Chapter 13

What are contributions?

- Contributions are unconditional transfers of cash or other assets from one entity to another for which the entity making the contribution does not directly receive equal value in exchange, where: §Conditions are stipulations which include both: §Barrier to be overcome, AND §Right of return (contribution would have to be returned) or right of release (donor would not be obligated to give promised contribution)

What happens if the unconditional promise to give is not expected to be collected until the following year?

- Will be restricted if not available until next year Support with inherent time restriction - An unconditional promise to give has an inherent time restriction because the nonprofit cannot spend cash that it has not received. -§In the example on the previous page, cash was expected to be received prior to current year end. Therefore, Contribution revenue—support without donor restrictions was credited.

Fundraising vs program expenses? 3 criteria

- §Allocate between fund-raising, program expenses if §Purpose, audience, and content rule met §Purpose/content: asks audience to take specific action that will help accomplish mission §Audience: not based on contribution likelihood §If three criteria not met, all fund-raising. If they are met can allocate to mission

How are assets, liabilities, and net assets presented?

- §Assets presented in order of liquidity - §Liabilities presented in order of anticipated liquidation - §Net assets presented by nature and amount of donor-imposed restrictions §Helps reader understand nonprofit's financial flexibility

What is a conditional promise to give?

- §Bind the donor to give upon the occurrence of a specified "future and uncertain" event. - Examples §Donor promises to match the donations of others to Food for the Community up to a maximum of $100,000 if received by Food for the Community prior to March 1, 2022. §Donor promises to give $1 million toward the construction of a new warehouse, but only if a new warehouse is built rather then refurbishing the existing Food for the Community warehouse. §Donor makes a provision in her will to give $100,000 to Food for the Community. Don't recognize until they die §Donor may change her will, thus, it is a conditional promise to give.

What do you do with a conditional promise to give?

- §Conditional promises to give recognized as receivables and revenues or gains only when conditions are substantially met

Investment Income - Beneficial Interests

- §Donor enters into a trust or other arrangement with a nonprofit, giving the nonprofit a beneficial interest in the agreement, but not the sole interest (pretty rare, ex: interest goes to spouse, remainder goes to NFP after death) - §Lead interest §Nonprofit receives distributions during the term of the agreement - §Remainder interest §Nonprofit receives all or a part of the assets when the term of the agreement ends

What happens when a donor restriction expires or is satisfied? What JE is made?

- §Donor restriction satisfied or expires when: §Purpose for which contribution made is fulfilled §Stipulated time period elapses - §Journal entry when donor restriction satisfied or expires §Reclassify net assets with donor restrictions to net assets without donor restrictions DR: Net Assets with donor restrictions, reclassification out CR: Net Assets without donor restrictions, reclassification in

What 3 amounts are required in a statement of activities?

- §FASB does not specify format for nonprofit statement of activities - §Statement of activities must report on entity as a whole and must include three amounts: §Change in net assets §Change in net assets with donor restrictions §Change in net assets without donor restrictions

What happens if a promise to give is not expected to be collected until more than one year after the statement of net position date?

- §FASB requires donations be reported at fair value §Promises to give cash more than one year after the statement of net position date must be discounted to present value §Discount rate generally nonprofit's average earning rate on investments or average borrowing rate §Over time, the discount is accreted and recorded as contribution revenue

Financial reporting for split interest agreements

- §Financial reporting for irrevocable split-interest agreements (record revenue when they give it to you) §Nonprofit should recognize contribution revenue and related assets at the fair value of the beneficial interest when irrevocable split-interest agreement is executed §Classification as support with or without donor restrictions depends on donor's stipulation on when resources are available for use by the nonprofit

What do you do with a split interest agreement?

- §Financial reporting for split-interest agreements depend on whether it is revocable (cancellable) by the donor - §Revocable split-interest agreement is only an intention to give (if they can change their mind and take it back don't recognize revenue) §Any contributions received while agreement is revocable §Debit Cash or other asset §Credit Refundable Advance (a deferred revenue account)

What is a VHWO?

- §Formed to provide voluntary services for various segments of society §Health care §Welfare §Other social services §Exempt from many taxes - §Examples §American Cancer Society §Boys and Girls Clubs of America §Equal Justice Initiative §Feeding America §Humane Society

What is the functional expense? Where is it?

- §Functional expenses reported by natural classification, such as: §Salaries, rent, electricity, supplies, depreciation, awards and grants to other, interest - §Functional expense information must be provided in a single location §Statement of activities §Separate financial statement §Schedule in notes to the statements

Do NFP's report depreciation expense? Are works of art and historical treasures depreciated?

- §Generally, nonprofits report depreciation expense §An allocation of the cost of a long-lived tangible asset over its useful life - §Works of art, historical treasures, and collections §If nonprofit chooses to capitalize them, individual works of art or historical treasures do not need to be depreciated if their economic benefit or service potential are used up so slowly that their estimated useful lives are extraordinarily long don't have to depreciate. Also don't have to record revenue for donations of collections if they choose not to §To not depreciate, nonprofit must have technological and financial capacity to preserve the asset

What are the objectives of NFP Financial Reporting?

- §Help Users §Make rational decisions about how to allocate their resources to nonprofits §Assess the services a nonprofit provides and its ability to continue to provide them §Assess how well the organization is managing donated resources (stewardship) (understand which percent of the money actually goes to the organization - want to make sure the majority goes to the mission (mission percentage)) §Understand the entity's assets, liabilities, and net resources and the effect that transactions have had or will have on them

When is investment income recognized? Is it donor restricted?

- §Investment income recognized as earned §Dividends and interest §Rents - §Statement of activities §Increases in net assets without donor restrictions, unless income is limited by donor-imposed restriction (will sometimes restrict the endowment fund itself and its earnings)

What are some examples of "other non-profit organizations?

- §Many provide benefits to members (anything that doesn't go into the other 3) §Revenues primarily from membership dues and fees - §Examples §Professional associations Texas AICPA §Labor unions §Homeowner associations §Other types of nonprofit organizations §Political parties §Political campaign committees §Political action committees

What are some similarities between gov organizations and NFP's?

- §Nonprofit characteristics may also apply to governments §Government's resource providers (taxpayers) do not expect proportionate benefits §Operate to provide goods and services, not for purposes of profit §No owners - §Some governmental entities are organized under nonprofit corporation laws - §Many nonprofits depend on government funding - §Services provided are often similar

What is a bifurcating contract? What should NFPs do with these?

- §Nonprofit organizations may have exchange and nonexchange components in contacts - §Before working through five steps to recognize revenues, nonprofits must determine which parts, if any, of contract are exchange transactions, and which represent contributions—nonexchangetransactions. - §Example §Membership dues to a historical society may include a newsletter, which is a direct benefit (exchange) to members, as well as a contribution (nonexchange component) from members. (Ex: museum members pay a fee, determination of value of goods and services you get. $100 cost. $30 for bag, parking benefits etc (services). The rest (70$) is a gift (contribution).)

What are contributions to collections?

- §Nonprofits have an option regarding how to recognize donated works of art, historical artifacts, rare books, and similar assets provided the donated items are added to collections that meet three conditions: (Just to enhance their collection, not to sell (unless they purchase more art with that money)) 1. §Held for public exhibition, education, or research in furtherance of public service rather than financial gain 2. §Protected, kept unencumbered, cared for, and preserved 3. §Subject to organizational policy that requires the proceeds from sales of collection items to be used to acquire other items for collections or to provide direct care of existing collections

What do NFP's do with exchange transactions?

- §Nonprofits often participate in exchange-based revenue transactions (when they get something in return) - §ASU 2018-08 provides clarifying what constitutes GAAP for revenue transactions §If exchange-based (reciprocal between parties), follow FASB revenue recognition criteria no differently than for-profit entities (Topic 606) §If nonexchange-based (contributions and grants), follow ASU 2018-08 applicable to nonprofit entities EX: Annual Membership Dues, College and Tuition Fees, Hospital Patient Services, Bookstore or gift shop sales

How do we record an unconditional promise to give? (pledge)

- §Promise to give (make the JE when the donor makes the pledge - before the cash) §A written or oral agreement to contribute cash or other assets to another entity - §Unconditional promise to give §Depend only on passage of time or demand by receiver of the promise §Recognize receivable and revenues or gains when nonprofit receives promise §Receivable reported at net realizable value §Revenue is reduced by Allowance for uncollectible contributions - allowance for potion we won't receive - put it at net amount

What is the statement of activities?

- §Provides reader with information about: §The effects of transactions and other events that change the amount and nature of net assets §How the nonprofit's resources are used in providing various programs or services

What is a IRC 501(c)(3) Nonprofit Entity? Public vs private charity?

- §Public charities subject to a public support test §At least 1/3 of support derived from the public (including contributions as well as government grants, where an individual gift of more than 2% of total support is excluded) (private foundation if they don't meet that requirement) - §Private foundations §Contributions from a single donor or small number of donors §Give grants to public charities

What is the difference between revenues and gains?

- §Revenues §Inflows from selling goods or providing services that constitute nonprofit's ongoing major or central operations §Fees for providing child care services §College tuition §Charges for services to hospital patients - §Gains §Inflows from a nonprofits peripheral or incidental transactions §Selling securities - §Donor contributions may be considered revenues or gains, depending on whether nonprofit actively seeks and receives contributions

What is the source of GAAP for NFPs?

- §Single Source of GAAP: §Financial Accounting Standards Board (FASB) §Accounting Standards Codification (ASC) - §FASB ASC Topic 958 applies only to nonprofits - §Separate Codification topics for nonprofits and nonprofit hospitals

What is a specialized skill?

- §Specialized skills §Provided by individuals who possess the skills, and typically would need to be purchased by nonprofit if services not donated - §Examples—services provided by: §Accountants, architects, carpenters, electricians, lawyers, nurses, plumbers, teachers, other professionals and craftsmen §Have to be doing the work that they're specialized in

What is the financial reporting focus for NFPs

- §These nonprofit organization characteristics require a markedly different focus §Financial accountability without earnings emphasis - §No reporting to owners—profits/losses, EPS §Must demonstrate accountability to donors §How donations have been used §What strings are attached to donations

What ways can a donor restrict donations?

1. Donors specify the purposes for which donated resources may be spent 2. Donors specify when donated resources may be spent 3. Donors may specify that donated resources may never be spent (endowments)

What are the characteristics of gov organizations?

1. Officers popularly elected or controlling majority of governing body appointed or elected by governmental officials 2. Power to enact or enforce tax levy 3. Power to directly issue tax-exempt debt 4. Government may unilaterally dissolve organization and assume their assets and liabilities

What makes a non-profit a non-profit?

1. Receive significant contributions from providers who do not expect proportionate benefits in return 2. Operate to provide goods and services, but not for the purpose of making a profit 3.No owners—no shares to be sold transferred or redeemed

What are the 2 possible accounting treatments fo contributions to collections?

1. §Capitalize item added to collection §Debit Collection—painting, etc. for fair value of donated item §Credit revenues or gains - asset and revenue 2. §Not capitalize item added to collection Most museums don't capitalize them - don't want public to see huge swings in gifts. They still keep track of the artwork though §No asset or revenue or gain recognized no asset or revenue §Must have consistent policy of capitalizing all items or no items in a collection

What are the 2 types of contributions with donor restrictions?

1. §Purpose-type restrictions §For specific programs, projects, or property and equipment --§Endowments-- 2. §Time restrictions - implied or explicit

What is a board designation?

A nonprofit's Board of Trustees may also designate a portion of the entity's net assets without donor restrictions for a particular purpose These Board-designated net assets are also reported separately on the face of a nonprofit's financial statements or in the notes BUT they are still apart of net assets WITHOUT donor restrictions

How do donor restrictions effect asset classification?

Classify the assets based on the donor restrictions §Examples - (deciding where on liquidity train to put them) §Investments to be held in perpetuity should be sequenced with long-term investments §Donor-restricted cash awaiting suitable long-term investment should be sequenced nearer to long-term investments §Donor restricted cash and investment that must be used to acquire capital assets should be sequenced closer to capital assets

§A nonprofit cancer research center receives a $100,000 gift from a donor. The donor states that $5,000 of the gift may be used currently for cancer research; $10,000 may be used next year; and the remaining $85,000 must be maintained in perpetuity with only the earnings from the $85,000 gift used for cancer research. Prepare the journal entry to record the gift.

DR: Cash 100,000 CR: Contribution Revenue - Donor Support with purpose restrictions 5,000 CR: Contribution Revenue - Donor Support with time restrictions 10,000 CR: Contribution Revenue - Donor Support with permanent restrictions 85,000 However, these extra specifications are not required, helps NFP keep track of restrictions, could just: DR: Cash 100,000 CR: Contribution Revenue - Donor Support with Donor Restrictions 100,000

§A homeless shelter receives a cash contribution of $20,000; a donation of stock with a fair value of $12,000 at the time of the donation; and a donation of free electricity for the month from the city owned electric company valued at $300. The donations do not include donor restrictions. Prepare the journal entry to record the transactions.

DR: Cash 20,000 DR: Investment 12,000 DR: Utility Expense 300 CR: Contribution Revenue - Support with out Donor Restrictions 32,300

§Food for the Community received a pledge from a wealthy donor that will be made in three annual installments of $5,000. The first installment will be made immediately on December 31, 2021, the end of it current year annual reporting period. The remaining installments will be made on January 1, 2023 and 2024. The average borrowing rate for Food for the Community is 5%. Prepare the journal entry to record the pledge.

DR: Cash 5,000 DR: Contributions receivable 10,000 CR: Contribution Revenue—Support with inherent time restriction 9,297 CR: Contribution Revenue—Support without donor restrictions 5,000 CR: Discount on contributions receivable 703

§Food for the Community has a CPA do their monthly bookkeeping. The CPA does the work pro bono. The CPA normally charges $100 an hour for this service and spent 90 hours on its bookkeeping for the year. Food for the Community also had volunteers donate 1,200 hours during the year to help stock and prepare food for delivery to needy individuals. They would have had to pay $9 an hour if not for the volunteers. Make the journal entry to record contributed services.

DR: Expenses―accounting services 9,000 CR: Unrestricted support―accounting services 9,000 No entry is made for the volunteers that helped stock and prepare food for delivery as their work did not require specialized skills.

§The Beacon Lighthouse for the Blind is a nonprofit that exists to provide manufacturing jobs to individuals, who are dominantly blind or visually impaired, so they can live independent lives. Assume Beacon's board of trustees designates $100,000 of the nonprofit's net assets to expand its plant. Make the journal entry to designate net assets.

DR: Net assets without donor restrictions 100,000 CR: Net assets without donor restrictions - board designated for plant expansion 100,000

§Food for the Community, a nonprofit organization, receives $100,000 in unconditional promises to give (pledges) from donors. Food for the Community expects to collect $98,000 of the pledges prior to its year end with the rest expected to be uncollectible. Record the journal entry to record the pledges.

DR: Pledges Receivable 100,000 CR: Contribution Revenue - support without donor restrictions 98,000 CR: Allowance for uncollectible contributions 2,000

Economic resources or current financial resources?

Economic Resources Accrual basis - normal accounting

What categories can expenses go into?

Expenses must be reported as decreases in net assets without donor restrictions Journal entry used to reduce donor-restricted assets and increase assets without donor restrictions - On statement of activities this shows underneath revenues in net assets released from restrictions, going from with restrictions column to without restrictions column. This will always net to 0

2 account investment reporting

FV adjustment up to 4300 (investment originally purchased for 4000) DR: Investment Valuation Account 300 CR: Change in Net unrealized investment gains and losses 300 Sale for 4400 DR: Change in Net unrealized investment gains and losses 300 CR: Investment Valuation Account 300 DR: Cash 4400 CR: Realized gains and losses on investments 400 CR: Investments 4000

One account investment reporting

FV adjustment up to 4300 (investment originally purchased for 4000) DR: Investments 300 CR: Net unrealized and realized investment gains and losses 300 Sale at 4400 DR: Cash 4400 CR: Investment 4300 CR: Net unrealized and realized investment gains and losses 100

Charity Watch - Which Veteran organizations got an A+?

Fisher House Foundation, Intrepid Fallen Heroes Fund, Semper Fi & America's Fund

Can conditional contributions be accepted as revenue?

No - §Only unconditional contributions are recognized as revenue (or potentially gains) Examples of contributions include: §Cash, investments, supplies, materials, rights to use facilities, personal services, works of art

What can put restrictions on donations?

ONLY the DONOR

When are contributed services recognized as revenue?

Only when: 1. Create or enhance non-financial assets OR 2. Require specialized skills

What is Non-Donor Contractual Restriction? Where is this information in the F/S?

Restrictions created by contracts with anyone other than a donor are reported as net assets without donor restrictions - Bond agreements - Licensing agreements - Other contracts Information about contractual restrictions is generally presented in the notes to financial statements, except when it affects presentation by order of liquidity

What does a statement of activities look like?

Separate columns for without donor restrictions and with donor restrictions §Net asset classes may be presented in multicolumn format or in a single column "pancake style" format Revenue, gains and other support less expenses and losses

What are conditions on contributions?

Stipulations which include both: 1. Barrier to be overcome AND 2. Right of return (contribution would have to be returned) or right of release (donor would not be obligated to give promised contribution)

What is the statement of financial position?

The Balance Sheet - §Provides information about assets, liabilities, and net assets of a nonprofit and their relationship to each other - §Helps donors, members, and interested parties assess a nonprofit's: §Ability to continue its operations §Liquidity §Financial flexibility §Ability to meet its obligations §Ability to meet its future financing needs

What is the largest not for profit by private donation?

United Way Worldwide

How are investments recorded

Updated to FV 1. §Initially §Recorded at acquisition cost if purchased by nonprofit §Recorded at fair value if received as a contribution 2. §Later—Report at fair value - update to fair value every year for securities, mark to market §Equity securities with readily determinable fair value §Debt securities §Carrying value of equity and debt securities usually adjusted to new fair value every year §Unrealized gains and losses on securities recognized in statement of activities

Are Liquidity Disclosures necessary? What do you disclose?

Yes §FASB purpose is to provide information about "the availability of a nonprofit's financial assets at the statement date to meet cash needs for general expenditures within one year of the balance sheet date" (Financial assets available in the next year) §Note disclosure necessary

What are the general rules for recognizing contributions? (other than services and collections)

§As revenue or gains in the period received §As assets, decreases in liabilities, or expenses, depending on the form the benefits take §As either support with donor restrictions or support without donor restrictions §Measure contribution at the fair value of the contribution received

What is an endowment fund?

§Assets in a fund that are intended to provide maintenance of a nonprofit (only use the earnings) §Created by donors who requests their gifts be invested in perpetuity (forever) or a specified period of time §Donors generally specify how investment earnings and gains may be used

How are expenses reported by function and nature? What are the 3 options?

§Choice of placement: Statement of Functional Expenses 1. §Face of the statement of activities 2. §Separate financial statement 3. §Notes to the financial statements - §Report by natural classification (in rows) §For example, salaries, rent, electricity, supplies - §Report by function (in columns) §For example, specific programs as well as management and general activities, fundraising activities, or potentially, membership development activities §Special consideration for joint costs

What are some types of NFP funds?

§Common types of nonprofit funds 1. Unrestricted Current Funds 2. Restricted Current Funds (Purpose but not endowed) 3. Endowment Funds (Principal endowed) 4. Plant funds (kept for acquisition/building of buildings/equipment)

Journal Entry to record contributed services?

§Debit asset or offsetting expense §Credit contribution revenue for fair value of donated services

What parts are included in the 990?

§Description of organization §Balance sheet §Statement of revenues §Statement of functional expenses §Compensation information for officers, directors, trustees, key employees, and highest compensated employees §Identification of and amounts paid to five highest compensated independent contractors that receive more than $100,000 of compensation §Governance information

What are the classes of net assets?

§Donor-imposed restrictions significantly influence nonprofit accounting and reporting §Net assets are presented in two groups in statement of financial position: 1. §Net assets with donor restrictions for specific purpose. (Only a donor can put restrictions on a gift) 2. §Net assets without donor restrictions (just general money)

How are expenses reported in the statement of activities? What are the 2 classifications?

§Expenses reported by their functional expense classifications - (2 expense categories. Only in the without donor restrictions category - this is for the statement of activities. Then might have a separate statement of functional expenses) 1. §Program activity what their mission is - (most will have 3-4 program activities) §Activity directly related to the purpose(s) for which the organization was established 2. §Supporting activity §Management and general activity §Fundraising activity §Membership development activity §Reported separately from program activity

What are the 2 major standards applying to NFPs?

§FASB ASU 2016-14 regarding financial statement presentation (used to be 3 columns, but now 2 columns) - changed the way the financials looked §FASB ASU 2018-08 regarding contributions received and made (nonexchange transactions)

How does a NFP become tax exempt?

§Form 1023 filed with IRS to obtain exemption under Internal Revenue Code Section 501(c)(3) ()Have to file 1023 when you want to become a non-profit. Includes budget for next 3-5 years, your mission. If you change your mission you have to restate your 1023 Can incorporate in any state

How are fundraising expenses reported?

§Fundraising costs reported separately as fundraising expenses ex: 5k run for charity. Fees to put on charity event. If you have materials that are mission related, you can put that towards mission expenses instead. NFP's often will try and maximize this. For runs about 70-80% will be allocated to mission instead of fundraising

What if we've already received the cash on a conditional promise to give?

§If donor transfers cash to nonprofit when conditional promise is made, the nonprofit would make the following entry until conditions are met: gives money ahead of time but still have condition to meet before you can recognize §Debit Cash §Credit Refundable Advance (a deferred revenue account)

What are the 2 options for reporting investments?

§May account for realized and unrealized investment gains and losses in one account or two accounts

Exchange contracts continued - revenue recognition

§Nonprofits account for exchange revenue and receivables in same manner as for-profit enterprises §Presumption that all revenues arise from written or unwritten contracts with customers §Five steps to each type of exchange revenue 1. Identify the contract(s) with the customer 2. Identify the performance obligations in the contract 3. Determine the transaction price 4. Allocate the transaction price to the performance obligations in the contract 5. Recognize revenue when (or as) the entity satisfies a performance obligation

Is fund accounting used by NFPs?

§Not permitted for GAAP financial reporting purposes §Some nonprofits use it for internal record-keeping purposes (put in a box and keep track of it ex: endowment funds to track endowments)

Investment Disclosures - what are the 3 levels?

§Note disclosures follow FASB three-level fair value hierarchy for determining how to measure fair value Level 1 (value easily determinable for that exact asset - stocks), Level 2 (comparable values), Level 3 (difficult to value - alternative investments, private companies)

What is the Statement of Cash Flows? What are the categories? Direct or indirect?

§Provides information about cash receipts and cash payments for the same period of time as the statement of activities §Three categories 1. §Operating activities §May use direct or indirect method, although direct is encouraged (and does not have to be accompanied by reconciliation if this method is used) 2. §Investing activities 3. §Financing activities

How are contributions with donor restrictions reported?

§Report as support with donor restrictions §Increases net assets with donor restrictions §If donor restrictions met in same period that contribution is received, the contribution may be reported as support without donor restrictions (even though technically should be in the second column, put in the first column since you're going to expense this year anyway)

Which categories can revenues, gains and support go into?

§Revenues, gains, and other support reported as increases in either net assets with donor restrictions or net assets without donor restrictions

What are the 3 required F/S?

§Statement of financial position (or balance sheet) §Statement of activities §Statement of cash flows Also requirements for: Functional expense reporting (may be a statement) Liquidity Disclosures

What 5 elements does the statement of financial position have to include?

§Total assets §Total liabilities §Total net assets §Total net assets with donor restrictions §Total net assets without donor restrictions

What are the 4 broad categories of NFPs?

§Voluntary health and welfare organizations (VHWO) §Health care organizations (Chapter 14) (hospitals) §College and universities (Chapter 15) SMU, TCU, Baylor, Rice (private) Other nonprofit organizations