Ch04 introduction nongovernment not for profit organizations

FASB NFP Guidance• SFAS 93 Recognition of Depreciation by Not-for-Profit Organizations • SFAS 116 Accounting for Contributions Received and Contributions Made • SFAS 117 Financial Stat

Learning Objectives

• Be able to:

– Identify a nongovernmental not-for-profit

organizations

– Understand the GAAP pertaining to

nongovernment not-for-profit organizations

including FASB Standards 116, 117, 124, and 136

Learning Objectives [cont’d]

• Explain the accounting and reporting criteria

for nongovernment not-for-profit

organizations

• Apply nongovernment not-for-profit

accounting and reporting requirements to

record transactions

• Distinguish reporting for health care

organizations from other not-for-profit

organizations

Not-for-Profit Organization

Characteristics

• Revenues received from providers who do

not expect economic benefits in return

• Operating purposes of the organization are

other than to make a profit

• Defined ownership interests are absent

In contrast, Government

Characteristics

• Government must have one of the following

– Popular election of officers or appointment by

officers by state or local government

– Potential for dissolution by government with

assets reverting to government

– Power to enact and enforce a tax levy

• Nongovernment organizations are all those

except governmental organizations

Types of Not-for-profit (NFP)

Organizations

• Four major types include

– Voluntary health and welfare organizations

– Colleges and universities

– Hospitals and other health care entities

– Other not-for-profit organizations such as social

organizations, associations, foundations,

political parties, museums, public broadcasting stations, civic organizations, etc

Not-for-profit (NFP) GAAP

• 1979 - FASB assumed authority for setting

accounting and reporting standards for

nonbusiness (NFP) organizations.

• 1984 - GASB was given authority to set

accounting and reporting standards for state and local governments including

governmental not-for-profits

GAAP Hierarchy Table -

A FASB statements and interpretations, APB opinions and AICPA ARBs

B FASB technical bulletins and AICPA industry audit and accounting guides and SOPs if cleared FASB C

AICPA practice bulletins cleared by FASB and Emerging Issues Task Force (EITF) consensus positions

AICPA accounting interpretations, FASB implementation guides, and industry practices that are widely recognized or prevalent

GASB technical bulletins and AICPA industry audit and accounting guides; SOPs if made specifically applicable and cleared by GASB

C AICPA practice bulletins cleared by GASB; EITF consensus positions, if GASB creates a group

D

GASB implementation guides and industry practices widely recognized or prevalent

FASB NFP Guidance

• SFAS 93 Recognition of Depreciation by

Not-for-Profit Organizations

• SFAS 116 Accounting for Contributions Received

and Contributions Made

• SFAS 117 Financial Statements for Not-for-Profit

Organizations

• SFAS 124 Accounting for Certain Investments Held

by Not-for-Profit Organizations

• SFAS 136 Transfer of Assets to a Not-for-Profit

Organization or Charitable Trust that Raises or Hold Contributions for Others

SFAS No 93 Depreciation

• Not-for-Profit must

– Record depreciation expense for the period

– Report balances of major classes of depreciable

assets at balance sheet date

– Report accumulated depreciation of major

classes of depreciable assets at balance sheet date

– Report method used in computing depreciation

for major classes of depreciable assets

SFAS No 116 Contributions

• Contributions, gifts, and unconditional pledges are

recognized as revenues at fair value in the period received

• Contributions made are recognized as expenses at

their fair values in the period made

• Promises to give conditional on a future event, are

recognized when the condition is satisfied

SFAS No 116 Contributions [cont’d]

• Distinction is made between unrestricted and

donor stipulated restrictions on

contributions (temporarily restricted or

permanently restricted)

• Contributions of services recognition criteria

– Create or enhance nonfinancial assets

– Require specialized skills

– Provided by individuals who possess specialized

skills

– Would typically need to be purchased if donated

SFAS No 117 Financial Reporting

• Financial Statements

– Statement of Financial Position

– Statement of Activities

– Statement of Cash Flows

– VHWO report additional expense schedule with

both functional and natural classification

SFAS No 117 [cont’d]

• Classification of organization’s net assets

based on presence or absence of

donor-imposed restrictions.

• Statement of Cash Flows [SFAS 95] amended

to extend provisions to NFPs and financing activities include new endowment gifts

SFAS No 124 Investments

• Equity and debt securities reported at fair

value rather than cost or market

• Losses on restricted investments absorbed

by temporarily restricted net assets if

available If not available, unrestricted net

assets report the loss in the statement of

activities

SFAS No 136 Resources Held by Others

• Resources received reported as revenue if

recipient organization can determine

resource usage I.e., variance power

• Without variance power, resources are held

in trust for others accounted for as an asset and a liability – no revenue is recognized

NFP GAAP Guidance in Progress

• NFP combinations

– Purchase methodology would apply

– Fair value is basis of the recognition

– Presume that if consideration is greater than fair

value, goodwill is recognized

– Presume that if consideration is less than fair

value, a contribution is recognized

Net Assets Classes

• Permanently restricted assets-principal must be

held in perpetuity and only the income may be used

• Temporarily Restricted-limited by donor imposed

stipulations such as time or purpose When

restriction are met, the resources are reclassed to unrestricted net assets

• Unrestricted net assets-are all assets not

permanently or temporarily restricted by donor

imposed stipulations.

Transactions Types

• Exchange Transactions - reciprocal transfers in

which each party received and sacrifices something

of approximately equal value

• Nonexchange Transactions - an unconditional

transfer of cash or other assets to an entity or a

settlement or cancellation of liabilities in a

voluntary non-reciprocal transfer by another acting

as other than an owner.

Restricted versus Unrestricted

• Only donors have the right to restrict not-for-profit

resources

• External and internal parties, other than a donor,

can designate, reserve, or allocate resources

• Restrictions are not conditions as restrictions may

be satisfied by NFP organization actions.

Conditional versus Unconditional

Contributions

• Conditional contributions depend on a

specified future and uncertain event to bind the promissor.

• Unconditional contributions are

nonexchange transactions that is recognized upon receipt

– May involve a cash payment

– May be a promise to give

Promises to Give

• Promise substantiated by sufficient evidence in the

form of verifiable documentation are recognized net

of any estimated uncollectable portion

• Also referred to as pledges

• May be

– Restricted – permanently or temporarily

restricted net asset revenue

– Unrestricted – unrestricted net asset revenue

• If restriction met in same year as resources are

received, may be originally recognized as

unrestricted

Noncash Contributions

• Contributions (gifts in kind) are recognized at

fair value when received

• Contributions are reported as program

expense or cost when items are consumed

Collections or Historic Treasures

• Works of art or historical treasures need not

be recognized as revenues and capitalized if donated items are added to collections held for public exhibition and education, cared for and are not used for financial gain

• Disclosures required for collection items not

capitalized.

• Equity and debt securities with readily

determinable fair values must be reported at fair value.

• Both realized and unrealized investment

income included in the current period

revenues.

Required Financial Statements

• Statement of Financial Position

• Statement of Activity

• Statement of Cash Flows

• Voluntary health and welfare organizations

required to include a matrix statement that compares expenses by natural class to

functions programs

Statement of Financial Position

• Single column – highly aggregated

• Presents totals by type of asset, liability and

nets asset in liquidity order

• Net Asset Section categorized into three

classes of net assets

– Permanently restricted

– Temporarily restricted

– Unrestricted

Statement of Cash Flows

• Classifies cash receipts and cash payments

during the period resulting from

– Operating activities using either the direct or

indirect method of presentation

– Investing activities

– Financing activities