Nonprofit Accounting Flashcards
Are nonprofit organizations required to use fund accounting?
No, though it is permitted
NPOs do not generally use budgetary or encumbrance accounting either
What are contributions?
Unconditional transfers of cash/assets by a non-owner
What are pledges?
Conditional promises to give – conditioned upon some future uncertain event
If uncertainty is remote, these are deemed unconditional
When is a pledge recorded?
Not recorded until it becomes unconditional (though it is recognized whenever there’s evidence of the conditional promise)
What happens if a promise contains stipulations which are ambiguous?
Presumed to be conditional unless clearly unconditional
What happens if it is ambiguous whether a given communication is a promise?
If it involves a legally enforceable intention to give, then it counts as a promise
What is a donor-imposed condition?
An uncertain event that frees the donor from the obligation to give, or gives the donor the right to have the asset back
What is a donor-imposed restriction?
Specifies the permissible use of the donated asset
Can be temporary or permanent
What is a permanent restriction?
A donor-imposed restriction which requires donated assets to be permanently maintained (i.e. not used), although the NPO can use returns on investment
What are board-restricted assets?
Restrictions by the NPO’s governing board on asset use – within the range of use permitted by the donor
What is peculiar about board-restricted assets?
They are classified as unrestricted assets
Under what circumstances are contributions of service recognized?
Only if:
(a) Nonfinancial assets are created or improved by the service, or
(b) Special skills are required, such that the service would otherwise be purchased
How are contributed collection items recognized?
Recognized as revenues or gains if, and only if, collections are capitalized
An entity does not need to recognize contributions of collection items under what circumstances?
If the items are added to collections that:
- benefit the public (rather than being for private profit)
- are protected and preserved
- are part of a policy requiring proceeds on the items to purchase other collection items
How are contributions classified as revenues or gains?
Revenues if part of central/major activities
Gains if part of peripheral/minor activities
How are contributions reported, and what accounts do they affect?
Restricted contributions are reported as “Restricted Support” and increase Permanently/Temporarily Restricted Net Assets
Unrestricted contributions are reported as “Unrestricted Support” and increase Unrestricted Net Assets
When should the expiration of donor-imposed restrictions be recognized?
In the period when the restriction expires
Under what circumstances are contributed services reported as both expenses and revenues?
If (1) services would otherwise be purchased,
(2) value of services is measurable, and
(3) there is essentially an employer-employee relationship
How are unconditional pledges reported?
As a receivable, recorded at PV if one year or longer
Reported net of an allowance for uncollectible amounts
How are unrestricted pledges reported?
Reported in statement of revenue and expenses
If part of pledge is to be used in some future period, that part is reported as restricted revenue
How are restricted pledges reported?
Reported as restricted support unless donor explicitly intends it to be used in current period
How are pledges to give future amounts recorded?
Usually increase temporarily restricted net assets
Pledges to give in the future have an implied restriction for future use
How are capitalized contributed collections reported?
Proceeds from sales (and from insurance recoveries for items not previously capitalized) are reported separately from revenues, expenses, gains, and losses
How are noncapitalized contributed collections reported?
- Cost of items decrease net assets
- Proceeds from selling items increase assets
- Proceeds from insurance recoveries of lost/damaged items increase net assets
The type of asset/net asset changed will be based on how restricted it is
What happens when a donated long-lived asset is put in use?
It is transferred to unrestricted net assets, unless the donor has placed a restriction on it
Same applies for donated assets used to acquire long-lived assets
If a long-lived asset has no donor stipulations restricting its use, when would it still be classified as restricted?
If the NPO’s accounting policy is to imply a time restriction that expires over the asset’s useful life
-If not, then the asset is reported as unrestricted support
Again, this also applies to donated assets that are intended to purchase long-lived assets
What are intermediary transactions?
When the NPO is given assets (from a resource provider) and must give the assets to another organization
The NPO intermediary acts as an agent
If an NPO is an intermediary, is it always acting as an agent?
No – it depends on how much discretion the NPO has to use the assets
If sufficient discretion is permitted, then the NPO is a donee rather than an agent
What are different factors determining how much discretion an NPO has in an intermediary transaction?
- why the NPO requests the asset
- composition of asset (e.g. NPO gains land but distributes cash to other party)
- legal title to assets
- intent to transfer
- awareness of ultimate recipient
- type of NPO (whether it has independent operations or serves to collect and distribute assets)
If an asset is donated to a recipient for the sake of a different beneficiary, how does the recipient report it?
Recognizes both asset and liability
If the donor gives the beneficiary variance powers, or if the recipient and beneficiary are “financially interrelated entities,” then recipient records it as contribution (not a liability)
What are variance powers?
They give the recipient the ability to change the beneficiary
For a donation to a recipient for the sake of a beneficiary, what are four conditions where the recipient recognizes a liability and the donor recognizes an asset?
- The donor may redirect the asset to a different beneficiary
- The donor may revoke the asset
- The donor controls the recipient
- The donor or an affiliate is the beneficiary (and the transfer is not equity)
If the beneficiary and the recipient are financially interrelated, what does the beneficiary report?
An interest in the recipient’s net assets
What does a beneficiary report if he is unconditionally entitled to receive the assets?
He reports a beneficial interest
What does the beneficiary recognize if the recipient is given variance power?
Doesn’t recognize an asset
If variance power is not granted to the recipient, and if the beneficiary does not recognize a beneficial interest or interest in net assets, what should he report?
A receivable
How is a transfer recorded if equity is transferred and the donor is the beneficiary?
Donor records interest in net assets of recipient
How is a transfer recorded if equity is transferred and an affiliate of the donor is the beneficiary?
Donor and recipient both record equity transaction as separate line item in statement of activities
Beneficiary records interest in net assets of recipient
How do NPOs record investment income?
Included in statement of activities as increases/decreases in unrestricted net assets (unless the securities are restricted)
Same goes for gains/losses
Under what circumstances is an organization deemed “related” to an NPO?
Under any of the following circumstances:(1) NPO controls organization (whether through contracts, legal documents, etc.)
(2) NPO is only beneficiary of organization
(3) NPO is liable for the organization’s debts should it liquidate
What is the method by which two NPOs become a new NPO?
Carryover method
Assets and liabilities are combined at their carrying amounts
In the carryover method, what changes might still be made in the financials?
- statements might need adjusted to GAAP
- reclassifications might be necessary to have uniform accounting (e.g. being measured differently)
- transactions between NPOs might be removed
Does the new NPO from a merger reflect the merger in its own financials?
No
What is the method by which an NPO records an acquisition of another NPO?
Acquisition method – essentially the same as the method by which for-profit entities acquire other companies
Identifiable assets, assumed liabilities, and noncontrolling interest are all recorded at acquisition-date FV
Can NPOs have goodwill?
Yes, and the more business-like the NPO (the more it generates its own revenues), the more goodwill is relevant
What does an NPO recognize if the acquired NPO has goodwill, but the acquiring NPO functions primarily by donations?
Amount that would have been recognized as goodwill is recorded as separate charge in statement of activities
What happens if the acquirer NPO gains net assets without exchanging equivalent consideration?
Such assets are basically contributions
Contribution should be recorded as a separate credit in statement of activities
What are the ways that the acquisition method is different for NPOs?
(1) acquirer doesn’t recognize any acquired donor relationship as an asset (i.e. separate from goodwill)
(2) if the acquirer doesn’t capitalize collections, then he shouldn’t recognize any such assets (e.g. art)
(3) conditional promises are recognized only if fulfilled
(4) if some acquired assets are conditionally promised to be contributed elsewhere, then they are recorded as a refundable advance (unless the conditions are fulfilled)
What financial statements are NPOs required to present?
- Statement of Financial Position
- Statement of Activities
- Statement of Cash Flows
Similar to for-profit companies, except that fund statements are also optional, though they must be aggregated
On the statement of financial position, how should net assets be reported?
- permanently restricted
- temporarily restricted
- unrestricted
Notice, this is how NET assets are reported (equivalent to equity), not how assets are reported
On the statement of financial position, how should assets be reported?
According to liquidity
Assets restricted to a particular purpose have the same liquidity as that purpose (e.g. cash restricted to buy PP&E will be far less liquid)
What is the sequence of items in the statement of activities?
Revenues and Other Additions - Expenditures and Other Deductions \+/- Transfers Among Funds = Net Increase (Decrease) in Net Assets \+ Net Assets -- Beginning of Year = Net Assets -- End of Year
In the statement of activities, how are revenues, expenses, gains, and losses classified?
Into the three restricted classes
All expenses are decreases in unrestricted net assets
How may an NPO report investment revenues on the statement of activities?
Net of expenses (e.g. advisory fees)
This is the case for all peripheral gains/losses as well
Ordinary revenues and expenses should be reported gross
How should expenses be classified in the statement of activities?
By functional classification (e.g. for program services)
What are the two main types of activities for an NPO?
Program services (main operations) and supporting activities
What are different kinds of supporting activities?
Management and general activities
Fund-raising activities
Membership-development activities
What is the alternative way to report a statement of activities?
In two parts: (1) a Statement of Unrestricted Revenues, Expenses, and Other Changes in Unrestricted Net Assets, and (2) a Statement of Changes in Net Assets
Basically, they handle (1) unrestricted net assets and (2) restricted net assets, respectively
What is the Statement of Unrestricted Revenues, Expenses, and Other Changes in Unrestricted Net Assets?
Based on the general funds
a.k.a. Statement of Operations
What is included in the Statement of Changes in Net Assets?
Summarizes first part and reports changes in restricted net assets
In the statement of cash flows, what is included in financing activities?
Receiving resources that are restricted for long-term purposes
This includes any interest and dividends that would also be so restricted (they would otherwise be under operating activities)
What is the Statement of Functional Expenses?
Required only for Voluntary Health and Welfare Organizations (VHWOs)
Provides further details about Statement of Activities through functional and natural/object classification
Should be presented in matrix format
What are examples of natural classifications?
Salaries, rent, utilities, depreciation, etc.
What general disclosures are required for NPO financials?
- ratio of fundraising expenses to amount raised, and how ratio is computed
- depreciation info (expense, depreciable base, accumulated depreciation, method)
On what sorts of items is depreciation expense not recognized?
Individual works of art or antiquity
NPO must prove that the work has value to preserve and that it is capable of preserving it
How do health care entities (HCEs) generally report revenues and expenses?
Basically the same as businesses – use accrual basis, recognize depreciation and amortization, have a provision for bad debts, etc.
What are the two classes of unrestricted revenue for HCEs?
Patient Service Revenue
Other Revenue (e.g. tuition from teaching programs, cafeteria revenue, fees for copies of medical records, etc.)
How is patient service revenue generally reported?
Reported net of bad debts
Does not include any possible revenues from charity care, since that is intended as free
How else is patient service revenue netted?
Beside deductions for Bad Debts, there are deductions for Contractual Adjustments and Other Adjustments
How did bad debts used to be recorded in HCE financials?
Not as a deduction from revenue, but merely as an expense
-Change occurred in December 2011.
Further, now, bad debts for non-patient service revenues are still classified as operating expenses, not deductions
How do HCEs report gains and losses?
Operating if part of central activities (which is uncommon), nonoperating if part of peripheral activities
Includes contributions, returns on investments, amounts from endowment funds available for general operating purposes
When would investment income be reported as revenue?
If it is essential to provide the services (e.g. a donation of an endowment that is necessary to fund a hospital)
How do commercial and governmental HCEs differ from NP HCEs?
Commercial HCEs have financials similar to other investor-owned entities
Governmental HCEs are accounted for as enterprise funds
How do colleges/universities report waived tuition (or other fees)?
The full amount of tuition is recognized, with the waived amount being an expenditure (e.g. Tuition Remissions, Scholarships)
Class Cancellation Refunds are not classified as revenue or expenditure, however
What are some typical operating accounts for colleges and universities?
- Tuition and Fees
- Appropriations
- Grants and Contracts
- Private Gifts, Grants, and Contracts
- Endowment Income
- Sales and Service of Educational Activities
- Auxiliary Enterprises [revenues]
- Educational and General
- Mandatory Transfers
- Nonmandatory transfers
- Auxiliary Enterprises [expenses]
What are auxiliary enterprises for colleges and universities?
Things like residence halls, cafeterias, athletic programs, and hospitals
What are the eight different subcategories within the Educational and General account?
- Instruction
- Research
- Public Services
- Academic Support
- Student Services
- Institutional Support
- Operation and Maintenance of Plant
- Scholarships and Fellowships
How is a university statement of activities formatted?
Has different columns in three groupings: current funds, trust funds (although universities don’t specifically use this label), and plant funds
Each of the three is broken down further
What are Voluntary Health & Welfare Organizations (VHWOs)?
Offer free or low-cost services, and are primarily supported by donations
E.g. United Way, American Heart Association, Boy Scouts, YMCA
Which four statements are required for VHWOs?
Same as required for other NPOs, plus a Statement of Functional Expenses
What is notable on VHWOs’ statement of activities?
Public Support is in a separate category from Revenue (which includes things like membership dues and investment income)
What are the two categories of funds reported by HCEs?
General funds and donor-restricted funds
Each fund (i.e. the general fund and each donor-restricted fund) involves a self-balancing group of accounts
What can be included in HCE general funds?
Assets whose use is limited solely by the board (rather than the donor)
Agency funds
PP&E used for general operations (rather than restricted)
What are specific-purpose funds?
Funds restricted to some specific operating purpose, such as research or education
What are plant replacement and expansion funds for HCEs?
Restricted to capital outlays
Expenditures of this fund decrease net assets for the plant fund and then increase PP&E and net assets for the general fund
Besides the PP&E itself, long-term debt issued to buy PP&E is not accounted for in the plant fund
What are endowment funds?
(Usually) permanently restricted funds whose principal cannot be spent
Investment income can be restricted or not, depending on donor stipulations
What are term endowment funds?
Restricted funds whose principal can be spent after certain conditions are satisfied (e.g. the donor dies, or a time period passes)
What is an acronym to remember different hospital funds?
UPSET
Unrestricted general Plant replacement Specific-purpose Endowment Term endowment
For a university, if revenues are partly restricted for debt service or capital outlay, how is it reported?
Full amount is reported as unrestricted current fund revenue
Restricted amount is recorded as mandatory transfer to appropriate fund
For a university, if revenues are designated (by the board) for debt service or capital outlay, how is it reported?
Full amount is reported as unrestricted current fund revenue, with a nonmandatory transfer to the appropriate funds
For a university, if some fund becomes unrestricted (e.g. an endowment), how is it reported?
Remaining balance is recorded in Net Assets Released From Restrictions (NARFR) in the unrestricted current fund
How may universities account for inventory?
Consumption/use method
Purchases charged to Expenses, but change in inventory is an adjustment to Expenses at year-end
What is a life income fund?
A trust fund which requires the income earned by the fund to be paid towards a recipient for a given time, usually the donor’s or recipient’s lifetime
Generally associated with annuity funds, which are different in that they have guaranteed fixed payments
How is a life income fund recorded?
At inception, no payable is recorded, since no fixed payments are required
As income grows, no revenue is credited – rather, Income Payable to Beneficiary is credited
What are quasi-endowment funds?
Endowment funds which are not stipulated by a donor but designated as such by the board
What is an acronym to remember different university funds?
C PAL ALE
Current Funds (unrestricted/restricted)
Plant funds
Agency funds
Loan funds
Annuity fund
Life income fund
Endowment funds (including term endowment and quasi-endowment)
How do plant funds for universities differ from plant funds for HCEs?
University plant funds include cash restricted or designated for paying long-term debt on capital outlays
What is included in university plant funds?
All fixed assets and long-term debt that is not related to university trust funds
What are the four plant fund subdivisions?
URRI
Unexpended Plant Fund
(Fund for) Renewals and Replacements
(Fund for) Retirement of Indebtedness
Investment in Plant
What are unexpended plant funds?
Used to buy new fixed assets (or at least, newly acquired fixed assets)
New assets are capitalized in Investment in Plant account
What are plant funds for renewals and replacements?
Used to renovate or replace existing university assets
Major improvements or replacements are capitalized in Investment in Plant accounts, but this is rare
What are plant funds for retirement of indebtedness?
Account for restricted/designated assets used to repay principal and interest
What are Investment in Plant accounts?
Records general fixed assets, general long-term debt, and difference between the two (which is “net investment in plant”)
Nongovernmental universities must report depreciation expense and accumulated depreciation on these assets in the Statement of Activities
What HCE fund is the (university) restricted current fund like?
The specific-purpose fund
What is the format for a university statement of financial position?
Assets on one side, liabilities and net assets on the other
Divided first by fund type (e.g. Current Funds, Loan Funds, Endowment Funds, Annuity and Life Income Fund, Plant Funds)
Then sometimes subdivided further (e.g. Unrestricted/Restricted for Current Funds, different Plant Funds)
How do VHWO funds differ from hospital funds?
VHWO funds record revenues and expenses in each fund (with a total column at the end), whereas hospital funds record them in a single unrestricted fund
What are the different fund types for VHWO funds?
L CRUEL
Land, Building, and Equipment (or Plant) Fund
Custodian Fund Restricted Current Fund Unrestricted Current Fund Endowment Fund Loan and Annuity Fund
What is the Land, Buildings, and Equipment (or Plant) Fund?
Accounts for resources to buy PP&E, the PP&E themselves, long-term debt on the PP&E, and the net investment in the PP&E
Basically identical to the university plant fund, though VHWOs may record debt service in the unrestricted current fund instead
How is it recorded if a fixed asset is donated to a VHWO to be sold, the proceeds of which will benefit ordinary operating expenses?
Assets are recorded in current fund (unrestricted or restricted)
The ultimate purpose of the assets is what counts
What is the Custodian Fund?
The same as a university agency fund
What is another name for the principal of an endowment?
Corpus
What is the Loan and Annuity Fund?
Accounts for resources restricted/designated to making loans and/or annuity payments
Similar to university annuity and life income fund
