Essentials of Accounting for Governmental and Not-for-Profit - PowerPoint by raa12791

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									  Essentials of Accounting for
Governmental and Not-for-Profit
         Organizations
          Chapter 10:
  Accounting for Not-For-Profit
         Organizations
Overview of Chapter 10
 Who has standard setting authority?
 Accounting for Voluntary Health and
  Welfare and Other Not for Profits
 Nonprofits and performance evaluation
Standard setting authority
   GASB
    – Authority over government related nonprofits
    – GASB34 Special Purpose Entity requirements may
      apply
    – GASB35 for Public Colleges and Universities
   FASB
    – Private nonprofits
    – AICPA audit guides also applicable
    – Major FASBs 93, 116,117, 124
Private nonprofits
   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 peculiarities of the college and
    hospital setting these entities are covered in separate
    chapters.
   This chapter focuses on how Financial Accounting
    Standards Board and AICPA Audit Guides apply to
    private nonprofit other than
    – Colleges, hospitals, mutual banks, mutual insurance
       companies, pension funds, trusts and farm cooperatives   .
VHWOs and other NFPs
 The remainder of this chapter focuses
  on Voluntary Health and Welfare
  Organizations and Other NFPs.
 What is 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.
Understanding the basic
financial statements
   You may find this chapter easier to understand if you
    look at the basic financial statements required by
    FASB 117, starting p. 288, then return to the detailed
    entries.
   The three required statements are:
    – Statement of Financial Position p. 290
    – Statement of Activities p. 289
    – Statement of Cash Flows p. 291
   VHWOs must also prepare a Statement of Functional
    Expenses p. 292
    – This statement is recommended but not required for other
      NFPs but may have to include similar info in notes.
Statement of Financial
Position p. 290
   Assets/liabilities not required to be classified
    as current and noncurrent, but could be used.
   Does include long-term assets and debt.
   Net Assets classified as:
    – Unrestricted
    – Temporarily restricted - time or purpose restrictions
    – Permanently restricted
Statement of Activities p. 289
   Shows activity for all three net asset
    categories:
    – Unrestricted, temporarily restricted, and
      permanently restricted plus total
    – Can use three separate statements or other
      formats
   Revenues, gains, and other support:
    – Revenues: exchange transaction, sales of
      service
    – Support: gifts such as contributions
Stmt of Activities p. 289 cont‟d
 Only the unrestricted column has
  expenses.
 Temporarily restricted resources must
  be „released‟ or moved from the
  temporary column to the unrestricted
  column as they are spent -- shows up as
  a release in revenues and related
  expense in unrestricted column.
Stmt of Activities p. 289 cont‟d
   Donated plant assets are typically recorded
    initially in temporarily restricted … released
    to unrestricted as matching depreciation
    expense is recorded.
     – Option: can record donated plant assets all
       in unrestricted.
   In expenses section, management and
    general; fund raising and membership
    development expenses are often grouped
    under a heading: “SUPPORTING
    EXPENSES” --- other expenses labeled as
    “PROGRAM EXPENSES”
Statement of Cash Flows p. 291
   FASB uses 3 categories (vs. SLGs using 4)
     – Operating -- Interest exp/ interest rev/ gains and
       losses here
    – Investing -- Purchases/sales of long-term assets as well
       as purchases/sales of long-term investments
    – Financing -- Issuance of nonoperating debt; repayments
       of principal of debt
   May also have noncash investing/financing
    section.
   Have the option of using either the indirect
    approach or the direct approach plus
    reconciliation.
Stmt of Functional Expenses p. 292
   This statement shows more detail than the Activity
    Statement on how the expenses were allocated to
    programs and supporting services.
   Programs are your primary activities.
   Supporting services include management, fund
    raising, and membership development.
   The purpose of this statement is to show the details
    of the entity’s spending on direct programs
    activities versus overhead (supporting services).
     – Helps donors assess entity efficiency.
Accounting for Asset Contributions
   An immediate donation of cash or assets would be
    recorded as unrestricted, temporarily restricted, or
    permanently restricted revenue.
   Under accrual basis, unconditional pledges can be
    recorded even before the cash is received. If an
    extended time period before the gift is received:
        » Record the Receivable at its present value net of an
          allowance for estimated uncollectibles and credit
          nonoperating revenue (temporarily restricted or
          permanently restricted depending on purpose of the
          pledge).
        » Present value will increase as the expected date of
          receipt approaches. The change in present value is
          recorded as additional nonoperating revenue rather
          than interest.
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.
   If recorded, how should they be
    recorded?
    – If a nonfinancial asset is enhanced Dr. Asset and Cr.
      Contributions; Otherwise, Dr. Expense and Cr.
      Contributions for the value of the services.
Exchanges vs. Contributions
   If money is received in advance of providing
    the service on an exchange like transaction,
    the amount received is considered Deferred
    Revenue.
   Contributions are considered as revenues as
    soon as received (or pledged) even though
    the work has not yet been done.
    – But depending on the terms of the contribution,
      may have a release from temporarily restricted or
      permanently restricted to unrestricted as the
      money is spent.
Intentions to give
 Pledges are recorded if legally
  enforceable and the nonprofit would be
  willing to use legal means to enforce.
 Intentions to give (oral promises, wills)
  are often not legally enforceable as the
  donor retains legal right to change their
  mind.
 Intentions to give are not recorded until
  the actual gift materializes.
Transfers of contributions to NFP
   ISSUE: If cash or other assets are held by a
    nonprofit with instructions to release this money
    for specified parties, is this a revenue or is it an
    agency relationship (liability)?
   CENTRAL CONCEPT: It is a revenue if the
    nonprofit can ‘control’ who gets the money,
    otherwise it is credited to a liability account
    because the nonprofit is only acting as an agent on
    behalf of the donor.
     – EXCEPTION: If the party receiving the money
       and the nonprofit are financially interrelated,
       may be a revenue to the nonprofit.
Example Entries pp. 284-285
   #1: Collections of unrestricted revenues and existing
    receivables.
   #2: Accrual of current unrestricted revenues.
   #3-6: Revenues crossing more than one fiscal year --
    defer the unearned portion until the 2nd fiscal year.
   #7: Interest received in cash and accrued at year end.
   #8-10: Recording pledges and collections including
    „interest accrual‟ and reclassification from
    temporarily restricted to unrestricted.
   #11: Recording expenses and releasing purpose
    restrictions.
   #12: Donated asset recorded at fair value.
Example Entries pp. 286-287
   #13: Use of restricted assets and purpose
    restriction release.
   #14: Time restriction release.
   #15: Endowment gift recorded at fair value.
   #16: Investments adjusted to fair value at
    year end.
   #17: Salary expenses (illustration ignores
    withholding)
   #18: Depreciation
Example Entries pp. 287-288
   #19: Payment of new grant and amount
    already accrued at beginning of the year
   #20-21: Miscellaneous expenses - in cash,
    accrued, or from use of supplies
   #22: Payment of interest and principal on
    debt
   #23-25: Closing entries for the 3 categories of
    net assets - unrestricted, temp. and perm. restricted
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 nonprofits may prefer the later
    approach because readers of the financial statements
    may think „unrestricted net assets‟ means spendable
    funds -- listing the long-term assets as temporarily
    restricted decreases requests to spend reserves that
    are not really available in a liquid form.
Performance Evaluation
   FASB 117 attempts to present nonprofit statements in
    a format similar to business statements.
   However, due to the environment the bottom line is
    some what more useful than in the government
    setting, but still not directly comparable to that of a
    business.
   On the other hand, it is a myth that nonprofit should
    not have any excess of revenues over expenses --
    profits are needed:
    – To replace equipment that costs more than the depreciation
      taken on old assets.
    – To expand operations.
    – To retire debt.
    – To continue programs beyond the time frame when seed
      money grants are available.
    Performance Evaluation Cont‟d
   The financial measure of greatest interest to
    donors is not the bottom line, but the ratio of
    program expense to total expenses.
   Total expenses = program expenses +
    supporting expenses
    – Supporting expenses are for 1. Management and
      general, 2. Funding raising, and 3. Membership
      development
   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.
Program vs. Supporting Expense
Allocations
   Because of the importance of the program % 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
    – Example, the American Cancer Society mails a brochure to
      the public in general listing the 7 early warning signs for
      cancer and also asks for a donation -- is the cost all fund
      raising or its it partly program expense?
    – Because an American Cancer Society goal is education, the
      cost may be partly allocable to program costs .
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.
      Slides prepared by

    Dr. Louella Moore
 Arkansas State University

								
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