2500: Not-for-Profit Accounting & Reporting

Question 1

What are the three categories of net assets reported for not-for-profit entities and how are they imposed?

Answer 1

1. Unrestricted
2. Temporarily restricted
3. Permanently restricted

Terminology, including “net asset” is encouraged but not required. Alternatives must be clear with meaningful captions.

Other useful information may also be presented.

Restriction is imposed by donors/grantors not directors or management or others

Question 2

How is an equipment purchase with a restricted gift from the prior year reported on the Statement of Activities?

Answer 2

Reclassification from temporarily restricted net assets to unrestricted net assets.

Equipment is also reported on Statement of Financial Position

Question 3

When are assets released from restriction?

Answer 3

Once resources are used according to donor limitations.

Question 4

How does a contribution to an NFP for long-term purposes (i.e. construction of a new building) appear on its statement of cash flows?

Answer 4

It is reported as cash flow from Financing activities (not operating or investing).

Question 5

How does investment income restricted by donor to an NFP for long-term purposes (i.e. contribution of a new building) appear on its statement of cash flows?

Answer 5

It is reported as cash flow from financing activities (not investing or operating).

Question 6

How are NFPs required to report expenses?

Answer 6

by functional classification in the statement of activities or
notes

health/welfare orgs must provide separate functional expense matrix with natural classification

Question 7

How is a donated depreciable asset accounted for if there is a time restriction per the donor or organizational accounting policy?

Answer 7

The asset is recorded as temporarily restricted and depreciated over its useful life. The residual value of the asset after depreciation remains temporarily restricted.

Asset DR
Contributions – Temp Rest CR

Functional (Depreciation) Expense DR
Accum Depr – Asset CR

Reclass from Cont -- Temp Rest  DR
Reclass to Cont -- Unrest  CR* 

*Report “net assets released from restrictions” on the statement of activities.

Question 8

How does an NFP account for a permanent endowment?

Answer 8

Each source of funds (original, gain, loss, dividend, interest) is evaluated separately according to donor’s wishes and relevant law. Depreciation expense (and all expenses) must be reported as changes in unrestricted net assets.

Unless contravened by donor or law, net losses reduce temporarily restricted net assets to the extent of prior gains/earnings then reduce unrestricted net assets.

If donor/law requires that principal cannot fall below original contribution value, excess expenses and losses over revenues is shown as a reductions in unrestricted net assets.

Question 9

How are expenses recorded for NFP?

Answer 9

As changes in unrestricted net assets

Classified as program services expense (by function for mission) or supporting services (mgmt & gen/fundraising)

Question 10

How can NFP recognize unconditional promises to give?

Answer 10

May recognize net realizable value by recording any portion expected to be uncollectible in Allowance for Uncollectible Contributions.

May not recognize an expense on uncollectible contributions.

May recognize at fair value on date of promise even if collection is years in the future.

May recognize at present value

Question 11

When are permanently restrcited net assets increased?

NFP

Answer 11

When the principal of a contribution is not to be spent.

Question 12

Required external financial statements for NFP

Answer 12

statement of financial position (BS)
statement of activities (IS)
statement of cash flows

Question 13

How are contributions receivable accounted for?

NFP

Answer 13

Contributions are unconditional and are recognized:

1. at present value of estimated cash flows
2. net realizable value if collectible within a year (optional)

Conditional promises are not contributions receivable until conditions are met (unconditional) or the likelihood of their not being met becomes remote.

Question 14

How does NFP account for items in collection if not capitalized?

Answer 14

criteria for “collection”:
held for exhibition
protected/preserved
policy of sales only to acquire other collection items

Report by including a line item on the face of FS that constitues a note/disclosure regarding the permanent collection.

Capitalize = Asset & Equity

Question 15

How is a conditional contribution recorded?

Answer 15

As a refundable advance

Question 16

G/L on investments purchased with permanently restricted assets

Answer 16

G/L are increases/decreases to unrestricted net assets unless explicitly restricted by donor or law

Question 17

NPO Sponsor receives tickets (available for sale) in partial exchange for sponsorship

Answer 17

Recognize ticket revenue for retail value of tickets and the balance as contribution revenue.

Question 18

Reporting NPO Expenses

Answer 18

Only reported in unrestricted net assets category, not temporarily restricted and permanent

Question 19

Art/Historical Treasure

Answer 19

If life is viewed as
Extraordinarily Long,
Depreciation is allowed but not required.

Question 20

The accounting used by private not-for-profit organizations has many parallels in for-profit accounting. However, investments provide one significant exception. This is significant because the amount of investments can be truly large for some private not-for-profit organizations.

Answer 20

With a for-profit organization, a difference in the reporting of gains and losses is required between available for sale securities and trading securities.

No such distinction exists for private not-for-profit organizations.

Investments are reported at fair value and gains and losses in that value are recorded immediately as either increases or decreases in net assets.