1. Accounting for Not-for-Profit Organizations
Chapter 13
Accounting for Not-for-Profit Organizations

2. Learning Objectives After studying Chapter 13, you should be able to:
Distinguish not-for-profit organizations (NFPs) from entities in the governmental and commercial sectors of the U.S. economy
Identify the authoritative standards-setting body for establishing GAAP for nongovernmental NFPs 1

3. Learning Objectives (Cont’d)
Explain financial reporting and accounting for NFPs:
Required financial statements
Classification of net assets
Accounting for revenues, gains, and support
Accounting for expenses
Accounting for assets 2

4. Learning Objectives (Cont’d)
Describe the accounting for NFP combinations and consolidations
Prepare financial statements in accordance with the generally accepted accounting principles governing NFP organizations
Describe optional fund accounting

5. Not-for-Profit Sector
The not-for-profit sector of the U.S. economy is very diverse, consisting of many different kinds of organizations
The majority of NFPs are philanthropic and quite often rely on contributions and the services of volunteers
Some NFPs are designed to serve the interest of the organizations’ members
Most are not governments or governmental in nature
A minority of NFPs are owned or operated by governments

6. How Does a Nongovernmental NFP Differ from a Business Entity?
Contributions of resources from
providers who do not expect a
proportionate return (i.e., nonexchange
transactions)
Operating purposes other than to earn a profit for owners (i.e., no one expects a return on their investment)
Lack of defined ownership (i.e., lack of owner oversight) 1

7. How Does a Nongovernmental NFP Differ from a Governmental Entity?
It was not created by a government, but rather by individuals who are not placed in power through popular election or appointment by government officials
It does not have the power to levy taxes
It may not have the power to issue tax-exempt debt 1

8. GAAP for Nongovernmental NFPs
The FASB, not the GASB, sets accounting and financial reporting standards for nongovernmental not-for-profit organizations
Unless otherwise indicated, all FASB standards apply to NFP organizations, but the FASB Accounting Standards Codification (ASC) in Section 958 apply specifically to NFPs 1

9. Financial Statements for NFPs
Statement of financial position (Ill. 13-2)
Statement of activities (Ill. 13-3)
Statement of cash flows (Ill. 13-4)
Statement of functional expenses for VHWOs (Ill. 13-5)
Notes to the financial statements 1

10. Statement of Financial Position
Can also be called a balance sheet
Net assets (the difference between assets and liabilities) must be classified into three classes:
Unrestricted
Temporarily restricted
Permanently restricted
Flexibility in displaying information, including fund-based data, is allowed as long as net assets are classified 1

11. Statement of Activities
Reports on changes in all classes of net assets for a period of time
Changes take the form of revenues, gains, 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 1

12. Statement of Activities (Cont’d)
FASB allows flexibility in presenting information; it can be presented as a single column or three separate columns, one for each class of net assets
Within net asset classes additional classifications can be used, such as operating and nonoperating, expendable and nonexpendable, earned and unearned, and recurring and nonrecurring
Expenses are reported on the face or in the notes by functional categories (i.e., program expenses vs. support expenses) 1

13. Statement of Cash Flows
NFP organizations follow the same standard as for-profit entities when preparing the statement of cash flows
Cash flows are reported as changes in operating, investing, and financing activities
The indirect method or direct method (with reconciliation) may be used for reporting cash flows from operating activities 1

14. Statement of Cash Flows (Cont’d)
Unrestricted contributions and gifts are reported as part of 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 1

15. Statement of Functional Expenses
VHWOs must present this statement showing both functional expenses and natural (object or line item) expenses (Ill. 13-5)
Salaries Adoption Mgt and General
Supplies Counseling Fund-raising
Depreciation Education
Functional Expenses
Natural
Expenses
Program
Support 1

16. Revenues
Traditionally, revenues have been defined as increases in unrestricted net assets that arise from 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 1

17. Support Support is a category of revenue that arises from
receipt of resources in nonexchange transactions in
which the donor derives no tangible benefit from the
recipient agency
Contributions – support in the form of cash, other assets or services (or cancellation of liabilities)
Pledges – the promise of a contribution 1

18. Support Increases:
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 from the assets

19. Pledges or Promises to Give
Unconditional pledges depend only on the passage of time or demand by the promisee for performance. Record these as support in the period made
Conditional pledges 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 1

20. Recording Pledges
Unconditional pledges received in less than a year can be reported at net realizable value (at year end adjust for any estimated uncollectible amount)
Long-term unconditional pledges are generally recorded at fair value
Apply fair value criteria to determine the present fair value of future receipts
The difference between the pledge amount and the fair value amount is recorded as a discount that is amortized as the pledges are received

21. Recording Pledges (Cont’d)
Example: A charity receives pledges of $1,000 to be paid within the next year. It also receives pledges of $5,000 to be collected 2 and 3 years from now. It is estimated the fair value of the long-term pledges is $4,760.
Debit Credit
Contributions Receivable 6,000
Contributions—Temporarily Restricted 5,760
Discount on Contributions Receivable

22. Donated Materials
Donated materials (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 objective, clearly measurable basis for fair value can be established 1

23. Contributed Services
Contributed services should be recorded as contributions and asset/expense (salaries expense) at fair value if the services:
Create or enhance nonfinancial 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., accountants or nurses)

24. Recording Contributed Services
A certified electrician contributes $10,000 in services to wiring a new building for a charity (enhances nonfinancial asset)
Debit Credit
Building 10,000
Contributions—Unrestricted 10,000
A nurse contributes $3,000 in services to provide professional services at the free clinic (these services are part of the clinic’s mission)
Salary expense 3,000
Contributions—Unrestricted 3,000

25. Special Events
Special events are fund-raising activities in which something of tangible value is offered to donor participants for a payment that includes a contribution
Examples include:
Dinners
Dances
Golf outings
Bazaars
Cookie sales

26. Special Events (Cont’d)
If special events give rise to incidental revenue, such as advertising, this revenue is reported in the special events category of support
Special event revenue and direct costs of the event should be reported at gross amounts, unless the expenses are peripheral or incidental in nature, in which case they can be netted against the gross revenue

27. Contributions Involving an Intermediary
An intermediary is a
fiduciary, assisting with the
transfer of assets between a donor and a beneficiary
As a general rule, the intermediary recognizes an asset (debit) and a liability to the beneficiary (credit) when it receives a contribution from the donor for the beneficiary
In this instance, the beneficiary recognizes the contribution as support revenue

28. Contributions Involving an Intermediary (Cont’d)
An exception occurs if one of the following situations exists:
The intermediary has “variance power,” which allows it to redirect the assets to another beneficiary
The intermediary is financially interrelated with the beneficiary organization (e.g., a captive fund-raising foundation)
If one of the exceptions occurs the intermediary recognizes the contribution as support revenue rather than as a liability

29. Expenses Recognized on the accrual basis of accounting
All expenses are reported as decreases in unrestricted net assets
Report depreciation expense for all capital assets, except collections 1

30. Joint Costs with a Fund-Raising Appeal
Report these as fund-raising support expenses, rather than allocating them to functional programs, such as education or advocacy
Criteria to be applied includes considering
Purpose
Audience
Content
Q: Can you define each criterion?

31. Investments
Equity securities that have readily determinable values and debt securities are reported at 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 1

32. Investments (Cont’d)
NFPs are not required to classify investments into trading, available-for-sale, and held to maturity
Unless restricted by donor or law, realized and unrealized gains/losses are adjustments to unrestricted net assets
FASB requires extensive disclosures regarding investments and related income 1

33. Collection Items
Collections include works of art, historical treasures, or other types of similar assets
NFPs can opt to recognize or not recognize collections
If recognized
Record at cost if acquired and at fair value if contributed
Depreciation is not recorded if the economic benefit of the collection is used so slowly the estimated useful life is extraordinarily long

34. Collection Items (Cont’d)
To not recognize assets related to a collection the assets must meet the definition of a collection
Held for public exhibition, education, or research in furtherance of the public interest
Protected, kept unencumbered, cared for, and preserved
Proceeds from sale of collection items are to be used to acquire other items for the collection

35. Consolidations and Combinations
NFPs have varied relationships with other NFPs, for-profit businesses, and governments that could result in:
Consolidations – generally occur if the NFP has a controlling financial interest in another organization
Combinations – occur through merger
or acquisition 1

36. Optional Fund Accounting
NFPs may use fund accounting for internal purposes to facilitate reporting back to grantors or funding agencies
FASB permits NFPs to present disaggregated data classified by fund groups, as long as the aggregated net asset statements are also presented 1

37. Concluding Comments There are many types of NFP organizations
GAAP for nongovernmental NFPs is set by FASB
Unique to NFPs is a dependence on contributions
Although there are many accounting similarities between for-profit and NFP organizations there are also several accounting issues unique to NFP organizations
END 1