301344 Flashcards
Alpha Hospital, a large not-for-profit entity, has adopted an accounting policy that does not imply a time restriction on gifts of long-lived assets. Alpha’s board designates $1,000,000 to purchase investments whose income will be used for capital improvements. Income from these investments, which were not previously accrued, is received. Indicate the manner in which this transaction affects Alpha’s financial statements.
Increase in unrestricted revenues, gains, and other support
Increase in board-restricted net assets
No required reportable event
Increase in net assets with donor restrictions
Increase in unrestricted revenues, gains, and other support
When resources are under control of the governing board and not specifically restricted by an outside donor, the resources are considered unrestricted and the resulting income is unrestricted revenue. The designation “board-restricted net assets” does not exist.
Financial Statements
A financial statement is a structured representation of historical financial information, including related notes, intended to communicate an entity’s economic resources and obligations at a point in time or the changes therein for a period of time in accordance with a financial reporting framework.
Financial statements ordinarily refer to a complete set of financial statements as determined by the requirements of the applicable financial reporting framework.
Not-for-Profit Entity
According to the FASB ASC Glossary, a not-for-profit entity is distinguished from a business entity by three characteristics: contribution of significant resources from providers who do not expect proportionate return, operating purposes other than to provide goods or services for profit, and absence of ownership interests like business enterprises. In addition, the IRS stipulates that no part of the organization’s net earnings can inure for the benefit of any specific person or persons.
FASB ASC Glossary
IRS Form 1023
AICPA Audit and Accounting Guide Not-for-Profit Entities, Section 15.09
2121.01
Several key features should be noted with respect to the statement of financial position (balance sheet):
Assets and liabilities are reported in reasonably homogeneous groups and sequenced or classified in ways that provide relevant information about their interrelationships, liquidity, and financial flexibility.
Net assets are classified into two required categories: net assets without donor restrictions and net assets with donor restrictions. Not-for-profit entities (NFPs) must disclose the components of their net asset classes based on external donor restrictions and internal board designations. Board designations on net assets (without donor restrictions) must be disclosed.
Net assets with donor restrictions: The part of net assets of a not-for-profit entity that is subject to donor-imposed restrictions
Net assets without donor restrictions: The part of net assets of a not-for-profit entity that is not subject to donor-imposed restrictions
NFPs must provide information about the nature and amounts of the different types of donor-imposed restrictions either by providing separate line items within net assets with donor restrictions or in notes to the financial statements to distinguish between various types of donor-imposed restrictions. Examples include restrictions related to (1) support of particular operating activities; (2) use in a specified future period; (3) the acquisition of long-lived assets; (4) investment for a specified term; (5) the creation of a donor restricted endowment that is perpetual in nature; and (6) assets, like land or works of art, that are donated with stipulations that they be used for a specified purpose, be preserved, and not be sold.
NFPs must also disclose the amounts and purposes of board-designated net assets either on the face of the statement of financial position or in the notes.
Cash, investments, and other assets restricted for plant asset purposes are reported as a separate line item (distinguished from other cash and investments, etc.). Likewise, cash, investments, and other assets restricted for endowment purposes are reported as a separate line item.
Contributions receivable for unconditional contributions are reported at the present value of the expected cash flows from contributions, except that those collectible within a year may be recorded at net realizable value. Contributions are unconditional promises to reduce liabilities of or to contribute assets to an organization. Conditional promises to give are not recorded as contributions receivable until the conditions are met or the likelihood of their not being met becomes remote. Should a contribution be conditioned on an uncertain event, the receipt should be recorded as a refundable advance.
The FASB issued ASU 2018-08, Not-for-Profit Entities (Topic 958): Clarifying the Scope and the Accounting Guidance for Contributions Received and Contributions Made, to facilitate in determining whether a transaction should be accounted for as a contribution or as an exchange transaction. The guidance applies to all entities that receive or make contributions, including business entities.
- An NFP organization would determine whether a resource provider is participating in an exchange transaction by evaluating whether the resource provider is receiving value in return for the resources transferred. This will result in most NFPs accounting for federal grants as donor-restricted conditional contributions rather than as exchange transactions (the prevalent practice prior to ASU 2018-08). The simultaneous release option (if elected) allows grants received and used within the same period to be reported in net assets without donor restrictions, consistent with where the grant revenue was previously reported.
- In instances where the resource provider is not receiving commensurate value for the resources provided, an organization would determine whether a transfer of assets represents a payment from a third-party payer on behalf of an existing exchange transaction between the recipient and an identified customer (e.g., Medicare). If so, other guidance would apply (for example, the revenue recognition standard).
- Another area of difficulty addressed by ASU 2018-08 is determining whether a contribution is conditional (income recognition is deferred) or unconditional (income is immediately recognized). A contribution is conditional if the agreement includes:
- a barrier that must be overcome (e.g., a measurable performance-related barrier, stipulations that limit discretion by the recipient on the conduct of the activity, and/or whether a stipulation is related to the purpose of the agreement).
- either a right of return of assets transferred or a right of release of a promisor’s obligation to transfer assets.
An agreement that contains both of these items is a conditional contribution. An agreement that omits one or both is unconditional.
Once a contribution has been deemed unconditional, either initially or when all conditions are met, an organization would then consider whether the contribution is restricted on the basis of the current definition of a donor-imposed restriction, which includes:
* the consideration of how broad or narrow the purpose of the agreement is and
* whether the resources can be used only after a specified date.
Donors will use the same criteria as recipients (i.e., a barrier or hurdle coupled with a right of return/right of release) to determine whether gifts or grants are conditional or unconditional. Expense recognition is deferred for conditional arrangements and is immediate for unconditional arrangements.
- Investments in debt securities are reported at market value, while investments in equity securities with readily determinable market values are reported at fair value. Investment gains and losses are reported as changes in net assets without donor restrictions unless their use is restricted by explicit donor stipulations or by law. Investments, including those from contributions with different kinds of restrictions, may be pooled for portfolio management.
- Collections are works of art and historical treasures that meet three criteria:
1. Held for public exhibition, education, or research—not for financial gain
1. Protected, kept unencumbered, cared for, and preserved
1. Policy requires sale proceeds to be used to acquire other collection items, for the direct care of collection items, or both.
Note: ASU 2019-03, Not-for-Profit Entities (Topic 958): Updating the Definition of Collections, amended the definition of collections (item 3) and requires the organization to disclose its policy for the use of proceeds from sales of collection items. If the policy allows proceeds from the removal of items from the collection to be used for direct care, the definition of direct care must be provided.
Three options for reporting collections (certain works of art and historical treasures) are permitted by the FASB:
1. Capitalize all collections purchased or donated (and recognize contributions revenue equal to the fair value of collections that are donated).
1. Capitalize collections purchased or donated after the effective date of the FASB’s guidance on accounting for collections (and recognize contributions revenue equal to the fair value of such collections that are donated).
1. Do not capitalize collections. (No contributions would be reported for donated collections, and expenses would be reported for purchases of collections.)
A merger of two not-for-profit entities (in which a new not-for-profit entity is established by the merger of the two previous entities) is accounted for by carrying forward the existing assets and liabilities of the merging entities to the books of the new entity. When a not-for-profit entity acquires another entity, acquisition accounting is used with limited variations from business guidance for an acquisition. The most significant difference is that the amount that normally should be reported as goodwill must be expensed if contributions are the primary source of support for the operations of the acquired entity as part of the combined entity.
FASB ASC Glossary
