NFP Financial Reporting Pt. 1 Flashcards
Characteristics of not-for-profit (NFP) organizations
they are defined by the FASB as entities that have the following characteristics:
their revenues come from contributions
their operating purpose does not include profit, although there is nothing to preclude the generation of a profit
their ownership interest are unlike business enterprises
NFPs are generally divided into 4 separate categories related to various industries: health care organizations, education institutions, voluntary health and welfare organizations (ex. Red Cross), and other private (not governmental) NFP organizations (ex. museum, library, labor union, etc.)
users of NFP financial statements have common needs; these common needs include the ability to assess: the services the organization provides, the organization’s ability to continue to provide those services, and the method the organization’s managers use to discharge their stewardship responsibility
generally accepted accouting principles require that NFP organizations report using the full accrual basis of accounting; the primary reporting emphasis is placed on disclosing the sources of the institution’s resources and how they were expanded, rather than on the periodic determination of net income; the overall emphasis for NFP financial statements is on basic information for the organization as a whole
the external financial statements of NFPs do not present funds; the focus of the financial statements is on the basic information of the organization taken as a whole
NFP financial reporting standards
a complete set of general purpose, external financial statements for a NFP include the following:
statement of financial position (equivalent to a commercial balance sheet)
statement of activities (equivalent to a commercial income statement and statement of changes in retained earnings)
statement of cash flows (equivalent to a commercial statement of cash flows using either the direct or indirect method)
all NFP organizations must report information about the relationships between functional classifications and natural classifications of expenses in one location; NFPs have the latitude to report in 1 of 3 ways: on the face of the statement of activities, as a schedule in the notes to the financial statements, and in a separate financial statement (no specific title provided by the FASB)
functional classifications of expenses categorize costs by major classes of program and support services; program services relate to the purpose and mission of the NFP organization; support services relate to such activities as management and general, fundraising, and membership development
natural classifications of expenses include such descriptions as salaries, rent, utilities, interest expense, supplies, etc., similar to general ledger titles for expense
Statement of financial position
the NFP statement of financial position is divided into three major components: assets, liabilities, and net assets (equity)
the components of net assets of NFP organizations may include one or both of the following two classifications: with donor restrictions or without donor restrictions; classifications are based on the existence or absence of donor-imposed restrictions
net assets without donor restrictions are available to finance general operations of a NFP and may be expended at the discretion of the governing board
net assets with donor restrictions are subject to specific, externally imposed limitations made by a donor; information regarding the nature and amounts of different types of donor-imposed restrictions should be either reported within the financial statement classification of net assets with donor restrictions or in the notes to the financial statements
internal board-designated funds are classified as net assets without donor restrictions; the examiners sometimes try to trick candidates with incorrect answer options that suggest board-designated endowment funds created by self-imposed limits should be reported as net assets with donor restrictions
NFP entities must disclose relevant information about the liquidity or maturity of assets and liabilities including restrictions and self-imposed limits on the use of particular items; in addition to information displayed on the face of the statement of financial position, NFPs must disclose in the notes of the financial statements:
qualitative information useful in assessing liquidity, including how the organization manages its liquid resources to meet cash needs for general expenditures within one year of the statement of financial position date; additional qualitative disclosures include: a description of the type of asset whose use is limited, nature and amount of limits, contractual limits, and how and when resources can be used
quantitative information that displays or discloses the availability of its liquid resources as affected by: the nature of the resources, external limits imposed by donors, and internal limits imposed by governing boards
Statement of activities
three required elements are presented in the statement of activities: change in total net assets, change in net assets without donor restrictions, change in net assets with donor restrictions
revenues are classified into 1 of 2 categories, according to the existence or absence of donor-imposed restrictions
net assets without donor restrictions - revenues are classified as net assets without donor restrictions unless the use of the assets received is limited by donor-imposed restrictions
net asset with donor restrictions - revenues are classified as net assets with donor restrictions (donor-restricted support) if the use of the asset received is limited by donor-imposed restrictions; all restricted revenue is included in the same classification regardless of whether the restriction is perpetual or if the restriction can be satisfied by the recipient; classification grouping does not, however, preclude the NFP from itemizing the character of restrictions on either the face of the financial statements or the notes
all expenses (other than investment expenses) are reported as decreases in net assets without donor restrictions; investment expense is netted against investment returns and classified according to the requirements of the investment revenue; details of functional classifications and their relationship to natural expense classifications must be presented on the face of the financial statements or the notes; examples of functional expense classifications are as follows:
program services - the activities for which the organization is chartered (ex. universities = education and research)
support services - include everything not classified as a program service (ex. fundraising, admin costs, etc.)
combined services - NFPs that combine fundraising efforts with educational (or program) services should allocate the combined cost between functions
