1. Accounting for Private Not-for-Profit Organizations
Essentials of Accounting for Governmental and Not-for-Profit Organizations
Chapter 10
Accounting for Private Not-for-Profit Organizations
McGraw-Hill/Irwin
Copyright © 2013 by The McGraw-Hill Companies, Inc. All rights reserved.

2. Overview of Chapter 10
This chapter focuses on how the Financial Accounting Standards Board and AICPA Audit Guides apply to private not-for-profits, generally.
Who has standard setting authority?
Accounting and reporting for Voluntary Health and Welfare and Other Not-for-Profits
Not-for-profits and performance evaluation

3. Standard Setting Authority
GASB
Authority over government related not-for-profits
GASB 34 Special Purpose Entity requirements may apply
GASB 35 for Public Colleges and Universities
FASB
Private not-for-profits
AICPA audit guides also applicable
Major SFASs 93, 116, 117, 124, 136, 164

4. Private Not-For-Profits
FASBs 116 & 117 were written in order to bring comparability between the financial reports of Private Colleges, Hospitals, Voluntary Health and Welfare Organizations and Other Not-for-Profits.
However, because of unique features of the college and hospital settings, these entities are covered in greater detail in separate chapters.

5. VHWOs and Other Not-for-Profits
The remainder of this chapter focuses on Voluntary Health and Welfare Organizations and Other Not-for-Profits.
What are the characteristics of a VHWO?
Promotes general health and well-being of the public.
Tends to operate mainly from grants and gifts.
Examples: United Way, American Cancer Society, Girl Scouts, YMCA.

6. Understanding the Basic Financial Statements
The three required statements are:
Statement of Financial Position
Statement of Activities
Statement of Cash Flows
Voluntary Health and Welfare Organizations must also prepare a Statement of Functional Expenses
This statement is recommended but not required for other not-for-profits.

7. Basis of Accounting and Use of Funds
Accrual Basis: The accrual basis is required.
This includes calculation and recording of depreciation expense.
The financial statements report expenses, not expenditures or encumbrances.
Funds: Many Private Not-for-profit organizations use fund designations internally for bookkeeping purposes, but the financial statements are on an overall basis and do not make reference to funds except in the notes or supplemental schedules

8. Statement of Financial Position
Assets and liabilities are not required to be classified as current and non-current, but may be.
Long-term assets and debt are reported.
Net Assets (equities) are classified as:
Unrestricted
Temporarily restricted - time or purpose restrictions
Permanently restricted

9. Statement of Activities
The statement must distinguish changes in net assets that are permanently restricted, temporarily restricted, and unrestricted. Restrictions must be outside donor-imposed
Can use three separate statements, columns or other formats
Revenue vs support:
Support: is a class of revenues limited to gifts such as contributions
Exchange transaction, such as sales of service, are labeled “revenues”

10. Statement of Activities
Expenses
All expenses are reported in the unrestricted column
Classify expenses as program or supporting services.
Restrictions
Temporarily restricted resources must be ‘released’ or moved from the temporary column to the unrestricted column as restrictions are satisfied.

11. Statement of Cash Flows
FASB uses 3 categories
Operating – Interest expense, interest revenue, and gains and losses are classified as operating
Investing – Purchases or sales of fixed assets as well as purchases or sales of long-term investments
Financing – Issuance of debt; repayments of principal of debt
Not-for-profits have the option of using either the indirect approach or the direct approach plus reconciliation.

12. Statement of Functional Expenses
This is a matrix (spreadsheet) of expenses where the columns are the program or supporting activities and the rows are the type of expense (salaries, supplies, depreciation, etc.)
This statement shows more detail than the Activity Statement on how the expenses were allocated to programs and supporting services.
The purpose of this statement is to show the details of the entity’s spending on direct programs activities versus overhead (supporting services).
It helps donors assess entity efficiency.

13. Accounting for Contributions
FASB Statement 116 requires contributions, including unconditional promises of support, to be recognized as contribution revenue in the period received at their fair market value.

14. SFAS 116: Accounting for Contributions Received and Made
SFAS 116 does not change the accounting for exchange transactions (earned revenues). Care should be taken to identify whether membership dues are contributions or exchanges.
Not-for-profit organizations must distinguish between contributions that are permanently restricted, temporarily restricted, and unrestricted. Such restrictions are donor-imposed.

15. Accounting for Pledges
Under accrual basis, unconditional pledges can be recorded even before the cash is received.
Record the receivable at the present value, net of an allowance for estimated uncollectibles
If there is expected to be an extended time period before the gift is received record the receivable at its present value:
The present value will increase as the expected date of receipt approaches. The change in present value is recorded as additional contribution revenue rather than interest.

16. Contributed Services Should contributed services be recorded?
Only if they
Create or enhance a nonfinancial asset OR
Require specialized skills, were provided by someone possessing those skills, and would have been purchased if not donated.

17. Contributed Services If recorded, how should they be recorded?
If a nonfinancial asset is enhanced:
Dr. Asset (for the value of the services).
Cr. Contribution revenues
Otherwise:
Dr. Expense (for the value of the services).

18. Exchanges vs. Contributions
Contributions are considered as revenues as soon as received (or pledged) even if the use is restricted. But depending on the terms of the contribution, may later be reclassified from temporarily restricted to unrestricted.
If money is received in advance of providing the service on an exchange-like transaction, the amount received is considered Deferred Revenue.

19. Intentions to Give Pledges are recorded if unconditional.
Intentions to give (oral promises, wills) are often not legally enforceable, as the donors retain legal right to change their mind.
Intentions to give are not recorded until the actual gift materializes.

20. Fixed Assets
Fixed assets, whether purchased or donated, can be recorded either as
Unrestricted assets, or
As temporarily restricted.
If initially recorded as temporarily restricted an amount equal to depreciation must be released each year to unrestricted assets.
NOTE: Some not-for-profits may prefer the later approach because readers of the financial statements may think ‘unrestricted net assets’ means expendable funds -- listing the long-term assets as temporarily restricted decreases requests to spend reserves that are not really available in a liquid form.

21. Performance Evaluation
FASB 117 presents not-for-profit statements in a format similar to business statements.
Although revenues and expenses are measured on the accrual basis, the “bottom line” (Change in net assets) is not directly comparable to that of a business.
Since many of the revenues are non-exchange, Change in Net Assets is not a measure of organizational effectiveness.

22. Is it Proper for Not-for-Profits to Have a Profit?
Legitimate reasons for a not-for-profit to have a profit are:
To replace and expand equipment and facilities.
To provide working capital.
To retire debt.
To continue programs beyond the time frame when seed money grants are available.

23. Program Service Expenses/Total Expenses
Program Expense Ratio
The most commonly used ratio for not-for-profit is the Program Expense Ratio:
Program Service Expenses/Total Expenses
Program Services include expenses associated with performing the mission of the organization
Supporting Services include management and general; fund raising and membership development

24. Program Expense Ratio
A high ratio of program expense will assure donors that the organization spends the bulk of dollars donated for its mission oriented activities rather than for overhead
The organization may need to keep detailed time records to properly report costs (e.g. salary) associated with both program and supporting activities.

25. Program vs. Supporting Expense Allocations
Because of the importance of the program expense ratio, care must be taken in the allocation of joint costs between program and supporting services.
Salaries and depreciation must be allocated to the two functions on an equitable basis.
Fund raising appeals sometimes also include program elements
and not-for-profits would like to allocate some of these costs to programs to improve the program expense ratio

26. Program vs. Supporting Expense Allocations cont’d
The criteria to determine whether part of the cost of a fund raising campaign applies to program expense are:
Purpose: Does the communication help meet program goals and functions?
Audience: General audience, not just sent to last year’s donors.
Content: Calls for specific action directed at program goals.

27. SFAS 124: Accounting for Certain Investments Held by Not-for-Profit Organizations
FASB requires investments with readily determinable market values to be recorded at fair market values and gains and losses be recognized

28. Transfers of Contributions to Not-for-Profits
Assume a not-for-profit receives assets from a donor for distribution to a beneficiary:
ISSUE: If cash or other assets are held by a not-for-profit with instructions to release this money for specified parties, is this a revenue or is it an agency relationship (liability)?

29. SFAS 136: Transfer of Assets to a Not-for-Profit
If the not-for-profit agrees to transfer the assets to a specified beneficiary, the not-for-profit is deemed to merely be acting as an agent and a liability, rather than a contribution, is recorded.
If the not-for-profit has the ability to redirect the assets to another beneficiary, or if the not-for-profit and beneficiary are related, the assets are recorded as a contribution.

30. Transfers of Contributions to Not-for-Profits
CENTRAL CONCEPT: It is a revenue if the not-for-profit can ‘control’ who gets the money, otherwise it is credited to a liability account because the not-for-profit is only acting as an agent on behalf of the donor.
EXCEPTION: If the party receiving the money and the not-for-profit are financially interrelated, then this may be a revenue to the not-for-profit.

31. Consolidation of not-for-profits
The AICPA Audit and Accounting Guide, Not-for-Profit Organizations, requires consolidation of entities in which a not-for-profit organization has a controlling financial interest.
Control may be determined by a majority ownership interest or by holding a majority voting interest in the governing board of an entity in which the not-for-profit has an economic interest through contractual or affiliation agreements.
This is similar to practices followed in the public sector with component unit reporting.

32. Mergers of not-for-profits
FASB Statement No. 164, Not-for Profit Entities: Mergers and Acquisitions, permits two different accounting treatments for combinations by not-for-profit organizations. The central issue is whether the combination is a merger or an acquisition

33. Mergers of not-for-profits
A merger is a transaction in which the governing bodies of two or more not-for-profit entities relinquish control of those entities to create a new not-for-profit entity. To qualify as a new entity, the combined entity must have a newly formed governing body. Although commonly there will be a new legal entity, that is not a requirement.
The resulting not-for-profit entity will account for the merger using the carryover method. Under the carryover method:

34. Carryover method – book values “carryover” to new entity
The new entity recognizes the assets and liabilities of the separate merging entities in the amounts (and classifications) reported in the financial statements of the merging entities.
No internally developed intangible assets (such as goodwill) are recognized.
The entity resulting from the merger is a new reporting entity, with no activity before the date of the merger.

35. Acquisition Method
Combinations not meeting the definition of a merger are reported as acquisitions.
The accounting treatment is similar to the purchase method of accounting for business combinations
The essential element of the acquisition method is that the entity records the acquired assets and liabilities at their fair values, not at the acquired entity’s book values.

36. Acquisition Accounting
The not-for-profit entity recognizes the identifiable assets acquired and liabilities assumed at their fair values at the date of acquisition.
Noncontrolling interest (if any) is reported at fair value at the acquisition date and is adjusted in subsequent periods in a manner similar to business organizations.
Goodwill may be reported.

37. Goodwill
Not-for-profit entities that derive their revenues from business-like activities are required to measure and report goodwill as an asset in a similar manner as businesses.
However, entities that derive their revenues primarily from contributions are to expense the goodwill at date of acquisition.