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13-1
Accounting for Governmental & Nonprofit Entities
JACQUELINE L. RECK SUZANNE L. LOWENSOHN
17/e
Copyright © 2016 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.
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Accounting for Not-for-Profit
Organizations
C H A P T E R
13
13-3
Learning Objectives
13-1 Distinguish not-for-profit organizations (NFPs) from entities in the governmental and commercial sectors of the U.S. economy.
13-2 Identify the authoritative standards-setting body for establishing GAAP for nongovernmental NFPs.
13-4
Learning Objectives
13-3 Explain financial reporting and accounting for NFPs, including required financial statements; classification of net assets; accounting for revenue, gains, and support; accounting for expenses; and accounting for assets. 13-4 Prepare financial statements in accordance
with the generally accepted accounting principles governing NFP organizations.
13-5
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.
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Not-for-Profit Organizational Forms
Not-for-profit (absence of ownership interests)
Nongovernmental
Taxable (e.g. not meeting tax-
exempt requirements)
Tax-exempt (e.g. social welfare organizations,
colleges, charitable,
religious, health care, scientific,
literary and service
organizations)
Governmental
General purpose (e.g. states and
cities)
Special purpose (e.g. colleges and hospitals)
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Not-for-Profit Categories
Voluntary health and welfare organizations
Other nonprofit organizations
Colleges and universities
Health care entities
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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.
• Colleges and universities, hospitals, museums, and social service agencies are examples of organizations that may be either governmental or nongovernmental.
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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.
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Objectives of Financial Reporting for NFPs
Making resource allocation decisions
Assessing services and ability to provide
services
Assessing management
stewardship and performance
Assessing economic resources,
obligations, net resources, and
changes in them
FASB’s objectives of financial reporting for not-for-profit organizations are to provide information useful in
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Stakeholders of NFP Organizations
Donors
Grantors
Members
Lenders
Consumers
Other resource providers
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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
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Statement of Financial Position
• Also known as a balance sheet, this statement shows assets, liabilities, and net assets for the organization as a whole.
• Net assets are required to be reported in three categories: – Unrestricted net assets – Temporarily restricted net assets – Permanently restricted net assets
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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.
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Statement of Activities
• The statement of activities is an operating statement that presents, in aggregated fashion, all changes in unrestricted net assets, temporarily restricted net assets, permanently restricted net assets, and total net assets for the reporting period.
• In the common four-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.
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Reclassification
“Net Assets Released from Restrictions” indicates the reclassification of temporarily restricted support to unrestricted support 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, sometimes measured by depreciation expense, and (3) satisfaction of time restrictions, either actual donor or implied restrictions.
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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, but a reconciliation of change in total net assets to net cash used for operating activities must be presented when the direct method is used.
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Statement of Cash Flows Classifications
Activity or transaction Classification on Statement of Cash Flows
Receipt of unrestricted gift Operating activities
Receipt of and earnings on net assets permanently or temporarily restricted for long-term purposes
Financing activities
Sale of donated financial asset with no restrictions
Operating activities
Acquisition of a building or equipment using temporarily restricted net assets
Investing activities
Noncash or in-kind contributions Noncash investing and financing activities
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Statement of Functional Expenses
Program Activities Supporting Services Research Public
Awareness Total Managerial Fund
Raising Total
The column headers shown above are examples of functional classifications.
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Statement of Functional Expenses
Program Activities Supporting Services Research Public
Awareness Total Managerial Fund
Raising Total
Salaries
Supplies
Rent
The row labels shown above are examples of natural classifications or objects of cost.
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Statement of Functional Expenses
• VHWO organizations are required to prepare a statement of functional expenses, but other NFP organizations are also encouraged to do so.
• Expenses that relate to more than one function should be allocated to the programs or functional expenses benefited.
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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 unrestricted, temporarily restricted, and permanently restricted net assets if not displayed on the face of the financial statements.
• Certain policy statements should also be included in the notes.
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Revenues, Gains and Support
• Increases in unrestricted net assets arising from exchange transactions in which the other party to the transaction is presumed to receive direct tangible benefit commensurate with the resources provided
Revenues
• Increases in net assets that relate to peripheral or incidental transactions of the entity and often are beyond the control of management Gains
• A category of revenues arising from contributions of resources or nonexchange transactions and includes only amounts for which the donor derives no tangible benefits from the recipient agency
Support
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Contributions and Gifts
A contribution is a
voluntary
nonreciprocal unconditional
transfer of assets or cash to a NFP (or settlement or cancellation of liabilities)
by an entity external to the NFP
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Donor Contributions
Unrestricted
Restricted as to time
Restricted as to
purpose
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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.
• 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, although they are considered temporarily restricted until it is clear the donor intent related to the contribution has been met.
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Gifts in Kind
A gift in kind is a donation 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.
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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.
• A donation of advertising time is considered to be a contributed asset rather than a contributed service and therefore does not have to meet the second criteria.
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Land, Buildings and Equipment
• Land, buildings and equipment are recorded at fair value at the time of donation, and may be unrestricted, temporarily restricted or permanently restricted.
• For buildings and equipment classified as temporarily restricted, an amount equal to annual depreciation expense is typically reclassified from temporarily restricted to unrestricted net assets each year.
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Special Events
Expenses related to promoting and conducting special events are reported as fund-raising expenses.
Receipts from the
event
FASB requires that revenues from special events be reported at gross
Direct expense Direct expenses of providing the
benefit reported separately.
Fund-raising expense
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Contributions with Intermediaries
• An intermediary serves in a fiduciary capacity by helping with the transfer of assets between a donor and a beneficiary.
• Generally, an intermediary records an asset and a liability when it receives a donation on behalf of another organization.
• However, if the agent or intermediary has variance power or is interrelated to the beneficiary organization, contribution revenue is recognized.
• Variance power exists when the agent or intermediary has the ability to redirect the assets it receives to an entity other than the beneficiary organization.
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Financially Interrelated
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Accounting for Expenses
Expenses
Accrual basis accounting
Recorded as decreases in unrestricted net assets
Functional classifications
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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
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Joint Costs of Fund-raising
• Not-for-profit organizations often conduct activities that combine a program or administrative activity with fund-raising.
• FASB guidelines for allocating joint costs of these activities are as follows:
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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.
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Criteria
Purpose
Audience
Content
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Criteria Met If
• The joint activity helps accomplish a program purpose or a management activity Purpose
• The audience was selected primarily for a program or management purpose rather than ability to make a donation
Audience
• The joint activity motivates the audience to action in furtherance of the mission, or meets a management responsibility Content
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Management and General Expenses
Budgeting
Accounting
Legal Services
Office management
Purchasing
General publicity
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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.
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Investments
Item or issue Treatment Purchase investments Acquisition price
Donated investments Fair market value on date of donation
Reporting periods, such as fiscal year end
Fair market value at measurement date
Category classification Not required
Realized and unrealized gain or loss
Reported on current period’s statement of activities Affects appropriate net asset account (unrestricted, temporarily restricted or permanently restricted)
Footnotes Detailed disclosures
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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 capitalization is not permitted.
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Collections
Capitalized collections should be recognized as assets in the period in which they are acquired.
Capitalized art or historical treasures need not be depreciated so long as their economic benefit is used up so slowly that their estimated useful lives are extraordinarily long. This characteristic exists if 1. the assets individually have cultural, aesthetic, or historic value
that is worth preserving perpetually and 2. the holder has the technological and financial ability to protect and
preserve essentially undiminished the service potential of the asset and is doing that.
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Consolidations and Combinations
Consolidations may be required in the following situations: Investments in for-profit entities Financially interrelated NFPs Component units of governmental entities Combinations may occur through merger or acquisition.
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Illustrative Transactions
Debits Credits 1. Net Assets Released—Expiration of Time Restrictions—Temporarily Restricted . . . . . . . . . . . . 5,125 Net Assets Released—Expiration of Time Restrictions— Unrestricted . . . . . . . . . . . . . . . . . 5,125 2a. Contributions Receivable—Unrestricted . . . . . . . . . . 69,500 Contributions—Unrestricted . . . . . . . . . . . . . . . . . 69,500 2b. Contributions Receivable—Temporarily Restricted . 16,500 Contributions—Temporarily Restricted—Program 16,500
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Illustrative Transactions
Debits Credits 3a. Cash . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 70,700 Contributions Receivable—Unrestricted . . . . . . . . 68,500 Accounts Receivable . . . . . . . . . . . . . . . . . . . . . . 2,200 3b. Cash . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 16,500 Contributions Receivable—Temporarily Restricted 16,500 3c. Cash . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 9,200 Contributions Receivable—Temporarily Restricted 9,200 4a. Cash . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 10,000 Contributions—Temporarily Restricted—Program . 10,000 4b. Direct Costs—Special Outreach Project—Program . . . 3,000 Cash . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3,000
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Illustrative Transactions Debits Credits 5. Cash . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 303,800 Fund-Raising Support Expenses . . . . . . . . . . . . . . . . 13,200 Contributions—Unrestricted . . . . . . . . . . . . . . . . 317,000 6. Salaries Expense . . . . . . . . . . . . . . . . . . . . . . . . . . . . 265,000 Employee Benefits Expense . . . . . . . . . . . . . . . . . . . . 51,000 Payroll Taxes Expense . . . . . . . . . . . . . . . . . . . . . . . . 20,300 Cash . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 321,200 Accounts Payable and Accrued Expenses . . . . . 15,100 7. Professional Fees Expense . . . . . . . . . . . . . . . . . . . . 17,000 Supplies Expense . . . . . . . . . . . . . . . . . . . . . . . . . . . 4,500 Printing and Publications Expense . . . . . . . . . . . . . . 1,600 Cash . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 23,100
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Illustrative Transactions Debits Credits 8. Professional Fees Expense . . . . . . . . . . . . . . . . . . . . . 43,000 Supplies Expense . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7,800 Telephone Expense . . . . . . . . . . . . . . . . . . . . . . . . . . 9,800 Postage and Shipping Expense . . . . . . . . . . . . . . . . . 7,800 Occupancy Expense . . . . . . . . . . . . . . . . . . . . . . . . . . 23,900 Rental and Maintenance of Equipment Expense . . . . 8,700 Printing and Publications Expense . . . . . . . . . . . . . . . 7,900 Travel Expense . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 22,000 Conferences, Conventions, and Meetings . . . . . . . . . . 13,800 Specific Assistance to Individuals . . . . . . . . . . . . . . . . 35,500 Membership Dues . . . . . . . . . . . . . . . . . . . . . . . . . . . . 700 Cost of Sales to the Public . . . . . . . . . . . . . . . . . . . . . . 900 Miscellaneous Expense . . . . . . . . . . . . . . . . . . . . . . . . 4,200 Accounts Payable and Accrued Expenses . . . . . . . 186,000
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Illustrative Transactions
Debits Credits 9. Cash . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 75,650 Contributions—Unrestricted . . . . . . . . . . . . . . . . . . 15,000 Membership Dues . . . . . . . . . . . . . . . . . . . . . . . . . 1,000 Program Service Fees . . . . . . . . . . . . . . . . . . . . . . 55,000 Investment Income—Unrestricted . . . . . . . . . . . . . 2,900 Miscellaneous Revenue . . . . . . . . . . . . . . . . . . . . . 1,500 Contributions—Temporarily Restricted—Program . 250 10. Accounts Receivable . . . . . . . . . . . . . . . . . . . . . . . . . 1,000 Sales to the Public . . . . . . . . . . . . . . . . . . . . . . . . . 1,000 11. Accounts Payable and Accrued Expenses . . . . . . . . . 182,864 Cash . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 182,864
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Illustrative Transactions
Debits Credits 12. Cash . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 20,000 Contributions—Temporarily Restricted—Time . . 10,000 Contributions—Temporarily Restricted—Program 6,000 Contributions—Temporarily Restricted—Plant . . 4,000 13a. Miscellaneous Expense . . . . . . . . . . . . . . . . . . . . . 4,540 Mortgage Payable . . . . . . . . . . . . . . . . . . . . . . . . . 6,500 Cash . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 11,040 13b. Cash . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5,000 Short-Term Investments—Temporarily Restricted—Plant . . . . . . . . . . . . . . . . . . . . . . . . 5,000 13c. Equipment—Temporarily Restricted . . . . . . . . . . . 5,000 Cash . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5,000
13-51
Illustrative Transactions
Debits Credits 14a. Cash . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1,390 Investment Income—Temporarily Restricted—Plant 1,390 14b. Cash . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 12,780 Investment Income—Unrestricted . . . . . . . . . . . 12,780 15. Professional Fees Expense . . . . . . . . . . . . . . . . . . 8,574 Cash . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8,574 16. Cash . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 100,000 Contributions—Permanently Restricted . . . . . . 100,000
13-52
Illustrative Transactions
Debits Credits 17a. Supplies Expense . . . . . . . . . . . . . . . . . . . . . . . . . . 3,995 Supplies . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3,995 17b. Postage and Shipping Expense . . . . . . . . . . . . . . . 317 Prepaid Expense . . . . . . . . . . . . . . . . . . . . . . . . 317 18. Unrealized Loss on Investments—Permanently Restricted . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4,000 Unrealized Loss on Investments—Unrestricted . . . . 3,000 Long-Term Investments—Permanently Restricted 4,000 Long-Term Investments—Unrestricted . . . . . . . . 3,000 19. Provision for Uncollectible Pledges . . . . . . . . . . . . . . 104 Allowance for Uncollectible Pledges—Unrestricted 104
13-53
Illustrative Transactions
Debits Credits 20a. Depreciation of Buildings and Equipment . . . . . . . . 4,185 Allowance for Depreciation—Building . . . . . . . . . 1,145 Allowance for Depreciation—Equipment . . . . . . . 3,040 20b. Net Assets Released—Satisfaction of Plant Restrictions—Temporarily Restricted . . . . . . . . . . . 4,185 Net Assets Released—Satisfaction of Plant Restrictions— Unrestricted . . . . . . . . . . . . . . . . . 4,185
13-54
Illustrative Transactions
Debits Credits 21. Counseling Program Expenses . . . . . . . . . . . . . . . . 2,480 Adoption Program Expenses . . . . . . . . . . . . . . . . . . 990 Foster Home Care Program Expenses . . . . . . . . . . 2,510 Special Outreach Project Program Expenses . . . . . 2,050 Management and General Support Expenses . . . . . 530 Fund-Raising Support Expenses . . . . . . . . . . . . . . . 165 Miscellaneous Expense . . . . . . . . . . . . . . . . . . . 4,540 Depreciation of Buildings and Equipment . . . . . 4,185 22. Special Outreach Project Program Expenses . . . . . 23,100 Professional Fees Expense . . . . . . . . . . . . . . . . 17,000 Supplies Expense . . . . . . . . . . . . . . . . . . . . . . . 4,500 Printing and Publications Expense . . . . . . . . . . 1,600
13-55
Illustrative Transactions
Debits Credits 23. Allocation of expenses to functions (see text) 24. Unrestricted Net Assets—Designated for Special Outreach Project . . . . . . . . . . . . . . . . . . . . . . . . . . . 30,000 Unrestricted Net Assets—Undesignated— Available for Operations . . . . . . . . . . . . . . . . . . . 30,000 Net Assets Released—Satisfaction of Program Restrictions—Temporarily Restricted . . . . . . . . . . . 27,400 Net Assets Released—Satisfaction of Program Restrictions—Unrestricted . . . . . . . . . . 27,400
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Illustrative Transactions Debits Credits 25a. Temporarily Restricted Net Assets—Time . . . . . . . 5,125 Net Assets Released—Expiration of Time Restrictions—Unrestricted . . . . . . . . . . . . . . . . . . . 5,125 Net Assets Released—Expiration of Time Restriction— Temporarily Restricted . . . . . . . . . 5,125 Unrestricted Net Assets—Undesignated— Available for Operations . . . . . . . . . . . . . . . . . . 5,125 Temporarily Restricted Net Assets—Plant . . . . . . . 4,185 Net Assets Released—Satisfaction of Plant Restrictions—Unrestricted . . . . . . . . . . . . . . . . . . . 4,185 Net Assets Released—Satisfaction of Plant Restrictions—Temporarily Restricted . . . . . . . . 4,185 Unrestricted Net Assets—Undesignated— Available for Operations . . . . . . . . . . . . . . . . . . 4,185
13-57
Illustrative Transactions
Debits Credits 25a. Temporarily Restricted Net Assets—Program . . . . 27,400 Net Assets Released—Satisfaction of Program Restrictions—Unrestricted . . . . . . . . . . . . . . . . . . 27,400 Net Assets Released—Satisfaction of Program Restrictions— Temporarily Restricted . . . . . . . 27,400 Unrestricted Net Assets—Undesignated— Available for Operations . . . . . . . . . . . . . . . . . . 27,400
13-58
Illustrative Transactions
Debits Credits 25b. Contributions—Unrestricted . . . . . . . . . . . . . . . . . 401,500 Sales to the Public . . . . . . . . . . . . . . . . . . . . . . . . 1,000 Membership Dues—Individuals . . . . . . . . . . . . . . 1,000 Program Service Fees . . . . . . . . . . . . . . . . . . . . . 55,000 Investment Income—Unrestricted . . . . . . . . . . . . 15,680 Miscellaneous Revenue . . . . . . . . . . . . . . . . . . . . 1,500 Unrestricted Net Assets—Undesignated— Available for Operations . . . . . . . . . . . . . . . . . 475,680
13-59
Illustrative Transactions
Debits Credits 25c. Unrestricted Net Assets—Undesignated— Available for Operations . . . . . . . . . . . . . . . . . . . . 580,315 Counseling Program Expenses . . . . . . . . . . . . 185,513 Adoption Program Expenses . . . . . . . . . . . . . . 69,560 Foster Home Care Program Expenses . . . . . . 172,531 Special Outreach Project Program Expenses . 62,870 Cost of Sales to Public . . . . . . . . . . . . . . . . . . 900 Management and General Support Expenses 53,189 Fund-Raising Support Expenses . . . . . . . . . . 35,752
13-60
Illustrative Transactions
Debits Credits 25d. Contributions—Temporarily Restricted—Program . 32,750 Contributions—Temporarily Restricted—Time . . . . 10,000 Contributions—Temporarily Restricted—Plant . . . . 4,000 Investment Income—Temporarily Restricted—Plant 1,390 Temporarily Restricted Net Assets—Program . . . 29,750 Temporarily Restricted Net Assets—Plant . . . . . . 5,390 Temporarily Restricted Net Assets—Time . . . . . . 10,000 Direct Costs—Special Outreach Project—Program 3,000
13-61
Illustrative Transactions
Debits Credits 25e. Contributions—Permanently Restricted . . . . . . . . 100,000 Permanently Restricted Net Assets . . . . . . . . 100,000 25f. Permanently Restricted Net Assets . . . . . . . . . . . 4,000 Unrestricted Net Assets—Undesignated— Available for Operations . . . . . . . . . . . . . . . . . . . 3,000 Unrealized Loss on Investments—Permanently Restricted . . . . . . . . . . . . . . . . . . . . . . . . . . . 4,000 Unrealized Loss on Investments—Unrestricted 3,000
13-62
Looking Forward
In this chapter, we covered accounting for not-for-profit organizations, including distinguishing characteristics, source of GAAP, and financial accounting and reporting for not-for-profit organizations. Required financial statements and various accounting related issues were explored.
The discussion of not-for- profit organizations continues in Chapter 14, where we consider regulatory, taxation and performance issues.
