FISCHER | TAYLOR | CHENG Accounting for Private Not-for-Profit Organizations

Learning Objectives (1 of 2) 1.Distinguish not-for-profit organizations from other entities. 2.Explain the jurisdictions of the GASB and the FASB with regard to not-for- profit organizations. 3.Explain how financial accounting and reporting for private not-for-profit organizations differs from that of state and local governments. 4.Demonstrate an understanding of the accounting for unrestricted and restricted contributions. 5.Demonstrate an understanding of the accounting for expenses in a private not-for-profit organization. 6.Identify and describe the financial statements and notes disclosure required of not-for-profit organizations. COPYRIGHT © 2012 South-Western/Cengage Learning 2

Learning Objectives (2 of 2) 7.State the requirements an organization must meet to be classified as voluntary health and welfare, and describe the accounting for public support. 8.Explain how to account for revenues and costs in a VHWO. 9.Prepare financial statements for not-for-profit organizations. 10.Prepare journal entries related to typical events of a not-for-profit organization. 11.(Appendix) Describe the typical funds used to account for VHWO transactions, and prepare optional VHWO fund-based financial statements. COPYRIGHT © 2012 South-Western/Cengage Learning 3

Not-for-profit organizations AICPA defines a not-for-profit organization as an entity that has significant contributions from resource providers who do not expect to get anything in return has an operating purpose other than to make a profit has no owners COPYRIGHT © 2012 South-Western/Cengage Learning 4

Not-for-profit accounting and financial reporting GASB: jurisdiction over governmental not-for- profits –Public colleges and universities –Government hospitals FASB: jurisdiction over all private not-for-profit organizations –Voluntary health and welfare organizations (VHWOs) –Private colleges and universities –Private health care providers –Other private not-for-profits COPYRIGHT © 2012 South-Western/Cengage Learning 5

PRIVATE NOT-FOR-PROFIT ORGANIZATIONS Accounting for COPYRIGHT © 2012 South-Western/Cengage Learning 6

General concepts Full-accrual basis of accounting Financial reporting emphasizes the organization as a whole Net asset classes distinguish between resources that are externally restricted and those internally designated –Unrestricted –Temporarily restricted –Permanently restricted—are used instead of fund balances. COPYRIGHT © 2012 South-Western/Cengage Learning 7

Revenues, Gains, and Contributions Distinguish between contributions and exchange or agency transactions Contributions with donor-imposed restrictions affect restricted assets All other are exchange transactions and affect unrestricted net assets Flow-through awards are treated as agency transactions COPYRIGHT © 2012 South-Western/Cengage Learning 8

Contributions Unconditional transfers of assets; cancellation of liabilities Nonexchange transactions –Donated assets (cash, investments, or property) are recorded at FMV when received as unrestricted, temporarily restricted, or permanently restricted –Restrictions are used for those not spendable in current period, or donor-specified for specific operating purpose, purchase of fixed assets, or future time period, or permanently COPYRIGHT © 2012 South-Western/Cengage Learning 9

Contribution Recognition Exceptions Donated services –Recorded at FMV only if they create or enhance nonfinancial assets or require specialized skills that would have been purchased Donations of art work and treasures –Optional if going into collection that will be held for research or public exhibition –If sold, proceeds will be used to acquire other collectibles COPYRIGHT © 2012 South-Western/Cengage Learning 10

Pledges Recorded in the period made if unconditional or when conditions lapse –Record allowance for uncollectible –Discount to present value if beyond a year Unrestricted pledges are reported as unrestricted revenue Restricted pledges are reported as either temporarily or permanently restricted revenue COPYRIGHT © 2012 South-Western/Cengage Learning 11

Pledges Unconditional –Recognize as a revenue or support in year made –Payable in the future: temporarily restricted Conditional –Depend on the occurrence of uncertain future events –Initially record as "refundable advances” –Recognize as revenue when the conditions are substantially met COPYRIGHT © 2012 South-Western/Cengage Learning 12

Contributions: Donor-Imposed Restrictions and Reclassifications Unrestricted: donor does not stipulate how the asset should be used Temporarily restricted: donor imposes a restriction –Identifies a particular program or capital asset –Specifies time period that the donated asset may be used –Restriction expires when The stipulated time has elapsed The stipulated purpose has been fulfilled The useful life of the donated asset has ended Permanently restricted Reclassification Decreases temporarily restricted net assets Increases unrestricted net assets COPYRIGHT © 2012 South-Western/Cengage Learning 13

Contributions Distinguished from Exchange and Agency Transactions Exchange –Reciprocal transfers in which each party receives and sacrifices approximately equal value –Accounted for as increases in unrestricted assets. Agency –Assets received on behalf of another individual or organization –Offset with a payable to the alternative beneficiary unless The donor has granted variance power to the not-for-profit Recipient organization and beneficiary are financially interrelated. COPYRIGHT © 2012 South-Western/Cengage Learning 14

Investments Permanently restricted contributions: endowments Earnings on endowment investments –reported in the period earned –Credit unrestricted revenue or temporarily restricted revenue Must report at fair value –Equity securities with readily determinable values –All debt securities at fair value. Uniform Prudent Management of Institutional Funds Act, where effective –Earnings on endowment not explicitly restricted are classified as temporarily restricted net assets COPYRIGHT © 2012 South-Western/Cengage Learning 15

Accounting for Expenses Recognize on accrual basis; all expenses reduce unrestricted net assets Segregate expenses –Program Expenses: direct and indirect cost of providing or conducting a particular mission –Supporting Expenses: management and general expense; fund-raising activities COPYRIGHT © 2012 South-Western/Cengage Learning 16

Private Not-For-Profit Financial Statements Emphasize organization as a whole Funds use is optional –Used for internal management –To supplement external financial statements Required external financial statements –Statement of financial position –Statement of activities –Statement of cash flows Additional requirement for VHWOs –Statement of functional expenses COPYRIGHT © 2012 South-Western/Cengage Learning 17

Statement of Financial Position Report organization-wide totals for assets, liabilities, and net assets Required liquidity disclosure –Usually met by sequencing assets and liabilities according to nearness of conversion to or use of cash Cash and contributions receivable restricted by donors for investment in land, building, and equipment are reported as ‘‘assets restricted to investment in land, building, and equipment” COPYRIGHT © 2012 South-Western/Cengage Learning 18

Statement of Financial Position Net assets replace Fund Balance Net assets are categorized as –Unrestricted: Assets unrestricted by donors, assets formerly temporarily restricted by donors and have become unrestricted; may include board-designated assets –Temporarily restricted: Donor-imposed restriction that will lapse when restriction is met –Permanently restricted: A donor-imposed restriction (e.g., principal of a permanent endowment) COPYRIGHT © 2012 South-Western/Cengage Learning 19

Statement of Activities Reports revenues, expenses, gains, losses, and reclassifications (between classes of net assets) Minimum requirements –Organization-wide totals –Changes in net assets for each class of assets –All expenses recognized only in the unrestricted classification A display of a measure of operations in the statement of activities is permitted COPYRIGHT © 2012 South-Western/Cengage Learning 20

Statement of Cash Flows Categories –Operating –Financing –Investing Similar to business organizations COPYRIGHT © 2012 South-Western/Cengage Learning 21

Not-for-profit Mergers and Acquisitions Carryover method –One nonprofit organization merges with another nonprofit organization –The new entity reports combined assets and liabilities using the amounts reported in the merging entities' separate financial statements at the merger date Acquisition method –One nonprofit acquirers another nonprofit organization –Acquirer recognizes and measures at fair value the identifiable net assets acquired from the acquiree along with any noncontrolling interest –Goodwill recognized only if the acquiree is expected to operate like a business (charging fees for services) COPYRIGHT © 2012 South-Western/Cengage Learning 22

VOLUNTARY HEALTH AND WELFARE ORGANIZATIONS (VHWOs) Accounting for COPYRIGHT © 2012 South-Western/Cengage Learning 23

VHWO Qualifications Primary source of revenue is from donors who do not directly benefit for the organization’s programs Program must be in the area of health, welfare, or community service COPYRIGHT © 2012 South-Western/Cengage Learning 24

VHWO Principles and Procedures Use full accrual accounting Major resource categories –Public support –Revenues Financial reports must show expenses on a program basis COPYRIGHT © 2012 South-Western/Cengage Learning 25

VHWOs: Public Support Accounts used to record receipts of assets from public support: Contributions Special Events Support Legacies and Bequests Received from Federated and Nonfederated Campaigns COPYRIGHT © 2012 South-Western/Cengage Learning 26

Release of Donor Restrictions Temporarily restricted donor contributions are released from restriction when the organization spends for the purpose the donor specified or when the specified time period occurs Release is done by reclassifying the net assets COPYRIGHT © 2012 South-Western/Cengage Learning 27 VHWOs: Public Support

Recording Certain Donations Volunteers –Services must meet criteria for recognition –Recognize as an expense and a contribution at fair market value Donated Materials –When received recognize both inventory and unrestricted contributions at fair market value Free Rent –When received recognize both rent expense and unrestricted contributions at fair rental value COPYRIGHT © 2012 South-Western/Cengage Learning 28 VHWOs: Public Support

VHWOs: Revenues Unrestricted revenues –Membership dues revenue –Program services fees –Sales of publications and supplies Investment revenues (restricted or unrestricted) –Investment revenue for interest, dividends, and other earnings –Realized gain on investment transactions –Net increase (decrease) in carrying value of investments COPYRIGHT © 2012 South-Western/Cengage Learning 29

VHWOs: Investments Carry investments at fair value Impairment recorded for permanent reductions in fair value Unrealized appreciation (depreciation) is shown separately in net increase (decrease) in carrying value of investments Gains/Losses on investments are considered increases or decreases in unrestricted net assets unless restricted by donor or law COPYRIGHT © 2012 South-Western/Cengage Learning 30

VHWOs: Program and Supporting Services Costs Operating statements will not show typical expenses Program services –Shows the cost of each program or service the organization provides Supporting services –Fund-raising –Management and general costs –Membership development activities COPYRIGHT © 2012 South-Western/Cengage Learning 31

VHWO: Financial Statements Statement of financial position Statement of activities Statement of cash flows Statement of functional expenses –Supplements the statement of activities –Provides detailed information on the expenses for each program and support service COPYRIGHT © 2012 South-Western/Cengage Learning 32

Appendix: Optional Fund Accounting for VHWOs Funds –Current unrestricted fund –Current restricted fund –Land, building, and equipment (plant) fund –Endowment fund –Agency (custodial) fund COPYRIGHT © 2012 South-Western/Cengage Learning 33

Appendix: Pooling of Investments Combine the investments of various funds into one group or pool –Provide greater flexibility at lower cost –Provide diversification to spread the risk Individual investments lose their identity as to fund –Contributing funds carry their investment account with an amount representing its portion of the pool Gains (losses) are allocated to each participating fund COPYRIGHT © 2012 South-Western/Cengage Learning 34