Module 4 External (GAAP) Financial Reporting Convery 20131

 Describe alternative forms of financial reporting  Identify financial statements required by GAAP  Describe the differences between the cash and accrual bases of accounting  Define exchange and nonexchange transactions  Identify the sources of GAAP for NPOs ◦ FASB ◦ AICPA  Identify other resources to assist in staying current with GAAP Convery 20132

Audited financial statements that comply with GAAP IRS annual reporting Form 990 Periodic Treasurer’s Reports to the Board – on a cash or accrual basis – comparisons of budget to actual Annual Reports that include outcomes measures as well as some financial data Convery 20133

 Statement of Financial Position  Statement of Activities  Statement of Cash Flows  Statement of Functional Expenses - for VHWOs  With Notes to the Financial Statements Convery 20134

 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  Flexibility is allowed in displaying information as long as net assets are classified; such as showing disaggregated fund-based data Convery 20135

Reports on changes in all classes of net assets for a period of time (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 decrease unrestricted net assets and are reported by functional categories (i.e., program vs. support) SFAS No. 117 allows considerable flexibility in presenting information; either a single column or three columns for each class of net asset Convery 20136

Cash flows from Operations  includes unrestricted gifts Cash flows from Investing  includes temporarily and permanently restricted net assets given for long-term purposes (and related income) Cash flows from Financing  includes issuance and repayment of long-term debt Noncash Investing and Financing Activities  Includes gifts-in-kind contributions Convery 20137

 Voluntary health and welfare organizations (VHWOs) must present this statement showing both functional expenses and natural (object or line item) expenses SalariesAdoptionMgt and General SuppliesCounselingFund-raising DepreciationEducation Convery Functional Expenses Natural Expenses Program Support

Argument for Cash:  It (most often) matches the budget  Board members understand it  Inadequate cash flows put organizations at high risk Arguments for Accrual:  Monthly reports should lead into the audited annual financial statement so there are no surprises caused by auditor’s accrual adjustments, such as depreciation  All information is captured (i.e., what is earned and incurred) Convery 20139

 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 Convery

 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 Convery

 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 Convery

 Audit and Accounting Guide Not-for-Profit Organizations, updated each May  Not-for-Profit Organizations – Annual Audit Risk Alert  See: Convery

Convery Example: GAAP for a Health Care Organizations For-Profit: Proprietary Not-for-Profit: Voluntary Governmental: Public AICPA Audit and Accounting Guide Health Care Organizations FASB Guidance GASB Guidance

Convery SFAS No. 93 — recognition of depreciation SFAS No. 116 — accounting for contributions SFAS No. 117 — financial statement display SFAS No. 124 —accounting for investments SFAS No. 136 —agent, trustee, intermediaries SFAS No. 133 derivatives and hedging activities, June 2000, see related 137, 138. SFAS No pension disclosures SFAS No. 121 —impairment of long-lived assets SFAS No. 157 Fair Value Measurements SFAS No. 158 Employers’ Disclosures about Pensions and Other Postretirement Benefits-an amendment of FASB Statements No. 87, 88, and 106 SFAS No. 159 The Fair Value Option for Financial Assets and Financial Liabilities SFAS No. 164 Mergers and Acquisitions for Not-for-Profit Organizations  GAAP from FASB (note: see Codification)

Convery AICPA Statement of Position 98-2 GASB Statement No. 39 Determining Whether Certain Organizations are Component Units, June GAAP from AICPA and GASB (see Codification)

Convery GAAP that Differs between GASB and FASB reporting entity contributions financial statement display cash flows deposits and investments (i.e., see GASB Statement No. 31, SFAS No. 115, and SFAS No. 124) operating leases compensated absences debt refunding; risks and uncertainties pensions; other post retirement benefits (OPEB)

 Revises SOP 87-2 on joint costs making it more difficult to allocate “educating the public” or “advocacy” costs to program expenses.  Provides that costs of all materials and activities that include a fund- raising appeal should be reported as fund-raising costs unless a bona fide program or management & general function has been conducted in conjunction with the appeal for funds.  Costs that are clearly identifiable should be charged to program, management and general, or fund-raising. The joint costs of a bona fide program or management and general function should be allocated between those cost objectives and fund-raising.  Criteria of (1) purpose, (2) audience (3) content must be met in order to conclude that a bona fide program or management & general function has been conducted in connection with fund-raising.  Goes beyond SOP 87-2 by covering total costs, not just joint costs, and applying to state and local governmental entities, as well as to NPOs. Convery

Convery Accounting for Certain Investments Held by Not-for- Profit Organizations Mark equity and debt investments to market. 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 Similar to SFAS No. 115 for businesses and GASB Statement No. 31 for governments, but simpler Investments SFAS No. 124

Convery NPOs have varied relationships with other NPOs, for-profit businesses, and governments characterized by: Ownership - financial equity interest in another organization Control - having the power to appoint the majority of Board members Economic interest - having the right to receive or use resources, receive income or services, or obligated to pay the debt of another organization. Financially Interrelated Entities

 “Transfers of Assets to a Not-for-Profit Organization or Charitable Trust That Raises or Hold Contributions for Others” (June 1999)  An organization that receives financial assets from a donor and agrees to transfer them to a specified “unaffiliated” beneficiary should recognize the fair value of those assets as a liability, not revenue. ◦ i.e., acting as an intermediary ◦ e.g., most federal fund-raising foundations, such as United Ways and community foundations.  An organization that receives “variance power” to redirect the assets to another beneficiary, or if the recipient organization and the specified beneficiary are “financially interrelated” organizations recognizes the assets as contributions received. ◦ i.e., acting as a donee and donor ◦ e.g., captive fund-raisers, such as institutionally-related foundations Convery

 If the designated beneficiary organization is “financially interrelated” to the recipient NPO, then it records an interest in net assets of the intermediary  If not financially related, then no accounting prior to the transfer. Convery