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

VIEWS: 280 PAGES: 26

									  Essentials of Accounting for
Governmental and Not-for-Profit
          Chapter 10:
  Accounting for Not-For-Profit
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
    – 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
   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
     » 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
   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
    – Unrestricted, temporarily restricted, and
      permanently restricted plus total
    – Can use three separate statements or other
   Revenues, gains, and other support:
    – Revenues: exchange transaction, sales of
    – Support: gifts such as contributions
Stmt of Activities p. 289 cont‟d
 Only the unrestricted column has
 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
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
   Have the option of using either the indirect
    approach or the direct approach plus
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
        » 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
    – 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
    – 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
   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
 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
   #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
   #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
   #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
   #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
   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
   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
   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

To top