NFP Revenue Recognition Flashcards
Revenue recognition from exchange transactions for NFPs
an exchange transaction is one in which the NFP earns resources in exchange for a service performed; revenues from NFP exchange transactions are recognized when realized or realizable and earned; revenues from exchange transactions are classified as increases to net assets without donor restrictions
What is a contribution?
it is an unconditional transfer of cash or assets (collection is certain) to a new owner (title passes) in a manner which is voluntary (the donor is under no obligation to donate) and is nonreciprocal (the donor gets nothing in exchange); contributions may include cash, services, and other assets
unconditional contributions are recognized as revenues or gains and reported as either an increase to net assets without donor restrictions or donor-restricted support in the period received and as assets, decreases of liabilities, or expenses, depending on the form of the benefits received; a contribution is classified as revenue if it is part of the ongoing major or central activities of the NFP; a contribution is classified as a gain if the transaction is incidental to the purpose of the NFP; conditional contributions are not recognized; conditions are indicated by the existence of both barriers and the right of the donor to demand return of the contribution
the existence of measurable performance-relate barriers or other barriers that may indicate a condition include: specified levels of service, specific outputs or outcomes, matching (collection of community match), and outside event (satisfaction of a contingency outside of the control of the NFP)
the donor has the right to require return of the donation from the recipient NFP
Cash contributions
they should be recognized as revenues or gains and reported as contributions that increase net assets without donor restrictions or donor-restricted support in the period in which they are received, and they should be measured at their fair value at the date of the gift
Promises to give (pledges)
unconditional promise - it is a contribution and is recorded at its fair value when the promise is made; it may be written or verbal; however, verbal pledges should be documented by the organization internally and may be more difficult to collect
conditional promise - it is a transaction that depends on an occurrence of a future and uncertain event; recognition does not occur until the conditions are substantially met (or when it can be determined that the chances of not meeting the conditions are remote) and the promise becomes unconditional
good faith deposits that accompany a conditional promise are accounted for as a refundable advance in the liability section of the statement of financial position
conditions are NOT synonymous with donor restriction; donor restrictions are satisfied by the NFP by use of the donated resources consistent with restrictions; conditions are satisfied by the resolution of barriers used to condition the contribution by the donor
multiyear pledge - it is recorded at the net present value at the date the pledge is made; future collections are considered donor-restricted revenues and net assets (time-restricted); the difference between the previously recorded present value and the current amount collected is recognized as contribution revenue, not interest income
in the absence of specific donor restrictions, NFPs must use the placed-in-service approach to report the expiration of restrictions on contributions associated with long-lived assets
an allowance for uncollectible pledges should be recorded in accordance with commercial accounting principles for accounts receivable in order to present the pledge at its net realizable value; however, in contrast to commercial accounting principles, there is no bad debt expense recognized at any point; instead, both the pledge and related contribution revenue are reported net of any allowance
do not confuse the net asset classification concept of with vs without donor restrictions with the revenue recognition concept of conditional vs unconditional; unconditional pledges are assured of collection and may be recognized as either with or without donor restrictions; conditional pledges are still subject to important contingencies and are not recorded
Donated services
when received by a NFP, they are generally not recorded because of the difficulty in placing a monetary value on donated services (and the absence of control over them); however, donated services should be recorded as a contribution and expense at fair value if the services meet one of the following criteria: they create or enhance a nonfinancial asset (land, building, inventory, etc.) or they require specialized skills that the provider possesses and would otherwise have been purchased by the organization (attorney, accountant, doctor, etc.)
contributions of services that do not enhance nonfinancial assets are recognized only SOME of the time:
specialized skills are required and possessed by the donor
otherwise needed by the organization
measurable
easily (at fair value)
donated services that qualify for recognition are displayed as nonoperating
costs of soliciting contributed services are considered fundraising expenses regardless of whether services meet recognition criteria
Donated collected items
they are contributed works of art or historical treasures; they are not required to be recorded by the recipient NFP if all of the following requirements are met:
the item is part of a collection, which is held for public viewing, exhibition, education, or research
the collection is cared for, preserved, and protected by the organization
the organization has a policy that requires any proceeds from the sale of donated items to be reinvested in other collection items or used to support the direct care of existing collections
if the preceding requirements are not met, the donation must be recognized as an asset and revenue; the policy may not be selectively applied and must be used for all assets
Donated materials
if significant in amount, donated materials should be recorded at their fair value on the date of receipt if the fair value can be objectively determined
donated materials that merely pass through the organization to an ultimate beneficiary, such as used clothing, should not be recorded, unless the amounts involved are substantial
assuming that donated materials are substantial, they should be recorded as a contribution with an offsetting entry to expenses and appropriately disclosed in the financial statements
when donated items are sold at greater than fair value, the amount received in excess of fair value is considered an additional contribution
What are gifts-in-kind?
they are noncash contributions, such as donated investments, and are recognized as a contribution at fair value; gifts-in-kind that are donated as part of a fundraising appeal are valued at fair value when received and revalued upon their sale as part of the fundraising appeal; the difference between the fair value at the time of donation and the value at the time of sale is accounted for as an additional contribution
Contributions without donor restrictions
unconditional promises to contribute in the future are reported as donor-restricted support (implied time restriction), at the present value of the estimated future cash flows using a discount rate commensurate with the risks involved; if the unconditional promises are expected to be collected or paid in less than one year, they may be measured at net realizable value since that amount is a reasonable estimate of fair value
collection of the pledge satisfied the time restriction and results in a reclassification
Contributions with donor restrictions
a contribution may be restricted by the donor; donor-imposed restrictions limit the use of contributed assets; they are recognized as revenues, gains, and other support in the period received and as assets, decreases of liabilities, or expenses, depending on the form of the benefits received
What is fundraising?
when a NFP offers premiums (giveaway items) to donors as part of a fundraising campaign, the cost of the premiums is classified as a fundraising expense
the cost of premiums given to acknowledge donations is also classified as a fundraising expense
generally, the difference between the contribution made by the donor and the fair value of any premiums transferred is classified as contribution revenue
the general rule for CPA exam questions, for amounts recognized as contributions received through fundraising appeals is:
total contribution received - fair value of premiums = contribution revenue
Industry-specific revenue recognition
educational institutions - revenues consist of all increases in net assets without donor restrictions and all donor-restricted resources that were actually expended during the period
student tuition and fees are reported at the gross amount; many prior CPA exam questions have required students to compute gross revenue from tuition and fees; scholarships, tuition waivers, and similar reductions are considered either expenditures or a separately displayed allowance reducing revenue
assessed student tuition and fees - canceled classes = gross revenue from tuition and fees
gains and losses on investments and other assets, classified as with or without donor restrictions, are reported in the statement of activities
health care organizations - patient service revenue should be accounted for on the accrual basis at established standard rates, even if the full amount is not expected to be collected; although patient service revenue is recorded on a gross basis, deductions are made from gross revenue to recognize patient service revenue net of deductions; central transactions include medical services such as doctors, surgery, recovery room, and room and board
charity care is defined as health care services that are provided but never expected to result in cash flows to the hospital
deductions from patient service revenue arrive at “net patient service revenue” include the following for uncompensated services: contractual adjustments for third–party payments, policy discounts, administrative adjustments, and bad debts associated with services billed prior to the organization’s assessment of the patient’s ability to pay
bad debt may be afforded one of two treatments, depending on the character of the bad debt
operating expense: bad debt resulting from failure to collect revenues that the health care organization anticipated earning
deduction from revenue: bad debt resulting from inability to collect large volumes of revenue that the health care organization never assess for quality or collectability
prior CPA exam questions have required candidates to compute “patient service revenue;” use this formula to answer those questions correctly:
gross patient service revenue - charitable services = patient service revenue
many prior CPA exam questions have required candidates to identify which of the three categories of revenue a particular item of income is to be reported in:
patient service revenue
other operating revenue (parking, gift shop, cafeteria, specific purpose grants, etc.)
nonoperating revenue (grants, gifts and bequests, donated services, interest and dividend income from investment activities, income from endowment funds, and income from board-designated funds)
