2. Non For profit Flashcards
Unless explicitly restricted by donor or law, any investment earnings are unrestricted and can be used for the organization’s general operations. Reported in the statement of activities in net asset in “without donor resection.”
Revenues and expenses from an annual fundraising campaign should NOT be netted together for non for profit entitie’s statement of activities. The purpose is to demonstrate how the NPO obtained resources and how they were used in providing its program and services. The statement reports revenues, net asset released from restriction and expenses.
Revenues and expenses reported at their gross amounts.
Secondary activities and peripheral information may be reported at net.
An unconditional pledge is a promise to provide resources to a not for profit organization. The amount promised is accrued in AR and recorded as revenue. Unconditional please to be received/paid during each year for next four years is “revenue with donor restrictions.”
Use present value factor if provided in question!!!
The endowment of not for profit organization have to come from an external party, board restriction doesn’t count.
Although a not for profit organization does not have equity interest or earn a profit for shareholders, it still must report net assets ( assets minus liabilities) on its FS.
Unrealized holdings gain/losses from fair value changes of marketable equity securities will also increase the change in net assets.
If donor specifies that a transferred asset must go to a specific entity ie. beneficiary, the NPO is merely an agent and will recognize a liability. If NPO can referent the funds received to other entities without donor’s consent, the NPO has variance power, will record revenue.
Gift in kind donated to a not for profit organization are recognized at their FV on the date received. In each reporting period the items donated will be marked up or down to their FV as of the reporting date.
NPO must recognize revenue from contributed services requiring specialized skills that are provided by individuals with this specialized skills, otherwise not recorded.
Changes in net assets are categorized as with or without donor imposed restrictions.
Expenditure of restricted resources must first be reclassified from net asset with restriction to net asset without restrictions before recording an expense.
NPO’s expenses will decrease net assets without donor restrictions.
The primary purpose of a not for profit organization’s statement of activities (IS equivalent) is to demonstrate how the organization’s resources are used in providing its programs and services.
Important:
The inflows of resources reported on the statement of activities refer to revenue, gains and net assets released from restrictions; the outflows of resources refer to expenses and losses. The difference between these categories is referred as “the change in net assets.”
The primary purpose of the statement of activities of a nonprofit is to report the change in net assets for the period. Not the one as of a specific date.
Not for profit Financing Activities
1. donor restricted contributions for long-term purposes
2. Other financials activities
- proceeds from debt
- payments of debt
Non for profit organization financials statements:
Statement of financial position
Statement of activities
Statement of cash flow
Statement of functional expenses*
May be presented as a separate statement, on the statement of activities or within the notes to the FS.
Appropriate characterization of the net assets of a nongovernmental not for profit organization - Residual interest.
Residual interest is the amount that the owners of the business would receive after selling the business’s asset and paying its debt. For profit is Equity interest.
The purpose of statement of financial position for a nongovernmental not for profit entity is to provide relevant information about the asset, liability and net assets and about their relationships to one another at a moment in time.
GAAP applies to for profit entities and nongovernmental, not for profit organizations.
Accrual is required for non for profit organization.
Cash and modified cash are not GAAP.
GASB requires state and local government entities to use modified accrual accounting for the governmental funds.
Financial reporting framework:
Cash and Modified cash - Special Purpose framework
Accrual - GAAP for profit and not for profit organization
GASB - governmental funds
Asset with doonors restriction and without is required for not for profit entity (eg private, not for profit).
Nongovernmental not for profit organizations are required to report FS on an economic resources measurement focus.
Nongovernmental not for profit organizations are subject to FASB standards and follow accrual accounting.
One similarity recording depreciation expenses for depreciable assets in a NPO’s financial statements. Asset that should be depreciated are long-lived with a definite useful life, tangible, and used in the normal course of operations.
Which of must be depreciated ?
1. Freezer costing $150,000
2. Building cost of $500,000 for construction in progress
Answer 1.
Non for profit organization expenses
Functional presentation
1. Program services
a. Program 1
b. Program 2
2. Supporting services (secondary to mission)
a. Management and general
b. Fundraising
c. Membership development
NPO must provide detailed information about their expenses each period using two formats: natural and functional.
Expenses must be carefully categorized to provide transparency to donors about how efficiency the NPO provides goods and services to its beneficiaries.
A functional presentation involves grouping expenses according to the purpose ie direct or indirect support of the NPO’s mission and objectives) for which expense is in incurred. The primary functional classification are as follows:
1. Program services expenses directly support the NPO’s mission and allow the organization to achieve the specific objectives for which it was established
2. Supporting services are secondary expenses incurred including management and general, fundraising, and membership development.
All of an NPO’s expenses will decrease ONLY net assets without donor restrictions.
Program expenses:
- furthers organization’s mission ie. boat depreciation, research, community services, public health, education
Support expenses:
Secondary to mission (management and general, fundraising, membership development) ie. marketing, tax prep., printing annual report, mailing pledge cards, maintaining donor list, salaries of fundraising, sending merchandise to contributors.
Primary purpose of the statement of activities of a nongovernmental not for profit organization is to report the change in net assets for the period.
Purchased vehicle and donated vehicle are depreciated.
Nongovernmental not for profit organizations must report expenses by the following classification:
1. Functional - presented in columns, expenses are classified according to the purpose (ie type of activity) of the costs incurred. Under this classification, expenses may be reported as relating to a specific program or a supporting activity (eg cancer awareness marathon).
- Natural - presented in rows, expenses are classified according to the type of economic benefit received (ie what the money was spent on). Under this classification, expenses may be reported as travel, supplies or deprecation.
Research and education costs directly support that mission.
Fundraising and management and general are supported services expenses.
Bed debt expenses does not include an amount related to charity care. Since charity care does not result in the recognition of receivable, there is no need to estimate uncollectible accounts.
