20.5 Flashcards
Which of the following is a transfer to a nongovernmental not-for-profit organization acting as an agent or intermediary that most likely is not recognized as a contribution?
A nongovernmental NFP enters into a revocable arrangement with a donor. The donor contributes assets to the NFP, and the NFP agrees to pay a fixed amount annually to the donor’s uncle.
Under trusts or other arrangements, NFPs may share benefits with the donor or third-party beneficiaries. A revocable split-interest agreement is accounted for only as an intention to give. Assets received are recognized at fair value when received and as refundable advances (a liability).
The following expenditures were made by Green Services, a society for the protection of the environment:
Printing of the annual report; $12,000
Unsolicited merchandise sent to encourage contributions: 25,000
Cost of an audit performed by a CPA firm: 3,000
What amount should be classified as fundraising costs in the society’s statement of activities?
$25,000.
The major classifications of expenses for an NFP are program services and supporting activities. An analysis also must be presented that disaggregates functional expense classifications by natural expense classifications (e.g., salaries, interest, rent, and depreciation). Program service expenses relate directly to the primary purpose or mission of the organization. Supporting activities expenses are further classified as management and general expenses, fundraising expenses, and membership development costs. The only fundraising-related cost is the unsolicited merchandise sent to encourage contributions.
The following expenditures were among those incurred by Alma University, a nongovernmental not-for-profit, during the current year:
Administrative data processing: $50,000
Scholarships and fellowships: 100,000
Operation and management of physical plant: 200,000
What amount was incurred for supporting services?
$250,000.
Supporting activities are all activities of a not-for-profit organization other than program services. They are usually classified as (1) management and general, (2) fundraising, and (3) membership-development activities. Thus, administrative data processing expenses of $50,000 and operation and management of the physical plant expenses of $200,000 should be included as institutional support expenditures.
A voluntary health and welfare entity received a $700,000 perpetual endowment during the year. The donor stipulated that the income and investment appreciation be used to maintain its senior center. The endowment fund reported a net investment appreciation of $80,000 and investment income of $50,000. The entity spent $60,000 to maintain its senior center during the year. What amount of change in net assets with donor restrictions should the entity report?
$770,000.
The $700,000 contribution to a perpetual endowment is an increase in net assets with donor restrictions. Income or appreciation from donor-restricted perpetual endowments is an increase in donor-restricted support if the donor restricts its use. However, if the restriction expires in the period the income and appreciation are recognized, it may be reported as net assets without donor restrictions if the entity (1) has a similar policy for reporting contributions received, (2) reports consistently, and (3) discloses its accounting policy. Assuming these criteria were satisfied, the donor-imposed restriction on the income and gains is deemed to have expired but only to the extent it was expended during the year. Accordingly, the change in net assets with donor restrictions was $70,000 ($80,000 gain + $50,000 income – $60,000 spent). The total change in net assets with donor restrictions is $770,000 ($700,000 contribution to a permanent endowment + $70,000 unexpended gain and income).
How should unconditional pledges received by a nongovernmental not-for-profit entity that will be collected over more than one year be reported?
Pledges receivable, valued at their present values.
If the contribution is an unconditional promise to give over a specified period, the promise should be reported as contributions or pledges receivable. It is treated as an increase in net assets with donor-imposed restrictions. Also, the fair value of unconditional promises to give cash expected to be collected in 1 year or more is the present value of the estimated future cash flows.
A nongovernmental not-for-profit entity holds an investment in common stock of a publicly traded entity and an investment in debt securities of another. The NFP holds the common stock as a long-term investment and has the intent and the ability to hold the debt securities until maturity.
Investment in Common Stock
Original cost: $50,000
Amortized Cost: $0
Fair Value: $63,000
Investment in Debt Securities
Original cost: $35,000
Amortized Cost: $28,000
Fair Value: $40,000
At year end, the statement of financial position records the stock at original cost and the debt securities at amortized cost. What adjustment(s), if any, should be made to the recorded amounts?
Investment in Common Stock:
Investment in Debt Securities:
Debit of $13,000.
Debit of $12,000.
All purchased (contributed) debt and equity securities are measured at cost (fair value). Subsequent measurement is at fair value for (1) all debt securities and (2), with an exception for lack of a readily determinable fair value, all equity securities.
A voluntary health and welfare entity received a $500,000 perpetual endowment at the beginning of the year. The donor stipulated that the income be used for a mental health program. Also, no reporting date fair value was stipulated by the donor or required by law. The endowment fund reported a $60,000 net decrease in fair value and $30,000 of investment income. The entity spent $45,000 on the mental health program during the year. What amount of change in net assets with donor restrictions should the entity report?
$440,000 increase.
The $500,000 contribution to a perpetual endowment is an increase in net assets with donor restrictions. The income is subject to a donor-imposed purpose restriction. However, if the restriction is met in the period the income is recognized, it may be reported as an increase in net assets without donor restrictions if the entity (1) has a similar policy for reporting contributions received, (2) reports consistently, and (3) discloses the policy. Assuming these criteria were satisfied, the restriction on the $30,000 of investment income expired when it was spent (with an additional $15,000, presumably from other sources). The endowment fund is underwater because its reporting date fair value ($500,000 gift – $60,000 = $440,000) is less than the amount of the gift. (No reporting date fair value was stipulated by the donor or required by law.) The loss is included with the fund in net assets with donor restrictions. The effect on net assets with donor restrictions of (1) creation of the endowment (an increase of $500,000 in net assets with donor restrictions), (2) the receipt and expenditure in the same period of income (an increase of $30,000 in net assets without donor restrictions), and (3) the loss on the principal of the endowment (a decrease of $60,000 in net assets with donor restrictions) is $440,000.
Home Care, Inc., a nongovernmental voluntary health and welfare entity, received two contributions in Year 4. One contribution of $250,000 was restricted for use as general support in Year 5. The other contribution of $200,000 carried no donor restrictions. What amount should Home Care report as donor-restricted support in its Year 4 statement of activities?
$250,000.
The donor restriction is satisfied by the passage of time. The contribution of $250,000 is therefore donor-restricted support until used as general support in Year 5. The $200,000 contribution was not donor-restricted and therefore is reported as support that increases net assets without donor restrictions.
Supporting activities are the activities of a nongovernmental not-for-profit entity that
Are not considered program services.
To help in assessing service efforts, a statement of activities or the notes should provide information about expenses reported by functional classification, e.g., by major classes of program services and supporting activities. An analysis also must be presented that disaggregates functional expense classifications by natural expense classifications (e.g., salaries, interest, rent, and depreciation). Supporting activities are all activities of an NFP other than program services. They include management and general, fundraising, and membership-development activities.
A nongovernmental, not-for-profit organization received the following donations of corporate stock during the year:
Donation 1 Number of shares: 2,000 Adjusted basis: $8,000 Fair market value at time of donation: $8,500 Fair market value at year end: $10,000
Donation 2 Number of shares: 3,000 Adjusted basis: $5,500 Fair market value at time of donation: $6,000 Fair market value at year end: $4,000
What net value of investments will the organization report at the end of the year?
$14,000.
Investments in equity securities (corporate stock) with readily determinable fair values are measured at fair value in the statement of financial position. Accordingly, the net value of the investments at the end of the year is $14,000 ($10,000 FV at year end + $4,000 FV at year end).
Fact Pattern:
Early in Year 2, a nongovernmental not-for-profit entity (NFP) received a $2,000,000 gift. The donor specified that the gift be invested in a perpetual endowment, with income restricted to provide speaker fees for a lecture series named for the benefactor. The NFP is responsible for all other costs associated with initiating and administering this series. The donor’s stipulation does not address gains and losses on this perpetual endowment, and the NFP reports only the minimum required classes of net assets. In Year 2, the investments purchased with the gift earned $50,000 in dividend income. The fair value of the investments increased by $120,000. The applicable state law is based on the Uniform Prudent Management of Institutional Funds Act (UPMIFA).
If the lecture series is not scheduled to begin until Year 3, the $120,000 unrealized gain should be recorded in the NFP’s Year 2 statement of activities as an increase in
Net assets with donor restrictions.
Investment return (income and gains) generally is free of donor restrictions unless its use is limited by (1) a donor-imposed restriction or (2) a law. Most donor-restricted endowment funds are subject to the Uniform Prudent Management of Institutional Funds Act of 2006 (UPMIFA). This statute extends a donor restriction to use of the assets, including the return, until appropriation for expenditure by the NFP’s governing board. Thus, without other language in the gift instrument, the assets in the fund (including the return) are net assets with donor restrictions until appropriation. Without a contrary legal interpretation, appropriation occurs upon approval for expenditure. No approval for expenditure of the increase in fair value of the investments has been made. Accordingly, the unrealized gain is an increase in net assets with donor restrictions.
A statement of cash flows is to be presented in general-purpose external financial statements by which of the following?
All businesses and nongovernmental not-for-profit entities.
A statement of cash flows is required as part of a full set of financial statements of all business entities (both publicly held and privately held) and nongovernmental not-for-profit entities.
In a nongovernmental not-for-profit entity’s statement of activities, the reporting of expenses most likely is reflected in which minimum required class(es) of net assets?
Net Assets without Donor Restrictions:
Net Assets with Donor Restrictions:
Net Assets with Permanent Restrictions:
Net Assets with Temporary Restrictions:
Yes
No
No
No
Most expenses are reported as decreases in net assets without donor restrictions. An exception is investment expense. It must be netted against investment return and reported in the same net assets category. Net assets with permanent restrictions and net assets with temporary restrictions are not included in the minimum required classes of net assets.
A nongovernmental not-for-profit entity borrowed $5,000, which it used to purchase a truck. In which section of the entity’s statement of cash flows should the transaction be reported?
In cash inflow from financing activities and cash outflow from investing activities.
The borrowing is a cash inflow from a financing activity because it results from issuing debt. The purchase of the truck is a cash outflow from an investing activity because it involves the acquisition of property, plant, or equipment or other productive assets.
How should a nongovernmental, not-for-profit entity report donor-restricted cash contributions for long-term purposes in its statement of cash flows?
Financing Activity Inflow.
Cash inflows from financing activities include donor-restricted receipts of resources for long-term purposes. For example, receipts of interest and dividends that are donor-restricted for long-term purposes are financing activities and not cash flows from operating activities.
