1. BUILDING FUTURES Armanino McKenna LLP Accounting Solutions Non-profit Accounting Basics June 2, 2009 Bookkeeping September 19, 2008

2. Non-profit Organizations (NPO) Discussion Topics I.NPO Structure – How are they structured? II.NPO Chart of Accounts structure – What makes them unique and different? III.Revenues, Contributions, and Support – What is this money we received? IV.Classification of contributions – Is it unrestricted, temporarily restricted or permanently restricted? V.Expenses – Learn about the unique categories for nonprofits VI.Net Asset balance by restriction – Determine net asset roll forward schedule VII.Accounting for Multi-year Contributions Receivable – Discounting

3. I. Non-profit Organizations (NPO) How are they structured? NPOs Legal structure Corporations (use articles of incorporation, by-laws, minutes) Apply to the IRS for exemption Identify their exemption type Once receive IRS exemption then apply for California exemption Tax Return Filed 990 Federal Information Return and State similar return For Profit Businesses Legal structure C-Corporations, S-Corporations, Partnerships, LLC, LLP, Sole proprietor …. Tax Return Filed Various Income Tax Returns for federal and state

4. I. Non-profit Organizations (NPO) How are they structured? continued NPOs Business Purpose _ _ _ For Profit Businesses Business Purpose _ _ _

5. I. Non-profit Organizations (NPO) How are they structured? continued NPOs Business Purpose Charitable, Religious, Education, Homeowners & Tenants’ Assoc., Relief Organizations (Org.), Healthcare Org., Veterans’ Org., Social Welfare Org., Political, Recreational, Employee Assoc., Police & Firefighters Assoc., Organizations supported by Government For Profit Businesses Business Purpose No restrictions as long as it is legal

6. I. NPO How are they Structured? continued Basis of Accounting Non-Profit Organization Tax Basis Cash Accrual Other (modified cash) Financial Statements Same as above GAAP (Generally Accepted Accounting Principles) FASB (Financial Accounting Standards Board) SFAS (Statement of Financial Accounting Standards) (Most common reporting basis is GAAP and Religious ones are modified cash) For Profit Business Tax Basis Cash Accrual Other (modified cash) Financial Statements Same as above GAAP (generally accepted accounting principles)

7. I. NPO How are they Structured? continued Non-Profit Basis of Accounting Accounting & Reporting Standards exclusive to Non-Profits SFAS 116 (Contributions received and made by NPOs) SFAS 117 (Financial Reporting for NPOs) SFAS 124 (Accounting for Investments held by NPOs) SFAS 136 (NPOs that hold and raise funds for other NPOs) Governing Agencies Attorney General and related legislation like SB 1262 (Senate Bill 1262) IRS & FTB (Internal Revenue Service and Franchise Tax Board) State Board of Equalization Others??

8. II. NPO Chart of Accounts Chart of Accounts (COA) need to consider the needs of the organization and ability or limitations of their accounting software. Usually the building blocks of financial stmts. The ability to track the following items is advantageous:  Net assets (equity) by restriction  Multiple cost centers & or programs  Multiple grants/ funding sources  Expenses by functional category (Program, Mgmt & General, and Fund Raising)

9. II. NPO Chart of Accounts continued Accounts that are unique or that you may think are unusual Assets Accounts receivable (AR), trade Current & Long-term AR Grants and contracts receivable Contributions (pledges) receivable Allowance for doubtful accounts Other AR accounts Discount on long-term receivables

10. II. NPO Chart of Accounts continued Accounts that are unique or that you may think are unusual Liabilities Deferred Income Advance Deposits Funds held for others (agency transactions) Net Assets (Equity) Unrestricted Temporarily Restricted Permanently Restricted

11. III. Revenues, Contributions, and Support – What is this money we received? Revenues, Contributions, Support Contributions (what is this?) Exchange transactions Grants and contracts reimbursements (what are these?) Investment Income Gifts-In-Kind Net Assets released from restrictions

12. IV. Classification of contributions NPO’s classify contributions received based on donor restrictions Contributions received can be: Unrestricted (no restriction placed by the donor) Undesignated Board Designated Temporarily restricted (donor imposed restriction) (a restriction of time or purpose) Permanently restricted (donor imposed restriction) (the original gift $ may never be spent) Net Assets Released from restriction (restrictions as to time or purpose have been met)

13. V. Expenses – Unique categories for NPOs NPOs group expenses under 3 groups (possibly 4) and then by natural account code within those groups 1.Program 2.Management & General 3.Fund Raising 4.Membership (if applicable)

14. VI. Net Asset Balances by Restriction NPOs must keep track of their Net Asset Balances (Equity) by 3 types and it is possible to have multiple groups within those types 1.Unrestricted Undesignated Board designation 2.Temporarily Restricted Schedule by purpose and time restrictions Schedule by donor if unique 3.Permanently Restricted Schedule by donor & restrictions

15. VI. Net Assets Continued Roll-forward Schedules Sample NPONet Asset Roll-forward Schedule Beg. Bal.FYE 6/30/08End. Bal. Restriction6/30/2007ContributionsIncomeExpensesTransfers6/30/2008 Annual Fancy Ball - 100,000 400,000 (250,000) - New Building 500,000 25,000 20,000 - 545,000 New Computers 100,000 - (100,000) - Scholarships 250,000 10,000 (185,000) 85,000 Send Kids to Camp 600,000 100,000 - (600,000) 250,000 350,000 Net Balance 1,450,000 135,000 30,000 (885,000) 250,000 980,000

16. VII. Accounting for Multi-year Contributions Receivable – Discounting If you have a receivable that is expected to be collected after 12 months then you need to determine the Net Present Value (NPV) of that future payment as of today. A risk free rate of return is assumed in calculating the discount. US Treasury Note is usually used (3% was used in this calculation). Receivable due in 2010 $50,000 Discount ($4,240) Net Present Value in 2008 $45,760 NOTE: The receivable is recorded at gross value and a discount account is created similar to an allowance for doubtful accounts account type.

17. Open Discussion & Questions ___________________________________________________________________