Ch. 13 Flashcards
Nonprofit entities are?
Mission-oriented and perform a wide range of activities
Charities vs. Other nonprofits
Charites have to benefit the general public
Other nonprofits only benefit the members (smaller group)
An entity is a nonprofit if it meets these requirements:
1) Receives contributions of significant amounts of resources from resource providers not expecting anything in return
2) Operate for purposes other than making a profit
3) Lack ownership interest
What entity determines the reporting standards for nonprofits?
FASB - Accounting for revenue/expenses and assets/liabilities is the use same measurement and focus of basis of accounting for profit entities
What financial statements is a nonprofit required to have?
1) Stmt of Financial Position (B/S)
2) Stmt of Activities (which includes Stmt of Functional Expenses)
3) Stmt of Cash Flows
What are the traditional ways that a nonprofit spends money?
Rent, wages, utilities, etc.
What are the other ways a nonprofit spends money?
Break out into:
1) Programming Expenses
2) Fundraising Expenses
3) Support Expenses
Although FASB recommends comparative financial statments?
They are not required.
Restriction
External to the organization, donation for a specific thing
Unrestricted
Here is money, go do good things with it
Time Restrictions
Funds must be used within a specific time period or saved for a future time period
Purpose Restrictions
Funds must be used for a certain thing (building, capital improvements, etc.)
Board Restrictions
Not restricted funds for reporting purposes (internal), it can be reversed
Requirements of the Statement of Financial Position
Open format but MUST include Total Assets, Total Liabilities, and Total New Assets
Net Assets MUST be allocated between restricted and unrestricted
Listed in order of liquidity and what gets paid first
Are nonprofits required to present cash available for current use?
No, governments are required to do this
Requirements of the Statement of Activities
Open format but MUST include Changes in Net Assets, Changes in Net Assets With Donor Restrictions, and Changes in Net Assets Without Donor Restrictions
Required to show revenue in two columns, with donor restrictions and without donor restrictions
Revenue
Implies exchange transaction
Support
Implies nonexchange transactions
Gains
Peripheral sale of something
Requirements of the Statement of Functional Expenses
Required with Stmt of Activities
MUST show program expenses, management and general expenses, and fundraising expenses
What is used to judge nonprofits?
Relation between program and supporting expenses - push towards program expenses
Contribution
Unconditional transfer of cash or other assets from one entity to another
Entity making the contribution does not receive value in exchange
Reporting contributions other than services/collections
1) Reported as revenues or gains in the period received
2) Reported as assets, decreases of liabilities, or expenses, depending on the form the benefits take
3) Measured at the fair value of the contribution received
4) Reported as either support with donor restrictions or as support received without donor restrictions
As an option, if a nonprofit receives donor restricted contributions whose restrictions are met in the _______________ , the contribution may be reported as support without donor restrictions.
Same reporting period the contributions are received
MUST stay consistent every year.
In perpetuity
Forever
Endowment
Donation is made and the donor says that the money can’t be spent. The money can be invested and the earnings can be used for research, etc.
Unconditional Promises
Pledged to give money but have not done it yet
Record as a receivable and revenue
What does FASB say about unconditional promises?
Meets the definition of asset because promise makers generally feel bound to honor them
Legally binding in some states
Need Allowance for Doubtful Acccounts
What does FASB require for future promises?
Must be discounted to present value
Conditional Promises
Bind donor on the occurrence of a specified future and uncertain event
Does not have to be in writing but should be: grant application looks better, better towards public fundraising, older donors might die
Do we record conditional promise pledge as a receivable?
No, there is no receivable until the condition is met or satisfied. Can include in footnotes.
Gifts-In Kind
Donations other than money (artwork, jewelry, services, time, etc.)
FASB requires under limited circumstances to recognize services if:
1) Create/enhance nonfinancial assets
OR
2) Require specialized skills, are provided by one who has those skills, and would have to pay for these skills if the service was not donated
Collections
Mostly apply to museums, donations or artwork, artifacts, etc.
Only get a tax deduction if a US entity
Collections are not recognized as revenue if:
1) Held for public exhibit, education, or research in furtherance of public service rather than financial gain
2) Protected kept unencumbered, cared for, and preserved
3) Policy requires that proceeds go towards the collections
If a nonprofit chooses to capitalize collections, they MUST include this on the Statement of Activities separately from everything else:
1) Cost of collections items purchased
2) Proceeds from sale of collections items
3) Proceeds from insurance recoveries of lost or destroyed collections items
Fair Value
FASB - investments should be carried on the balance sheet at fair value, not at historical cost
***Record unrealized gains/losses
FMV Hierarchy
Level 1 - Quoted prices in active markets for identical assets
Level 2 - Inputs other than Quoted prices that are observable, directly or indirectly
Level 3 - Unobservable inputs based on assumptions
Split-Interest Agreements
Donors enter into a trust or other arrangement with a nonprofit, giving the nonprofit a beneficial interest in the agreement, but not the sole interest
Charitable Remainder Trust
An example of a split-interest agreement.
Nonprofit will receive the money put into the trust by law.
Everyone is taken care of except the government.
Recorded at present value
Ex. the principal is set aside for the nonprofits, but the earnings are given to the children of who set up the trust.
If an exchange transaction, then FASB ___________ apply (just like a business).
Revenue Recognition Rules
Revenue is not recorded unitl?
Performance obligations have been met
Conservatism
Don’t overstate assets.
Don’t understate liabilities.
Don’t overstate profits.
Bifurcate
To separate; splitting into two components
It is always an estimate
Example of Bifurcate
A museum offers a membership. If an individual decides to be a member and pay membership dues, they may be allowed a few things in return such as a few free admissions or attending seminars. There is some exchange and nonexchange.
What are the 5 steps to recognize revenue?
1) Identify contract with the customer.
2) Identify performance obligations in the contract.
3) Determine the transaction price.
4) Allocate the transaction price to performance obligations in the contract.
5) Recognize revenue when (or as) the entity satisfies a performance obligation.
What are you supposed to look at when it comes to revenue recognition?
Do NOT follow the flow of cash. It is irrelevant. It is important to look at the contract and performance obligations.
Federal Government Grants
The Govt is not a customer, however the entity is receiving funding to provide a service (ex. free lunches as school). In this case, the revenue should be recognized over time, as the obligation is performed.
Fundraising: Direct Costs
Reported as an offset to revenue (what it costs to run the event: music, dinner, hall, etc.)
Fundraising: Indirect Costs
Reported as functional expenses on the stmt of functional expenses.
Advertising, mailings, etc.
What information is important on the Statement of Functional Expenses?
Total Program Service Expenses compared to Total Expenses - get a percentage.
Expenses are broken out into program, management/general, and fundraising.
***The more money spent on program, the happier people will be.
This stmt includes a lot of estimates. There is always incentive to skew the numbers towards program expenses. It makes an entity look better. Be careful!
What is needed in order for a nonprofit to allocate costs between fundraising and program expenses?
Purpose, Audience, and Content
If one of the criteria is not met, all the costs are considered fundraising expenses.
Liquidity
One financial reporting objective is to help users assess services that a nonprofit can provide and its ability to continue to provide those services.
***FASB requires nonprofits to disclose working capital (not always required)
Regulation
1) Legally organize, apply to the state. (Legal life does not come from the federal government, it comes from the states).
2) Apply to the federal government to be tax-exempt (501c3), which is a very formal and somewhat difficult process. Just because a state grants legal existence, does not make an entity tax exempt.
3) Determination Letter. The federal government determines if an organization is tax-exempt.
Private Foundations
Can be tax-exempt and not be a charity (supports members and not the general public).
Can be subject to tax. They fundraise money for other charities (organizations that will do the work). If they do not send at least 5% of money to other charities, they are taxed.
Public Support Test
After 5 years, a private foundation can take a test to gain charity status.
More than 1/3 of revenue must come from the general public.
Unrelated Business Income Tax (UBIT)
If an organization provides services that compete with a business they are required to pay tax on that service.
Exceptions to Unrelated Business Income Tax (UBIT)
If it is a one time service, the organization does not have to pay tax.
If whatever they sell was donated, it is not subject to tax.
If all workers are volunteers, not subject to tax.
Do not make a profit, not subject to tax.
