Chapter 121 Not-for-Profit Organizations

Chapter 122 Learning Objectives  Identify the authoritative standards-setting bodies for establishing GAAP for Not-For-Profits (NFPs).  Division of Resources into: -Unrestricted -Temporarily restricted -Permanently  Reporting of Cash Flows by NFPs  Explain financial reporting and accounting for NFPs: -Contributions, contributions of services, pass through contributions -Pledges -Collection Items -Gains and losses on Investments -Fixed Assets  Special problems of determining the cost of fund-raising activities  Assessing the financial conditions of NFPs’

Chapter 123 Governments Vs. Non-profits  GASB: sets standards for all state and local governments.  FASB: sets standards for non governmental non- profits except federal government.  FASB Stmt. #117: Requires that non-profits issue 3 statements:  Balance sheet  Statement of Activities  Statement of Cash flows  FASB Stmt. # 117: also requires that net assets be classified as unrestricted, temporarily restricted, or permanently restricted based on the existence or absence of donor-imposed restrictions.

Chapter 124 Governments Vs. Non-profits (cont’d) FASB Stmt. # 117 requires that:  Revenues and expenses be reported in statements of activities.  Statement of activities should separately include gains and losses on investments and other assets.  Revenues should be reported as increases in one of the 3 categories of net assets.  Non-profits make 2 entries when spending restricted resources: 1) in restricted fund 2) unrestricted fund.  Expenses should be reported by function.

Chapter 125 Governments Vs. Non-profits (cont’d) GASB requires that cash flow statements be categorized into:  Operating activities  Non capital financing activities  Capital and financing activities  Investing activities It also mandates that governments use direct method to report cash flows. FASB No. 95 requires cash flow statements to include:  operating activities  financing activities  investing activities

Chapter 126 GAAP for Nongovernmental NFPs FASB Statement (SFAS) No. 93 — depreciation FASB Statement (SFAS) No. 116 — contributions FASB Statement (SFAS) No. 117 — financial statement display FASB Statement (SFAS) No. 124 — investments AICPA Audit and Accounting Guide Not-for-Profit Organizations (AAG-NPO)

Chapter 127 Nongovernmental NFP Vs. 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. -March of Dimes’ mission is to improve the health of babies by preventing birth defects, premature birth, and infant mortality. -American Red Cross works to provide relief to victims of disasters and help people prevent, prepare for, and respond to emergencies.

Chapter 128 FASB and GASB standards differ on these issues:  Financial statement display  Reporting entity  Investments  Cash flows  Pensions  Compensated absences  Operating leases  Risks and uncertainties

Chapter 129 Financial Statements for NFPs  Statement of Financial Position (Table 12-1)  Statement of Activities (Table 12-2)  Statement of Functional Expenses (Table 12-3)  Statement of Cash Flows (Table 12-4 and 12-5)  Notes to the Financial Statements American Red Cross’s consolidated financial statements can be found using the following link:

Chapter 1210 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 into classes: unrestricted, temporarily restricted, permanently restricted  Considerable flexibility in displaying information including showing disaggregated fund-based data, as long as net assets are classified.

Chapter 1211 March of Dimes—Statement of Financial Position

Chapter 1212 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 revenues, gains, support, expenses, and losses.  Net assets released from restrictions decrease temporarily restricted net assets and increase unrestricted net assets, as restrictions are met.  All expenses should be reported as decreases in unrestricted net assets.

Chapter 1213 Statement of Activities (cont’d)  SFAS No. 117 allows considerable flexibility in presenting information; either a single column or three columns (Table 12-2) for each class of net asset that are often used.  Additional classifications can be used, such as:  operating and non operating,  expendable and nonexpendable,  earned and unearned, and  recurring and nonrecurring.  Expenses are reported by functional categories (i.e., program vs. support)

Chapter 1214 March of Dimes—Statement of Activities for 2003 and 2004

Chapter 1215 Statement of Cash Flows  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.  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.

Chapter 1216 Statement of Functional Expenses Voluntary health and welfare organizations (VHWOs) must present this statement showing both functional expenses and natural (object or line item) expenses (Table 12-3). SalariesAdoption Mgt and General SuppliesCounseling Fund-raising Depreciation Education Functional Expenses Natural Expenses Program Support

Chapter 1217 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.  Examples include: -membership dues -program service fees -sales of supplies and services -investment income -some grants

Chapter 1218 Expenses  Use accrual accounting.  Report all expenses as decreases in unrestricted net assets.  Record depreciation expense for all capital assets, except collections.

Chapter 1219 Joint Costs with a Fund-raising Appeal  Reported as fund-raising support expenses, rather than allocate to functional programs, such as education or advocacy  Criteria to be applied includes considering  purpose,  audience, and  content.  AICPA SOP 98-2.

Chapter 1220 Investments GAAP - SFAS No. 124  Mark equity investments that have readily determinable values and all debt securities to fair value.  Report realized and unrealized gains and losses and investment income in the Statement of Activities.  Report income and gains and losses as changes in unrestricted net assets, unless their use is restricted by the donor or legally restricted by 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, losses reduce unrestricted net assets if the net appreciation requirement has been reached, otherwise temporarily restricted net assets.  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.

Chapter 1221 Investments-Example: American Red Cross The notes to the financial statements of American Red Cross indicated the following:  Investments are reported at fair value.  The separately managed endowment fund accumulates realized gains and losses on security transactions which are available to meet current expenses.  Investment income classified as operating revenue consists of interest and dividend income.  All other realized and unrealized gains and losses are classified as non- operating activity.  Revenues, expenses, gains, and losses are classified based on the existence or absence of donor-imposed restrictions.  The net assets of the organization are classified and reported as unrestricted, temporarily restricted, and permanently restricted.

Chapter 1222 Contributions Contributions: nonreciprocal receipts of assets/services.  Includes unconditional promises—pledges.  GAAP: FASB Stmt. # 116 “Accounting for Contributions Received and Contributions made.”  Contributions are the main means of support in NFP’s  Support is: -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.

Chapter 1223 Contributions (cont’d) Contributions Increase:  Unrestricted net assets when no donor restrictions exist or the restrictions have expired. Ex: March of Dimes’ unrestricted net assets for 2004 = $15,087,000.  Temporarily restricted net assets when the donor imposes restrictions as to purpose (how the asset is used) or time (when the asset is used). Ex: March of Dimes’Temporarily restricted assets for 2004 = $ 4,602,000.  Permanently restricted net assets when the donor stipulates that the assets must be held in perpetuity, but the organization can spend the income. Ex: March of Dimes’ Permanently restricted assets for March of Dimes for the year 2004 = $11,950,000.

Chapter 1224 Contributions (cont’d) Unconditional promises:  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.

Chapter 1225 Contributed Services Contributed services should be recorded as contributions and expense (salaries expense) at fair value if the services:  create or enhance non financial assets (such as a carpenter constructing a building), or  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: -professional nature -the entity would have paid for it if it had not been donated.

Chapter 1226 Conditional Promises  Definition: -Specific conditions have to be satisfied for the donor to provide the resources.  FASB Stmt. # 116: -conditional promise shall be recognized when the specified conditions are met.

Chapter 1227 Contributions—Example: 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.

Chapter 1228 Pledges  Pledges: promises to make donations of cash or other assets.  Pledges are enforceable when the organization has relied on the pledge and thereby incurred costs.  Prior to FASB Stmt. # 116: non-profits recognized pledges when received.  Traditional view: not recognize until cash has been collected.

Chapter 1229 Gains on Investments  Gains are:  Increases in unrestricted net assets  Relate to peripheral or incidental transactions of the entity  Often are beyond the control of management  Examples include:  realized gains on investment transactions  gains on sale or disposal of equipment

Chapter 1230 Assessing Not-for-Profits  Some not-for-profits are comparable to business.  Some not-for-profits are like governments.  They derive revenues from exchange transactions. -Lack of power to tax -Not-for-profits are private rather than public institutions.  Some non-profits are hybrids: -Rely both on exchange and non exchange transactions. -Ex: colleges and universities.

Chapter 1231 Financial Indicators  Liquidity: -Quick ratio -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

Chapter 1232 Financial Indicators (cont’d)  Important to know what proportion of revenues are directed to an organization’s mission.  4 important ratios: -Fund raising ratio: fund-raising expense measured as a % of total related revenues. -Program ratio: compares expenses of mission- oriented programs to administrative costs. -Contributions and grant ratio -Revenue from services ratio

Chapter 1233 Optional Fund Accounting  NFPs may use fund accounting for internal purposes to facilitate reporting back to grantors or funding agencies.  SFAS Stmt. # 117 permits NFPs to present disaggregated data classified by fund groups, as long as the aggregated net asset statements are also presented.

Chapter 1234 Optional Fund Accounting AICPA AAG-NPO pars  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). American Red Cross

Chapter 1235 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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