Exam #1 Chapters 1 & 13 Flashcards
An organization is governmental if they have ONE or more of the following characteristics:
- Their officers are popularly elected, or a controlling majority of their governing body is appointed by government officials
- They hold the power to enforce or enact a tax levy
- They hold the power to directly issue debt whose interest is exempt from federal taxation
- They face the potential that a government might dissolve them unilaterally and assume their assets and liabilities
Nonprofit entities:
- Receive contributions of significant amounts from resource providers who do NOT expect equivalent value in return
- Operate for purposes other than to provide goods and services at a profit
- Lack ownership interests like those of a business enterprise
What is the purpose of a business?
To increase the owner’s wealth and consistently make a profit.
Exchange transactions
Exchange transactions are transfers, each side gets something (what businesses engage in)
Non-exchange transactions
Non-exchange transactions are one sided, a true donation. Donor does not expect anything in return.
GASB
- Governmental Accounting Standards Board
- The GASB statement of reporting objectives for state and local governments calls for financial reporting to assist in fulfilling government’s duty to be publicly accountable and to help users assess that accountability.
FASB
- Financial Accounting Standards Board
- FASB’s financial reporting objectives focus on information useful to present and potential resource providers, as well as other users, in making rational decisions about allocating resources to those organizations.
Different types of revenue sources for Governments
Taxes
Different types of revenue sources for nonprofits:
Donations and grants
Nonprofits and Governments can engage in?
Both exchange and non-exchange transactions.
Classifications of net assets for Nonprofits:
- Net assets with donor restrictions
- Net assets without donor restrictions
Donors may impose restrictions such as:
Purpose - funds may be used only for a specific purpose
Time - funds may be used only at a specific point in time.
Assets - Liabilities = ?
Net Assets
Restrictions
Think external. If someone donates money, it HAS to be used for what they want. It MUST be reported that way - for specific purposes.
Internal Restrictions?
Do not exist. ***When an entity itself earmarks money for a purpose it is not restricted because they have the control over the money and can change their mind. There is NO such thing as an internal restriction.
NFP FASB Required Financial Statements
- Balance sheet (statement of financial position)
- Statement of Activities
- Statement of Functional Expenses
- Statement of Cash Flows
What are the different sections on a statement of cash flows?
- Operating Activities
- Investing Activities
- Financing Activities
Program Expense
An activity that is directly related to the purpose(s) for which the organization was established.
Support Expense
The nature of resources received by many nonprofits.
Management Expense
Associated with the overall direction and management of the organization, in addition to those associated with record keeping, the annual report, etc.
Fundraising Expense
Other supporting services associated with the solicitation of money, materials, etc. for which the individual or organization making the contribution receives no economic benefit
Spending when program AND fundraising
- Purpose
- Audience
- Content
Must fulfill all three to allocate expense between program and fundraising.
If any of the three aren’t met total expense is classified as fundraising.
Museums - Collections - Option not to report donated asset if:
- Held for public exhibit, education, or research in furtherance of public service rather than financial gain.
- Protected, kept unencumbered, cared for, and preserved.
- Policy requires proceeds to go towards collections.
**Don’t recognize it as an asset if nothing will ever come of it. Price/Valuing these donations are irrelevant and will not be used for loans, etc.
Reporting donated services
- Create or enhance a non-financial asset
OR
- Requires specialized skills, are provided by one who has those skills, and would have to pay for the services if they were not donated
**Record contribution revenue for the donation and offset with an expense.
Revenue Recognition - Applicable to businesses as well as non for profits.
- Identify contracts with the customer.
- Identify performance obligations.
- Determine the transaction price.
- Allocate the transaction price to performance obligations.
- Recognize revenue when performance obligations are satisfied.
**Do NOT follow the flow of cash for revenue recognition. Look at contracts and performance obligations.
Conditional Pledge
Bind donor on an occurrence of a specified future and uncertain event. These promises are NOT recognized as revenue/receivables until conditions on which they depend are substantially met.
Unconditional Pledge
A written or oral agreement to contribute cash or other assets to an entity. These promises meet the definition of an asset, FASB believes that promise makers generally feel bound to honor them. Need Allowance for Doubtful Accounts. Should be recognized as receivables or revenues when promises are made.
Reporting contributions other than services and collections
- Reported as revenues or gains in the period received
- Reported as assets, decreases in liabilities, or expenses, depending on the form the benefits take.
- Measured at the fair value of the contribution received.
- Reported as either support with donor restrictions or support received without donor restrictions.
Expense Reporting for Nonprofits
Function - refers to specific programs such as well as management and general activities, fundraising activities, and in some nonprofits, membership development activities.
Nature - refers to items such as salaries, rent, electricity, supplies, professional fees.
Non for Profit Organization - Tax Exempt
- Once incorporated, NFP may apply to the federal government and if approved receive a determination letter which proves their tax exemption status.
Donor restriction “in perpetuity”
- Donors may stipulate that their cash contribution be maintained permanently (“in perpetuity). With the income from investing the cash to be used to perform a specific research project.
