FAR SEC 20 Flashcards
What are NFPs?
nongovernmental not-for-profit entities (NFPs)
What are three characteristics of NFPs?
1) Contributors of significant resources to the NFP do not expect a proportionate return.
2) The NFP has operating purposes other than providing goods or services for profit.
3) The NFP has no ownership interests similar to those of a business entity.
What are 8 examples of NFPs?
Among the many kinds of NFPs are
(1) educational institutions,
(2) healthcare entities,
(3) cultural organizations,
(4) voluntary health and welfare entities,
(5) federated fundraising organizations,
(6) unions,
(7) political parties, and
(8) public broadcasting stations.
Which three characteristics differentiate NFPs from businesses?
1) NFPs receive significant resources from providers who do not expect to receive repayment or proportionate economic benefits (nonreciprocal transactions).
-They have transactions that are infrequent in businesses, such as grants and contributions, and no transactions with owners, such as dividend payments.
2) NFPs have operating purposes other than to provide goods or services at a profit.
3) NFPs lack defined ownership interests that (a) can be sold, transferred, or redeemed or (b) entitle an owner to distributions upon liquidation of the entity.
What are four similarities between the operating environments of private businesses and NFPs?
1) Obtain resources in exchange transactions in markets.
2) Pay for labor, materials, and facilities now or promise to pay in the future.
3) Borrow funds using direct loans or issuing debt and securities.
4) Should provide information to creditors about risks and returns of securities.
How should financial reporting be done for NFPs? (3 elements)
1) Financial reporting should provide information useful to resource providers (e.g., the members, donors, and guarantors of NFPs) in making resource allocation decisions.
2) Whether resources are given for economic or non-economic reasons, all providers seek information about economic resources, obligations, net resources, and changes in them to assess future net cash flows.
3) All providers also focus on indicators of performance and management stewardship. For example, donors want to know whether managers (a) comply with restrictions and (b) act consistently with the entity’s objectives.
What do users of information about NFPs want to know?
Users of information about an NFP are interested in how effectively and efficiently it performs services.
Which three aspects of NFP performance to NFP information users evaluate?
Users of information about an NFP are interested in how effectively and efficiently it performs services. This information, e.g., about service efforts relevant to the mission, helps to evaluate
1) The NFP’s ability to continue performing those services,
2) How well objectives are met, and
3) Whether to continue support.
What is the primary purpose of the financial statements of NFPs?
The primary purpose of financial statements of an NFP is to provide relevant information serving the common interest of donors, creditors, and other external resource providers.
NFP financial reporting information should help assess the following three aspects of the NFP:
This information should help to assess the NFP’s
(a) services,
(b) ability to continue providing those services, and
(c) stewardship and other aspects of performance.
Which NFP financial/economic variables or events should be provided in NFP financial reporting? (5 elements)
1) Assets, liabilities, and net assets;
2) Changes in net assets;
3) Flows of economic resources;
4) Cash flows, borrowing and repayment of borrowing, and other factors affecting liquidity; and
5) Service efforts.
What financial reporting model is used for NFPs?
Reporting is based on a net assets model.
What are the three attributes of the net assets model for NFPs?
1) Net assets equals the excess or deficiency of assets over liabilities. Net assets is classified as
2) With donor restrictions or
3) Without donor restrictions.
How does an NFP Statement of Financial Position compare to the statements for a for-profit business?
A statement of financial position is equivalent to a for-profit entity’s balance sheet.
Which elements are included in the NFP Statement of Financial Position? Which elements are not included?
1) The elements are assets, liabilities, and net assets. The statement presents information about the elements and their relationships at a moment in time.
2) The elements investments by owners and distributions to owners are not included.
How does the NFP Statement of Activities compare to the financial statements for for-profit enterprises?
A statement of activities is an operating statement equivalent to a for-profit entity’s income statement.
What are the elements of an NFP Statement of Activities? (4 elements)
Its elements are revenues, expenses, gains, and losses.
What item is not an element of the NFP’s Statement of Activities?
Comprehensive income is not an element of an NFP’s statement of activities.
What three things does the NFP Statement of Activities provide information about?
The statement provides information about
1) The effects of transactions and other events and circumstances that change the amount and nature of net assets.
2) The relationships among those transactions, etc.
3) How resources are used to provide programs and services.
How does the NFP Statement of Cash Flows compare to the financial statements for private enterprises?
A statement of cash flows is similar to the statement reported by for-profit entities.
Is fund terminology used for NFPs?
Fund terminology is not used because the emphasis is on net assets and changes in net assets taken as a whole.
For NFPs, is reporting by fund groups required? Why or why not?
Fund terminology is not used because the emphasis is on net assets and changes in net assets taken as a whole. Reporting by fund groups therefore is not required for external reporting.
For NFPs, is disaggregating information by fund groups allowed?
Disaggregating information by fund groups is allowed but NOT REQUIRED for external reporting.
For NFPs, is the presentation of comparative statements required?
No. Presentation of comparative statements is encouraged but not required.
On the NFP Statement of Financial Position, which items must be presented? (6 elements)
1) Total assets
2) Total liabilities
3) Net assets without donor restrictions
4) Net assets with donor restrictions
5) Total net assets
6) Total liabilities and net assets
For the NFP Statement of Financial Position, what are the minimum required classes of net assets to be presented? (2 elements)
The minimum required classes of net assets are (1) those with donor restrictions and (2) those without donor restrictions.
What are donor restrictions? What three circumstances cause them to arise?
A donor-imposed restriction is a stipulation that is more specific than the limits resulting from (a) the nature of the entity, (b) its environment, or (c) its organizational objectives (e.g., those stated in bylaws).
What are the attributes of donor restrictions? (3 elements)
1) Some restrictions are temporary. For example, a stipulation may require resources to be used (1) in a later period or after a specific date (time restriction), (2) for a specific purpose (purpose restriction), or (3) both.
2) Other restrictions are perpetual. For example, the stipulation may require resources to be maintained in perpetuity.
3) A law may extend donor-imposed restrictions, for example, to investment returns.
What are three temporary restrictions that could apply for NFP funds with donor-imposed restrictions?
Some restrictions are temporary. For example, a stipulation may require resources to be used (1) in a later period or after a specific date (time restriction), (2) for a specific purpose (purpose restriction), or (3) both.
How may the governing board of an NFP limit use of those net assets not subject to donor restrictions? (2 elements)
A governing board of an NFP may limit use of part of its net assets without donor restrictions by
1) Establishing a quasi-endowment (a board-designated endowment fund) or
2) Self-imposing specific earmarks (board-designated net assets), e.g., for investment, contingencies, or construction of fixed assets.
For NFPs, how are the restrictions on donor funds reported on the Statement of Financial Position?
Information about the nature and amounts of restrictions must be provided on the face of the statement or in the notes. Also, to report different types of restrictions, separate line items may be included in (a) net assets with donor restrictions or (b) the notes.
For NFPs, how are the restrictions on donor funds reported on the Statement of Financial Position? What are six examples of this?
Information about the nature and amounts of restrictions must be provided on the face of the statement or in the notes. Also, to report different types of restrictions, separate line items may be included in (a) net assets with donor restrictions or (b) the notes. The following are examples:
1) Support of particular operating activities
2) Investment for a specified term (term endowments)
3) Use in a specified future period
4) Acquisition of long-lived assets
5) Assets, e.g., land or works of art, to be used for a specified purpose, preserved, and not sold
6) Assets to be invested to provide permanent income (e.g., donor-restricted perpetual endowments)
For the NFP Statement of Financial Position, how are assets reported on the Statement of Financial Position? (4 elements)
1) Assets must be combined into reasonably homogeneous groups.
2) Assets (including cash) that are donor-restricted to long-term use must not be classified with assets without donor restrictions that are currently available.
3) The nature and amount of limitations on the use of cash and cash equivalents should be disclosed in the notes or on the statement of financial position.
4) The guidance for reporting current and noncurrent assets and liabilities applies to for-profit entities and NFPs.
On the NFP Statement of Financial Position, how are receivables from exchange transactions reported?
Receivables from exchange transactions must be measured at net realizable value if amounts are due within 1 year.
On the NFP Statement of Financial Position, how are property, plant, and equipment reported? (3 elements)
Property, plant, and equipment (PPE) consist of long-lived tangible assets.
1) The amount initially recognized for contributed PPE includes all costs incurred to place the assets in use, e.g., freight and installation costs.
2) NFPs recognize depreciation on most items of PPE.
-Depreciation expense decreases net assets without donor restrictions. A donor’s time restriction on a depreciable asset expires as the economic benefits are used.
3) Land used as a building site and certain individual works of art and historical treasures with very long useful lives are not depreciated.
i) A work of art or historical treasure is nondepreciable only if verifiable evidence supports the conclusions that
-It has cultural, aesthetic, or historical value worth preserving perpetually.
-The holder has the means of, and is, preserving its full service potential.
ii) However, the capitalized costs of major preservation or restoration efforts should be depreciated.
For the NFP Statement of Financial Position, when are works of art, historical treasures, and similar items recognized?
Contributions of works of art, historical treasures, and similar items are recognized as assets and as revenues or gains if they are not collection items.
For the NFP Statement of Financial Position, what conditions apply for the amount capitalized in relation to contributions of works of art, historical treasures, and similar items?
If the amount capitalized is not presented separately on the statement of financial position, it must be disclosed.
For the NFP treatment of works of art, historical treasures, and similar items, what is the definition of “collections”? (4 elements)
1) Collections are works of art, historical treasures, and similar items that are
2) Held for public exhibition, education, or research to further public service rather than for financial gain;
3) Protected, kept unencumbered, cared for, and preserved; and
4) Subject to a policy that requires the proceeds of items sold to be used for acquisitions of new collection items, the direct care of existing items, or both.
What must the NFP do when items are removed from a collection?
The NFP must disclose its policy for proceeds when items are removed from a collection.
What are the NFP’s options regarding the capitalization of collections? (3 elements)
An NFP may choose to (a) capitalize its collections, (b) capitalize prospectively items acquired after a certain date, or (c) not capitalize collections.
-Capitalization of part of the collections is not permitted.
For an NFP, is capitalization of collections permitted?
No. Capitalization of part of the collections is not permitted.
What happens if an NFP does not capitalize collections?
If an NFP does not capitalize collections,
1) No assets or contribution revenues or gains are recognized.
2) The costs (proceeds) of the collection items purchased (sold) are recognized separately as a decrease (an increase) in the appropriate class of net assets. The entry for purchase with net assets without donor restrictions is
Net assets without donor restrictions $XXX
Cash $XXX
3) The proceeds from insurance recoveries for collection items are recognized as an increase in the appropriate class of net assets.
4) Cash flows from purchases, sales, and insurance recoveries of uncapitalized collection items are reported in the investing activities section of the statement of cash flows.
For NFPs, what is the treatment of prospective capitalization of collections?
If collections are capitalized prospectively, proceeds from sales and insurance recoveries of items not previously capitalized are reported separately.
For the NFP Statement of Financial Position, how are liabilities treated?
Liabilities also must be combined into reasonably homogeneous groups.
-An NFP must recognize a liability for (a) its unconditional promise to give or (b) an amount received in an agency transaction.
What is the NFP Statement of Activities?
The statement of activities reports the changes in (1) net assets and (2) the categories of net assets for the reporting period.
How are revenues reported on the NFP Statement of Activities? (2 elements)
1) Revenues, expenses, gains, and losses must be combined into reasonably homogeneous groups.
2) They also must be reported as increases or decreases in (i) net assets with donor restrictions or (ii) net assets without donor restrictions.
3) Revenues are reported as increases in net assets without donor restrictions unless the use of the assets received is restricted by the donor.
4) The gross amounts of revenues and expenses from the entity’s ongoing major or central operations are reported.
-But investment returns not related to program services must be reported net of external, and direct internal, expenses.
5) The accounting for contributions is described in Subunit 20.2.
6) Examples of classification of revenues:
-Fees for services and investment income ordinarily are without donor restrictions.
-Income from a perpetual or term endowment ordinarily increases net assets with donor restrictions.
On the NFP Statement of Activities, what is reclassification of net assets? (3 elements)
1) Other events, e.g., expirations of donor-imposed time or purpose restrictions, result in reclassification of net assets.
2) They are reported separately as net assets released from restrictions.
3) A reclassification of net assets is displayed as an increase in one net assets class and a decrease in the other. The reclassification entry does not include cash flows.
On the NFP Statement of Activities, how are exchange transactions accounted for?
Exchange transactions must be accounted for in accordance with the guidance for revenue from contracts with customers discussed in Study Unit 3, Subunit 3.
-Resources received in exchange transactions must be classified as revenues in net assets without donor restrictions even if the provider (e.g., a government) limits their use.
On the NFP Statement of Activities, how are gains and losses on assets or liabilities reported? (2 elements)
1) Gains and losses on assets or liabilities are changes in net assets without donor restrictions unless their use is restricted explicitly by the donor or by law.
2) Gains and losses may be reported as net amounts if they result from
i) Peripheral or incidental transactions or
ii) Other events and circumstances largely beyond the NFP’s control.
On the NFP Statement of Activities, how are expenses reported? (4 elements)
1) Most expenses are reported as decreases in net assets without donor restrictions.
2) An exception is investment expense. It must be netted against investment return (not related to program services) and reported in the same net asset category.
3) A statement of activities or the notes must provide information about expenses by functional classification (program services and supporting activities).
i) All NFPs must report information about all expenses in one place: (1) the statement of activities, (2) a schedule in the notes, or (3) a separate statement.
ii) An analysis must be presented that disaggregates functional expense classifications by natural expense classifications (e.g., salaries, rent, interest, electricity, awards and grants to others, supplies, professional fees, and depreciation).
4) Some expense recognition issues are unique to NFPs.
i) Fundraising costs, including the costs of special events, are expensed as incurred even if they result in contributions in future periods.
ii) How costs related to sales are displayed depends on whether the sales are a major activity or an incidental activity.
-For example, a major fundraising activity should report and display separately the revenues from sales and the related cost of sales.
-If sales relate to a program service or a supporting activity, the cost of sales is a program expense or a supporting expense, respectively.
On the NFP Statement of Activities, how are expenses classified? (3 elements)
1) A statement of activities or the notes must provide information about expenses by functional classification (program services and supporting activities).
2) All NFPs must report information about all expenses in one place: (1) the statement of activities, (2) a schedule in the notes, or (3) a separate statement.
3) An analysis must be presented that disaggregates functional expense classifications by natural expense classifications (e.g., salaries, rent, interest, electricity, awards and grants to others, supplies, professional fees, and depreciation).
What expense recognition issues are unique to NFPs? (2 elements)
Some expense recognition issues are unique to NFPs.
1) Fundraising costs, including the costs of special events, are expensed as incurred even if they result in contributions in future periods.
2) How costs related to sales are displayed depends on whether the sales are a major activity or an incidental activity.
i) For example, a major fundraising activity should report and display separately the revenues from sales and the related cost of sales.
ii) If sales relate to a program service or a supporting activity, the cost of sales is a program expense or a supporting expense, respectively.
For the NFT Statement of Activities, which other categories of changes in net assets may be useful? (2 elements)
Certain other categories of changes in net assets may be useful.
1) Examples are
Operating and nonoperating,
Recurring and nonrecurring,
Recognized and unrecognized, and
Expendable or nonexpendable.
2) If an intermediate operating measure (e.g., operating profit or operating income) is used, it must be in a financial statement that at a minimum reports the change in net assets without donor restrictions.
For the NFP Statement of Activities, what is the functional classification of expenses? (3 elements)
1) Program services distribute goods and services to beneficiaries, customers, or members to fulfill the purposes of the entity.
-Those services are the major purpose and output of the entity and often relate to several major programs.
2) Supporting activities of an NFP are not program services. They usually include the following:
i) Management and General
a) Oversight and business management
b) Budgeting, financing, and related activities
c) Recordkeeping
d) Most management and administrative activities
ii) Fundraising
a) Publicity and conducting campaigns
b) Maintenance of donor lists
c) Special events
d) Preparing and distributing related materials
e) Other solicitation activities
iii) Membership Development
a) Soliciting for members and dues
b) Member relations
3) Some expenses relate to more than one major program or supporting activity.
i) Direct identification (assignment) of specific expenses (direct expenses) with programs, services, or support activities is preferable when feasible. Otherwise, allocation (indirect expenses) must be rational and systematic, and the result must be reasonable.
-For example, the cost of a direct-mail solicitation may need to be allocated between fundraising (a supporting activity) and the NFP’s educational mission (a program service).
For the NFP functional classification of expenses, what are program services?
Program services distribute goods and services to beneficiaries, customers, or members to fulfill the purposes of the entity.
-Those services are the major purpose and output of the entity and often relate to several major programs.
For the NFP functional classification of expenses, what are supporting activities? (4 elements)
1) Supporting activities of an NFP are not program services. They usually include the following:
-Management and General
-Oversight and business management
-Budgeting, financing, and related activities
-Recordkeeping
-Most management and administrative activities
2) Fundraising
-Publicity and conducting campaigns
-Maintenance of donor lists
-Special events
-Preparing and distributing related materials
-Other solicitation activities
3) Membership Development
-Soliciting for members and dues
-Member relations
For the NFP functional classification of expenses, what is done for those expenses that relate to more than one major program or activity? (2 elements)
1) Some expenses relate to more than one major program or supporting activity.
2) Direct identification (assignment) of specific expenses (direct expenses) with programs, services, or support activities is preferable when feasible. Otherwise, allocation (indirect expenses) must be rational and systematic, and the result must be reasonable.
-For example, the cost of a direct-mail solicitation may need to be allocated between fundraising (a supporting activity) and the NFP’s educational mission (a program service).
For the NFP Statement of Cash Flows, how do the general guidelines for ALL cash flow statements apply?
The guidance in Study Unit 16 for reporting a statement of cash flows applies to all NFPs and business entities. For example, the term “income statement” includes a statement of activities, and the term “net income” includes the change in net assets. The outline in this section includes the guidance specific to NFPs.
For the NFP Statement of Cash Flows, how are cash inflows from operating activities treated? (4 elements)
1) Cash inflows from operating activities include receipts of contributions without donor restrictions.
2) NFPs and for-profit entities also treat interest and dividends on investments without donor restrictions as operating cash flows.
3) Either the direct or indirect method of presenting cash flows from operating activities may be used.
-If the direct method is used, a reconciliation to the indirect method is permitted but not required.
4) Operating activities may include agency transactions.
-In an agency transaction, the NFP receives assets in a voluntary transfer but has little discretion in their use.
For the NFP Statement of Cash Flows, how are cash inflows from financing activities treated? (3 elements)
1) Cash inflows from financing activities include receipts of resources that are donor-restricted for long-term purposes.
2) Accordingly, cash donor-restricted to (a) acquiring, constructing, or improving long-lived assets (e.g., a building or equipment) or (b) establishing or increasing a donor-restricted endowment fund is a cash inflow from a financing activity. Moreover, it is also reported as a cash outflow from an investing activity.
3) Receipts of investment income (cash interest and dividends) that are donor-restricted for such purposes also are financing cash inflows.
For the NFP Statement of Cash Flows, what are investing activities?
Investing activities include cash flows from purchases, sales, and insurance recoveries of unrecognized, noncapitalized collection items.
For the NFP Statement of Cash Flows, how are noncash investing and financing activities treated?
Noncash investing and financing activities, e.g., receipt of a contribution of a building, securities, or recognized collection items, are separately disclosed.
For the NFP Statement of Cash Flows, how can restrictions effect cash equivalents classification?
Restrictions may prevent items otherwise qualifying as cash equivalents from being classified as such.
-An example is a short-term, highly liquid investment purchased with resources donor-restricted to long-term investment.
What is an important limitation on the scope of the accounting for contributions to NFPs and businesses?
The accounting for contributions applies to NFPs and businesses (but not transfers from governments to businesses).
For NFP accounting, what is a contribution?
A contribution is an unconditional, voluntary, and nonreciprocal transfer of assets (or a reduction, cancellation, or settlement of liabilities). It also may be an unconditional promise to give or consist of nonfinancial assets.
What things are not considered contributions? (3 elements)
A contribution is not
1) An investment by, or a distribution to, an owner.
2) An involuntary nonreciprocal transfer (e.g., taxes).
3) An exchange transaction, a reciprocal transfer in which each party receives and sacrifices approximately commensurate value.
i) A resource provider (contributor) often receives indirect value in the form of positive sentiment from the donation or a public benefit. But that sentiment or benefit is not commensurate value.
ii) In an exchange transaction, the potential public benefit is secondary to the direct benefit to the resource provider.
iii) EXAMPLE: An exchange transaction likely exists if the resource provider and recipient agree on the amount of assets transferred for commensurate value.
iv) EXAMPLE: A contribution likely is made if the recipient solicits assets without intending to give commensurate value or the resource provider has full discretion regarding the amount of assets.
For NFP contributions, what is a promise to give? (3 elements)
1) A promise to give is an oral or written agreement to contribute assets to another entity. It is unconditional if it depends only upon the passage of time or a demand by the promisee for performance.
2) Sufficient verifiable documentation must exist.
3) An ambiguous promise is unconditional if it is unconditional and legally enforceable.
For NFP contributions, what are contributed nonfinancial assets?
Contributed nonfinancial assets (gifts-in-kind) may, for example, be land, buildings, intangible assets, or recognized contributed services.
-Contributed nonfinancial assets must be reported on a separate line item in the statement of activities. They also must be disclosed and disaggregated by category.
For NFP contributions, what are donor-imposed conditions? (4 elements)
1) A donor-imposed condition is a barrier that must be overcome before the recipient is entitled to the assets. If it is not overcome, the contributor must have a right of return of the assets or the promisor a right of release from its obligation.
2) A conditional promise to give is not recognized until the condition is substantially met (i.e., the barrier is overcome).
-A transfer of assets before the condition is met is a conditional contribution. It is accounted for as a refundable advance until the condition is (a) substantially met or (b) explicitly waived by the donor.
Assets $XXX
Liability-refundable advances $XXX
3) Whether a contribution is conditional must be determinable from an agreement. It should be sufficiently clear that the recipient has an entitlement only if it has overcome the barrier.
i) Without an apparent indication of a barrier, the agreement does not contain a right of return or release. It is therefore an unconditional contribution.
ii) However, a donor stipulation that is ambiguous and not clearly unconditional is presumed to be conditional.
4) The following indicators may be useful in determining whether a barrier exists:
i) A measurable performance-related barrier may consist of a specified service level, output, or outcome.
ii) An other measurable barrier may be an identified event, e.g., a matching requirement.
iii) The recipient’s limited discretion over the conduct of an activity may extend to (a) guidelines about qualifying expenses or (b) a protocol that must be followed.
iv) A stipulation related to the purpose of the agreement may be a barrier, e.g., a homeless shelter’s serving a specified number of meals. But administrative and trivial stipulations (e.g., routine reporting) are not barriers.
When are NFP contributions recognized?
A contribution is usually recognized by the donor and the donee (a) at the same time (when made or received, respectively) or, (b) if conditional, when the barrier is overcome.
For NFPs, how are contributions received accounted for? (4 elements)
1) Contributions received ordinarily are accounted for when received at fair value.
2) Debits are to
i) Assets (e.g., cash or other assets),
ii) Liabilities (e.g., for payment of an NFP’s debt), or
iii) Expenses (e.g., services when the contribution is received and used at the same time).
3) Credits are to income, specifically to
i) Revenues if the transactions are part of the NFP’s ongoing major or central operations, e.g., soliciting contributions.
ii) Gains if the transactions are peripheral or incidental.
4) The difference between the amount ultimately received and the fair value is recognized as an adjustment of the original contributions.
For NFP contributions, how may present value be applied? (4 elements)
1) Present value may be used to measure the fair value of an unconditional promise to give cash.
2) Interest accruals are recognized using the interest method as
i) Contribution revenue by donees and
ii) Contribution expense by donors.
Contributions (pledges) receivable $20,000,000
Contribution revenue – net assets with donor restrictions $16,454,000
Discount $3,546,000
3) However, unconditional promises to give expected to be collected in less than 1 year may be recognized at net realizable value (that is, minus an estimated uncollectible amount).
4) The recipient of an unconditional promise to give must disclose the allowance for uncollectible promises receivable. But the allowance excludes amounts determined to be uncollectible when the receivable was measured initially.
When are contributions of services to NFPs recognized? (2 elements)
Contributions of services are recognized if they either
1) Create or enhance nonfinancial assets (e.g., buildings) or
2) Require special skills, are provided by those having such skills, and usually would be purchased if not donated.
How are NFP contributions of utilities accounted for?
A contribution of utilities, such as electricity, is a contribution of other assets, not services. A simultaneous receipt and use of utilities should be recognized in the period of receipt and use.
Expense $XXX
Revenue – net assets without donor restrictions $XXX
How are capitalizations of collections by NFPs accounted for?
If an NFP capitalizes collections, contributions of collection items received are recognized as assets and as revenues or gains in the appropriate net asset class. They are measured at fair value.
Assets – collections $XXX
Contribution revenue – net assets with donor restrictions $XXX
How are NFP contributions made accounted for?
Contributions made are recognized at fair value when made as (a) expenses and (b) decreases of assets or increases in liabilities.
For the NFP reporting of contributions, how does the NFP distinguish between contributions with donor-imposed restrictions and those without such restrictions? (5 elements)
1) An NFP distinguishes between (1) contributions received with donor-imposed restrictions and (2) those without such restrictions.
2) Donor-restricted support consists of contribution revenues or gains that increase net assets with donor restrictions.
3) Contribution revenues or gains without donor restrictions increase net assets without donor restrictions.
4) An NFP must recognize the expiration of a donor-imposed restriction on a contribution in the period when it expires. Expiration occurs when
i) The time stipulated has lapsed,
ii) The purpose stipulated has been fulfilled, or
iii) Both.
5) Under the simultaneous release accounting policy, an NFP may elect to report donor-restricted contributions whose restrictions are met in the same period as support within net assets without donor restrictions. The NFP must
i) Have a similar policy for investment gains and income,
ii) Report consistently, and
iii) Disclose the policy.
-The election of the simultaneous release policy also may be made for contributions that were initially conditional (assuming the condition was met). However, the NFP is not required to elect that policy for (a) other donor-restricted contributions or (b) investment gains and income (if the reporting is consistent and the policy is disclosed).
How do NFPs report unconditional promises to give?
Unconditional promises to give, with payments due in future periods, are reported as donor-restricted support unless the donor clearly intended support for current activities.
-Unconditional promises to give cash in future years usually increase net assets with donor restrictions.
How are contributions restricted to acquisition of long-term assets reported? (3 elements)
1) Contributions restricted to acquisition of long-term assets are reported initially as donor-restricted support.
2) Unless a donor has stipulated a time restriction on the use of such assets, donor restrictions expire when the assets are placed in service.
3) An NFP must not imply a time restriction that expires over the term of a long-lived asset.
What are agency transactions? (2 elements)
1) Agency transactions are types of exchange transactions in which the NFP acts as an agent, trustee, or intermediary for a third party who may be a donor or donee. An agent acts for or on behalf of another. An intermediary merely facilitates the transfer of assets from the donor to the donee beneficiary and is not an agent, trustee, donor, or donee.
2) Financial assets received in an agency transaction should be reported as increases in assets and liabilities. Distributions should be reported as decreases.
Asset $XXX
Liability $XXX
-If the assets are nonfinancial, the recipient has the option not to recognize the assets and liabilities.
What are exchange transactions?
An exchange transaction is a reciprocal transfer in which one entity receives assets, services, or satisfaction of a liability(ies) by transferring other assets, performing services, or incurring another obligation(s).
What are the attributes of exchange transactions? (5 elements)
1) An exchange transaction is a reciprocal transfer in which one entity receives assets, services, or satisfaction of a liability(ies) by transferring other assets, performing services, or incurring another obligation(s).
2) The cost of premiums given to potential donors in a mass fundraising appeal is a fundraising expense if the premiums are not given in exchange for contributions.
Fundraising expenses – premium expense $20
Cash $1,399,980
Premium inventory $20
Revenue – sales $1,399,980
i) The cost of premiums given to acknowledge contributions also is a fundraising expense if the cost is immaterial in relation to the contributions. But the cost of premiums that is not immaterial is a cost of sales, and the transaction is part exchange and part contribution.
ii) Total contribution revenue is the excess of total contributions received over the costs of fundraising premiums.
3) Dues from members may have elements of a contribution and an exchange if members receive tangible or intangible benefits from membership. Dues and nonrefundable fees received in exchange transactions are recognized as revenues in accordance with the guidance for revenue from contracts with customers.
4) Grants, awards, or sponsorships are contributions if (1) the resource providers receive no value or (2) the value is incidental to the public benefit.
-The transfers are exchange transactions if the public benefit is secondary.
5) Resources received in exchange transactions are classified as revenues in net assets without donor restrictions even when resource providers limit the use of the resources (limitations are not donor-imposed restrictions and contributions).
What is a donation on behalf of a beneficiary?
A donation on behalf of a beneficiary is a contribution of cash or other financial assets to an NFP that agrees to use it on behalf of a third party.
What are the attributes of donations on behalf of a beneficiary? (4 elements)
1) A donation on behalf of a beneficiary is a contribution of cash or other financial assets to an NFP that agrees to use it on behalf of a third party.
2) If the donor explicitly grants variance power, the NFP records the asset and contribution revenue at fair value. Variance power is the unilateral power to redirect the use of the assets to another beneficiary.
3) If the donor does not grant variance power, the NFP recognizes an asset and a liability to the beneficiary, which also recognizes an asset.
Common stock – X Corp. $XXX
Liability – beneficiary Y $XXX
-If the assets are nonfinancial, such as materials or supplies, the recipient is not required to recognize the assets and the liability. The NFP must disclose this accounting policy and apply it consistently.
4) If the recipient and the beneficiary are financially interrelated, the nontrustee recipient recognizes the fair value of the assets as a contribution.
i) NFP organizations are financially interrelated if (a) one has the ability to influence the operating and financial decisions of the other and (b) one has an ongoing economic interest in the other.
ii) Below is a summary of journal entries for the recipient:
What is shown on the table for Grants of Variance Power?
What is a split-interest arrangement? (3 elements)
1) A split-interest arrangement is an agreement in which a donor enters into a trust or other arrangement under which the not-for-profit entity receives benefits that are shared with other beneficiaries.
2) For example, a charitable remainder trust is part of a split-interest agreement in which the donor (or a third-party beneficiary) receives distributions during its term.
3) After trust termination, an NFP receives the remaining trust assets.
How do certain important laws pertain to the accounting for NFP investments?
Laws address the use of the investment return on donor-restricted endowment funds. The majority of jurisdictions follow a statutory version of the relevant uniform act (Uniform Prudent Management of Institutional Funds Act of 2006, or UPMIFA). Others follow trust law. One issue is whether the investment return is available to be spent.
The outline and questions in this subunit assume that UPMIFA applies. However, if the endowment is subject to trust law, the original gift and net appreciation generally are unavailable to be spent. But ordinary income (interest, dividends, etc.) generally may be spent assuming no purpose or other donor restriction.
For NFP investments, how are purchased debt and equity securities treated? (4 elements)
1) Purchased debt and equity securities initially are measured at acquisition cost (excluding transaction costs).
2) Debt and equity securities received as contributions or through agency transactions initially are measured at fair value.
3) If a debt or equity security is acquired by contribution, it is recognized as an asset and as a revenue or gain when received.
4) An NFP may hold an investment as an agent with little or no discretion in how income and realized and unrealized gains and losses are used. The NFP therefore must report those activities as agency transactions (changes in assets and liabilities), not as changes in net assets.
How are NFP gains, losses, dividends, interest, and other investment income reported? (3 elements)
1) Gains and losses, dividends, interest, and other investment income are reported in the statement of activities as changes in net assets without donor restrictions. But, if they are donor-restricted (or if they are subject to a law that extends donor restrictions), they are reported as changes in net assets with donor restrictions.
2) Under the simultaneous release accounting policy, donor-restricted gains and investment income may be reported as increases in net assets without donor restrictions if the restrictions expire in the period the gains and income are recognized. The NFP must
i) Have a similar policy for contributions received,
ii) Report consistently, and
iii) Disclose the policy.
3) Investment return not related to program services must be reported net of related external, and direct internal, investment expenses.
Where is the guidance for NFP equity securities stated in the Gleim outline?
Study Unit 5, Subunit 3, outlines the guidance for subsequent measurement of equity securities.
For NFP investments, how is subsequent measurement of debt securities reported?
Subsequent measurement of debt securities is at fair value in the statement of financial position.
For NFP investments, what is the treatment of donor-restricted endowment funds? (5 elements)
1) A donor-restricted endowment fund is created by a donor stipulation requiring a gift to be invested for a specified period or in perpetuity.
i) This definition excludes board-designated endowment funds.
ii) Classifying a donor-restricted endowment fund within net assets with donor restrictions or net assets without donor restrictions depends on (1) the donor’s specific stipulation and (2) the applicable law.
3) Without a donor or legal restriction, investment return generally is free of donor restrictions. But most donor-restricted endowment funds are subject to the UPMIFA. This statute extends a donor restriction to use of the assets, including the return, until appropriation for expenditure by the governing board.
i) Thus, without contrary language in the gift instrument, the assets in the fund (including the return) are net assets with donor restrictions until appropriation.
ii) An appropriation reduces net assets with donor restrictions if all time and purpose restrictions have been met. The result is a reclassification to net assets without donor restrictions.
-Appropriation occurs upon approval for expenditure unless a legal interpretation states otherwise.
4) An underwater endowment fund has a reporting-date fair value less than the amount (a) of the gift or (b) required by the donor or a law that extends donor restrictions.
-The accumulated losses are included with that fund in net assets with donor restrictions.
What is the definition of a donor-restricted endowment fund?
A donor-restricted endowment fund is created by a donor stipulation requiring a gift to be invested for a specified period or in perpetuity. This definition excludes board-designated endowment funds.
For NFP investments, what factors determine the classification of donor-restricted endowment fund? (4 elements)
1) Classifying a donor-restricted endowment fund within net assets with donor restrictions or net assets without donor restrictions depends on (1) the donor’s specific stipulation and (2) the applicable law.
2) Without a donor or legal restriction, investment return generally is free of donor restrictions. But most donor-restricted endowment funds are subject to the UPMIFA. This statute extends a donor restriction to use of the assets, including the return, until appropriation for expenditure by the governing board.
3) Thus, without contrary language in the gift instrument, the assets in the fund (including the return) are net assets with donor restrictions until appropriation.
4) An appropriation reduces net assets with donor restrictions if all time and purpose restrictions have been met. The result is a reclassification to net assets without donor restrictions.
-Appropriation occurs upon approval for expenditure unless a legal interpretation states otherwise.
