Govt Chptr 12 NFPs

In what significant way do NFPs account for investments differently from businesses?

Unlike businesses, NFPs are not required to divide their securities portfolios into 3 categories- trading securities, avaliable for sale and held-to-maturity. NFPs "mark" all these securities to fair value.

A NFP organization maintains an endowment of $1 million, the income from which must be used for research into substance abuse. In a particular year, the endowment had income of $60,000, all of which is expended in accord with the donor's specifications. The expense should be reported as a decrease in...

Unrestricted Assets

The Association for Educational Enrichment receives a contribution of $400,000 that must be used for student scholarships. Prior to granting any scholarships, the Association invests the funds received in marketable securities. During the year, the securities pay dividends of $10,000 and increase in market value by $440,000. The association should report...

Unrestricted Investment Earnings of $50,000.

Emerson Museum received a cash gift of $7 million. The board of trustees decided that the gift should be used to establish a permanent endowment, the income in which would be used to provide research grants to Impressionist art historians. The museum should report the gift as an increase in...

Unrestricted resources

Walden Institute, a NFP, politically oriented association, was promised a $1 million endowment on condition that it establish a program in entrepreneurial studies and hire a leading scholar to lead it. Upon receiving the pledge the institute should recognize

Zero Revenue

A private think tank receives a gift of $100,000 that must be used to fund a symposium on federal accounting. When the institution conducts the symposium, which of the following accounts should be debited in a temporarily restricted fund?

"Net Assets RELEASED from restriction" *purpose=TR

Carter Research Center, a NFP entity, acquires $50,000 of laboratory instruments with funds that were donated and restricted for the purchase of equipment. The instruments have a useful life of 5 years of the instruments' useful life, the Center should recognize depreciation expense of

$10,000 in an unrestricted fund

The Senior League, a NFP welfare agency, redeemed a $100K bond that it had held as an investment of unrestricted resources. It also received an interest payment of $6,000. In its statement of cash flows, the league should report...

$106,000 as a cash flow from investing activities and a $6,000 as a cash flow from operating activities.

What is meant by "variance power?" Suppose that a charitable foundation receives a gift that the donor specifies must be used to support the college education of a particular individual. What is the relevance of "variance power" in how the foundation accounts for the gift?

"variance power" is the right to unilaterally redirect the use of resources to another beneficiary. If the foundation has such as right, then it can recognize the contribution as revenue (and the subsequent disbursement as an expense). If it doesn't, then it would recognize the contribution as a liability, a payable to the beneficiary.

The Museum of Contemporary Art received 2 valuable paintings. The museum determined that one, with a market value of $7,000, is inappropriate for display and therefore will be sold and the proceeds will be used to acquire another painting that can be displayed. The other, with a market value of $10,000, will be placed on exhibit. The museum has a policy of not capitalizing works of art unless required to do so. In the year that it receives the two paintings, it should recognize contribution revenues of

$0

At the start of the year, the permanent endowment fund of the State Performing Arts Festival Association reported Net Assets of $1 million. During the year, it earned $40,000 in interest and dividends, but its investments lost $60,000 in market value. The association spent the entire $40,000 of interest and dividends. At year-end the permanent endowment fund should report net assets of

$1 million

The Mountain Research Institute began the year with net assets in its permanent endowment fund of $1 million. During the year, it earned $70,000 and the fair value of its investments increased by $20,000. However, the institute's policy, decided upon by its BOD, is to permit earnings to be spent only to the extent that they exceed an amount necessary to cover inflation. The inflation rate for the year was 3%. During the year, the institute spent none of the $70,000. At year-end, the permanent endowment should report net assets of...

$1 million

A local chapter of the Society for Protection of the Enviornment benefited from the voluntary services of two attorneys. One served as a member of the Society's board of directors, performing tasks comparable to other directors. During the year, he attended 20 hours of meetings. The other drew up a lease agreement with a tenant in a building owned by the Society. She spent 5 hours on the project. The billing rate of both attorneys is $200 per hour. In the year in which the services were provided, the Society should recognize revenues from contributed serivces of...

$1,000

The United Way of Lano County distributes all contributions to NFPs within the area it serves. Donors have a choice: They can either designate the organization to which their contributions will be given, or permit the United Way to distribute their contributions as it deems appropriate. During the current year, the United Way received $1 million specifically designated contributions and $6 million of undesignated contributions. It should recognize contribution revenue of

$6 million

Provide examples of resources that are temporarily restricted as to: (a) purpose; (b) time; and (c) the occurrence of a specific event.

(a) resources restricted as purpose: must be used for research; conferences; acquisition of plant and equipment (b) resources restricted as to time: a term endowment- the principal must remain intact for a specified period of time; thereafter it is available for expenditure; pledges receivable that will not be fulfilled in the same period (since the resources are unavailable for expenditure until the pledge is fulfilled). (c) resources restricted until the occurrence of a specific event: a life annuity- the principal and income must be used to provide income for the donor until the donor's death. Thereafter it can be expended.

The Fellowship Church of America issues $10 million in bonds, the proceeds of which must be used to construct new facilities. Included in the bond indenture is a provision that the church maintain $400,000 in a specially designated bank account to ensure timely payment of principal and interest. Upon receiving the $10 million in bond proceeds and placing the $400,000 in the designated bank account, the church should report...

Cash of $10 million in an unrestricted fund.

Enrex Corporation gave a NFP research foundation $500,000 to conduct research relating to the development of a new type of battery. Per the terms of the gift, Enrex owned the rights to any patents issued as a consequence of the research, and controlled when and where the research results would be published. At the time of receipt of the $500,000, the foundation should recognize

Deferred Revenue of $500,000 in a unrestricted fund

A museum received gifts of 2 valuable paintings. It recorded the value of one as an asset and recognized the corresponding revenue. It gave no accounting recognition to the other. What might be a legitimate explanation for such an apparent inconsistency?

FASB Stmt No. 116 says that entities need not recognize contributions of collectibles as long as the items satisfy ALL of the following conditions: 1.)They are held for public exhibition, education, or research in furtherance of public service rather than financial gain 2.)They are protected, kept unencumbered, cared for, and preserved. 3.)They are subject to an organizational policy that requires proceeds from sales of collection items to be used to acquire other items for collections. Hence, one of the paintings may have satisfied these conditions, whereas the other did not. For example, the museum may have planned to sell one of the paintings and display the other.

All costs of activities that have a fund-raising component must be classified as fund-raising costs unless it can be demonstrated that they satisfy the criteria dealing with all of the following except

Fiscal Viablity *should be: purpose, content, audience

Would your response be the same if the foundation pledged to donate the funds only if and when the station agreed to carry a particular program?

If the pledge were conditional upon the broadcasting station carrying out a particular program, then it should be recognized as revenue only when the station satisfied the stipulated condition- that is, by conducting the program.

The Friends of the Opera, a financially interrelated fund-raising support group for the City Opera Company, receives $100,000 in donations, all of which will eventually be transferred to the City Opera Company. When Friends of the Opera receives a gift...

It should recognize revenue of $100,000, and the City of the Opera should recognize an increase of $100,000 in its interest in the Net Assets of Friends of the Opera.

Why do many NFPs object to the standards pertaining to revenue recognition pledges?

Many NFPs object to the requirement that pledges be recognized as revenue because until the donation has been received, it is not available for expenditure. Hence, they contend, the entity's f/ss leave the impression that the organization has command for greater resources than it actually does.

How do NFPs differ from governments in the way they account for biz-type activities, such as dining halls, gift shops, admission fees?

NFPs unrestricted operating funds are accounted for on a full accrual basis.

Variance power refer to the ability

Of a charitable organization to unilaterally decide to direct the use of donated assets to a beneficiary other than that specified by the donor.

The statement of cash flows of a NFP should be divided into which of the following categories of cash flows?

Operating Act, Financing, and Investing

In what significant ways do the FASB standards differ from those of the GASB with respect to the statement of cash flow?

Per the standards of the FASB, the cash flow statement or a NFP organization must be in three categories of activities ( operating, financing, and investing) rather than the four specified by the GASB. Moreover, the FASB encourages, but does not require, the direct method of presentation.

A foundation promises to donate $1 million to a local public broadcasting station (a NFP organization) in one year. When, and in what amount, should the station recognize revenue? The station applies discount rate to all pledges.

Pledges should be recognized in a restricted fund upon receipt and should be measured at the present value of estimated future cash flows using a risk free rate. Hence the broadcasting station should recognize revenue of $909,091 ( the present value of $1 million discounted for one year at 10%) upon receiving the pledge.

Provide an example of permanently restricted resources.

Resources permanently restricted: An endowment- the principal of which must be kept intact permanently; only the income is available for expenditure.

A NFP organization receives a restricted gift. When, and in which type of fund, should it recognize revenue? When, and in which type of fund, should it recognize the related expense? What is the reason for the apparent inconsistency between the fund types in which the revenues and expenses are reported?

Restricted contributions should be recognized as revenue in a restricted fund when the contribution (even if only a pledge) is received. Expenses should be recognized in an unrestricted fund when the funds are used. As the contributions are used, the restrictions are met, and the resources are released from the restricted to the unrestricted categories. The FASB reasoned that donors control only how contributed resources may be used. They do not control the timing of the expenses or the specific activities in which the organization engages.

Harley Safe Place, a NFP organization, received an unrestricted pledge of $600,000. The donor promised to make payment within 6 months (which would be in the organization's next fiscal year). At the time of the pledge, the organization should recognize

Revenue of $600,000 in a temporarily restricted fund.

In allocating joint costs between fund-raising and other activities, a NFP could use all of the following methods except

Straight-line *could use: physical units, relative direct cost, stand-alone costs

What special abuse does the AICPA address in its statement of position on the allocation of fundraising costs? What general criteria does it establish as to when common costs of materials and activities that include a fund-raising appeal can be allocated to programmatic, rather than fund-raising, activities?

The AICPA Stmt of Postion was directed at NFP organizations that claim to be spending resources on programmatic activities when they are, in fact, spending them on fund-raising. The SOP requires that all costs of materials and activities that include a fund-raising appeal be considered fund-raising costs, unless the three criteria are satisfied: 1.)Purpose. A key purpose of the combined activity is to fufill a program, management, or general function in addition to fundraising and public education. 2.)Audience. The audience for the materials or activities is selected primarily on its need for the program or for its ability to advance program goals in ways other than by financial support. 3.)Content. If materials or activities are in support of a program, then they must call for specific action that will help accomplish the entity's mission beyond providing financial support.

Why is the "fund-raising ratio" of key concern to both donors and financial analysts?

The fundraising ratio indicates the proportion of revenues spent on fund raising activities. It is of concern to donors because virtually all donors want their contributions to support the main mission of the entity, not excessive fund raising expenditures. It is of concern to financial analysts because if donors reduce their donations, then the fiscal health of the organization may be in jeopardy.

Members of the National Accounting Association, a NFP organization, are charged annual dues of $150. Of this amount, $50 is restricted, per association policy, to covering the cost of the association's journal, which every member receives. In what category of restrictiveness should the association report the portion of revenues associated with the journal? Explain.

The portion of the dues restricted to covering the cost of the journal appears to be more the result of an exchange transaction than a contribution. Therefore, since it is not donor restricted, it should be classified as unrestricted.

A term endowment is a gift

The principal of which is available for expenditure after a specified period of time.

In a recent month a CPA provided 10 hours of volunteer time to the Society for the Visually Impaired. He devoted seven hours to maintaining the organization's financial records and three to recording tapes of newspapers and magazine articles. If volunteers had not provided these services, the organization would have to hire paid personnel. Should the organization give accounting recognition to the CPA's services?

The society should give recognition to the CPA's services as an accountant, but not as a recording artist. NFPs should recognize volunteer services that require specialized skills, are provided by individuals possessing those skills, and would typically need to be purchased if not provided by donation. These types of skills are provided by "professionals and craftsmen." The CPA possesses specialized skills as a professional accountant, but not as a recorder of tapes of newspapers and magazine articles.