) Investing activities
• REMEMBER: GASB requires that cash flow statements be categorized into: I) Operating activitiesII (a) Non capital financing activitiesII (b) Capital and financing activitiesIII) Investing activities
• It also mandates that governments use direct method to report cash flows.
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IV) Statement of Cash flowsMiscellaneous Accounting Reminders• Unrestricted gifts are included with operating
activities.
• Restricted contributions given for long-term purposes are included with financing activities along with the related income.
• Noncash gifts or in-kind contributions are disclosed as noncash investing and financing activities in a separate section.
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Additional Topics-Financial Indicators
• Liquidity: --Quick ratio and Current ratio• Burden of debt: Total debt/Total assets• Adequacy of available resources: shows extent of
organization’s reserves.• Current fiscal performance: extent of operating
surpluses or deficits.• Reliability of budgetary projections• Proportion of revenues directed to the organization’s
mission• 4 important ratios:
o Fund raising ratio: fund-raising expense measured as a % of total related revenues.
o Program ratio: compares expenses of mission-oriented programs
to administrative costs. o Contributions and grant ratioo Revenue from services ratio
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Optional Fund Accounting
• NFPs may use fund accounting for internal purposes to facilitate reporting back to grantors or funding agencies.
• FASB Stmt. No. 117
Permits NFPs to present disaggregated data classified by fund groups, as long as the aggregated net asset statements are also presented.
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Optional Fund AccountingAICPA AAG-NPO pars. 16.01 -16.20
•Unrestricted current funds (or unrestricted operating or general funds)
•Restricted current funds (or restricted operating or specific purpose funds)
•Plant funds (or land, building, and equipment funds)
•Loan funds (most often in private universities)
•Endowment funds.
•Annuity and life income funds (or split-interest funds)
•Agency funds or (custodian funds).
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Summary• FASB sets accounting standards for Not-for-Profits (NFPs) other
than governments. Thus they follow the full accrual basis of accounting.
• NFPs should classify their resources into three categories: unrestricted, temporarily restricted and permanently restricted.
• NFPs should recognize as revenue all unconditional contributions including both pledges and restricted donations when they are received.
• NFPs should recognize contributed services only if they are of a professional nature and would be required by the NFP if not donated.
• NFPs are not required to recognize and capitalize works of art.• NFPs like governments face special problems of accounting for
pass-through grants and contributions.• NFPs follow AICPA’s SOP 98-2 to allocate joint costs that have a
fund-raising appeal.• The Fiscal health of an NFP can be assessed using traditional
financial ratios.
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