Not-for-Profit Organization

Question 1

Characteristics of Not-for-profit Organization

Answer 1

It follows FASB accounting

1. Their revenues come from contribution
2. Their Operating purpose does not include profit, although there is nothing to preclude the generation of a profit
3. Their ownership interests are unlike business enterprise

Note Statement of functional Expenses, which is required for voluntary health and welfare organizations, and although not mandatory, is encouraged for other organization

Question 2

Basis of accounting

Answer 2

GAAP require that NFP report on 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 expended, rather than on the periodic determination of net income. The overall emphasis for NFP is on basis information for the organization as a whole

Question 3

NFP Statement of financial position Components

Answer 3

1. Assets
2. Liabilities
3. Net assets

The statement of financial position must include total assets, total liabilities, unrestricted net assets, temporarily restricted net assets, permanently restricted net assets and total net assets

Question 4

Unrestricted Net Assets

Answer 4

Unrestricted net assets are available to finance general operation of the particular organization, and may be expended at the discretion of the governing board.

Please note Internal board designated funds are considered unrestricted

Question 5

Temporarily restricted net assets

Answer 5

Temporally restricted net assets are similar to permanently restricted net assets, except the donor imposed stipulations either expire by passage of time or can be fulfilled and removed by action of the organization .

Temp restricted net assets should not be displayed as a deficit and any over-expenditure of temporarily restricted net assets should be classified a reduction of unrestricted net assets

Question 6

Timing of Reclassification of Restriction

Answer 6

Contribution with donor imposed restriction are recorded as restricted revenue in the period in which they are received. They increase temporarily or permanently restricted net assets

Donor imposed restriction that are met in the same period they are received may be recorded as unrestricted support ( contribution revenue) , provided that organization and consistently applies this accounting policy

Question 7

Expense classification in stamtent of activities

Answer 7

Expense are reported as decreases in unrestricted net assets and it must be face on the F/S or the notes to the F/S

Program Services - which are the activties for which the organization is chartered, example Universities - eduction and research , hospital - patient care & education

Supporting services which include everything not classified as a program service examples, fund raising , administration, management and general

Question 8

NFP Statement of Cash flows- Operating Activities

Answer 8

Include applicable agency transactions 
When using the direct method, operating activities should be reported by major class of gross receipts (including contribution , program income, and interest income or dividend income from investment) 
Include receipts of unrestricted resources designated by the governing body to be used for long -lived assets 

Note contribution of unrestricted revenue later earmarked ( board designated ) for construction or purchase of long-lived assets are classified as Operating activities

Question 9

NFP Statement of cash flows - Financing Activities

Answer 9

Cash flows from financing activities not only include the cash transaction related to borrowing they are typically found in commercial statement of cash flows but also include cash transaction related to certain restricted contribution.

Cash received with donor imposed restrictions limiting it’s use to long term purposes such as increases to an endowment, purchase of assets, or annuity agreement is displayed as a financing activity.

Other financing activities include receipts and disbursements associated with borrowing, disbursement associated with split interest agreements, and receipts of dividend and interest restricted to reinvesment

Question 10

NFP Statement of cash flows - Investing Activities

Answer 10

Include proceeds from the sale of works of art or purchase of works of art
Include investment of equipment
Include proceeds from the sale of assets that were received in prior periods and whose sale proceeds were restricted to investment in equipment

Exclude donor restricted securities that may otherwise meet the cash equivalents definition in commercial accounting

Question 11

Statements of Functional Expenses

Answer 11

The statement of functional expenses is mandatory for voluntary health and welfare organization but optional ( encouraged) for all other NFP organization

The total amount of each functional expense should be clearly disclosed in the statement of activities and/or the footnotes

The statement of functional expenses analyzes expenses by their natural expense classification such as salaries, rent & utilities

Question 12

Accounting for contribution received and contribution made

Answer 12

Resource inflows in NFP organization are generally classified in the F/S as either revenue or other support.

Revenues typically represents exchange transaction in which the NFP organization earns resources in exchange for a service performed

Note unconditional pledges are assured of collection and may recognized as either restricted or unrestricted

Question 13

Conditional Promises

Answer 13

A conditional promise to give ( pledge) is a transaction that depends on an occurrence of a future and uncertain event. Recognition does not occur until the condition are substantially met and the promise becomes unconditional

Good faith deposits that accompany a conditional promise accounted for as a refundable advance in the liability section of statement of financial position.

Note the multi year pledge are recorded at the net PV at the date the pledge is made

Question 14

NFP Donated services

Answer 14

Generally donated services are not recoded however service should be recorded as contribution revenue and expenses at fair value if the services meet the following criteria

1. They create or enhance a non financial assets
2. They require specialized skills that the provider possess and would otherwise have been purchase by the organization

disclosure in the notes to the F/S should include the nature and extent of contributed services received for the period

Question 15

Recording promises to contribute and other support transactions

Answer 15

Unconditional promises to contribute in the future are reported as restricted support (implied time restriction), at the PV of the estimated future cash flows using a discount rate . If unconditional promises are expected to be collected or paid in less than one year, they may be measured NRV since that amount is a reasonable estimate at FV

Question 16

Agency Transactions

Answer 16

Agency transactions consist of resources received by the NFP over which the NFP has little or no discretion or variance power. Agency transactions are accounted for as an asset and liability

Receipts that are restricted by a donor for specific purposes are displayed as restricted revenues and increase restricted net assets. Receipts that are restricted by a donor for specific beneficiaries are displayed as liabilities since the organization has no variance power

Question 17

Exchange Transactions

Answer 17

Exchange transactions are classified as unrestricted revenues and net assets, even in circumstances in which resources provides place limitations on the use of the resources.

Amount Transferred

=Contribution Revenue

Question 18

General Principles - Recipient Accounting

Answer 18

An organization that accepts assets from a donor and agrees to use or manage them on behalf of a specified beneficiary without variance power accounts for assets as follows

1. Assets are value at FV
2. Assets are recognized as a liability to the beneficiary

Assets transfer to the receipts organization are not contribuation

Question 19

Granted variance power

Answer 19

An organization that accepts assets from donor and agrees to use or mange them on behalf of beneficiary but is granted variance power

1. Assets are value at FV
2. Assets are recognized as contribution revenue when received and expensed when distributed to the beneficiary.

Question 20

Beneficiary Accounting

Answer 20

Specified beneficiareis recognize their rights to assets held by others ( recipient) unless the recipient is explicitly granted variance power

Recognized Interest - Financially Interrelated
Dr. Assets Cr. Equity transaction

Recognized beneficial interest - Pools of assets
Dr. Beneficial interest Cr. Contribution Revenue

Recognized Receivable and contribution Revenue
Dr. Receivable Cr. Contribution Revenue

Question 21

NFP Basis of assets

Answer 21

Purchased Fixed assets are carried at cost
Fixed assets donated to the NFP are recorded at FV at the date f the gift
Depreciation is recorded in accordance with GAAP for non governmental NFP organization

note works of art and historical treasures are not depreciated

Question 22

Fund Accounting

Answer 22

Fund accounting is only appropriate for internal reporting of private NFP and external reporting of governmental NFP. Fund can be disclosed in the notes, however, for external F/S of private NFP organization.

Question 23

Endowment Fund

Answer 23

An endowment fund ( consisting of permanently restricted net assets) is used account for donated assets, the principle of which must be retained intact.

Permanent endowment income is expendable as directed by the donor and recorded based on donor restriction. Corpus ( principle ) in not permitted to be spent.

Question 24

Quasi Endowment

Answer 24

A quasi endowment fund is used when the internal governing board of an institution (not the donor) has determined that funds are to be retained and invested for specific ( other than loan or plant) purposes. They are designation of unrestricted net assets

Question 25

Fund Accounting to FNP Accounting

Answer 25

Fund accounting is not used for external reporting by NFP organization. GAAP permits NFP organization continue to disclose information based upon internally maintained funds ( fund accounting) provided the data regarding net assets is also presented

There are seven basis types of fund used by NFP

1. Unrestricted Current Fund
2. Restricted Current Fund
3. Plant Funds
4. Loan Funds
5. Endowment Funds
6. Annuity and life income funds
7. Agency Funds

Question 26

Annuity and life income funds ( split interest funds)

Answer 26

Funds used to account for resources provided by donors under various kinds of agreements in which the organization has a beneficial interest but is not the sole beneficiary

Fund balances cab be any classification of net assets, depending on the character of the donation associated with the annuity or life income fund.

Agency fund ( custodian funds ) resources held by the entity as an agent for resource providers before those resources are transferred to third parties but it reflects as a liability

Question 27

NFO specific industry application - College and universities

Answer 27

The primary objective in financial reporting for colleges and universities in accounting for the resources received by the institution and for the use of these resources in accordance with any restriction there are imposed

Note Scholarships, tuition waivers, and similar reduction are considered either expenditure or a separately displayed allowance reducing revenues

Question 28

NFO specific industry application - College and universities - Revenues

Answer 28

1. Student tuition and fees
2. Government Aid
3. Gifts and private grants
4. Endowments income
5. Sales and services of educational departments, such as publications and testing services
6. Revenues of auxilary enterprises, such as food service, residence halls, campus store and athletics

Assessed Student Tuition and Fees
(minus Cancelled Classes)
= Gross Revenue from Tuition and Fees ( unrestricted net assets )

Question 29

NFO specific industry application - College and universities - Expenses

Answer 29

Expenses are decreases in unrestricted net assets and may include such items as

1. Scholarship and fellowship
2. Maintenance and operations
3. Administration and institutional
4. Research
5. Teaching
6. Public service program
7. Auxiliary enterprise
8. Libraries
9. Students services

Question 30

Heath Care Organization

Answer 30

Health care organization are similar to commercial entities as is evidenced by their profit oriented nature. Private NFP health care organization also record depreciation in the same manner as other not for profits entities.

Patient service revenue should be accounted for on the accrual basis at the established standards rates, even if full amount is not expected to collected

Categories of revenues

1. Patient Service revenue
2. Other Operating revenue
3. Non-operating revenue

Question 31

Health care organization - Charity Care

Answer 31

Charity care is defined as health care services and that are provided but never expected to result in cash flows to the hospital

1. Managements policy for providing charity care should be disclosed in the F/S
2. Charity care is not recorded as a receivable or as revenue
3. Charity care is not recorded as a bad debt expenses.

Gross patient service revenues
(minus Charitable Services)
= Patient service revenue

Donated services are non operating revenues