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Focus on the Mission:Not-for-Profit Accountingand Reporting Today andTomorrow
FMIS/16/01
This product is intended to serve solely as an aid in continuing professional education. Due to the constantly changing nature of the subject of the materials, this product is not appropriate to serve as the sole resource for any tax and accounting opinion or return position, and must be supplemented for such purposes with other current authoritative materials. The information in this manual has been carefully compiled from sources believed to be reliable, but its accuracy is not guaranteed. In addition, Surgent McCoy CPE, LLC, its authors, and instructors are not engaged in rendering legal, accounting, or other professional services and will not be held liable for any actions or suits based on this manual or comments made during any presentation. If legal advice or other expert assistance is required, seek the services of a competent professional. April 2016 cpenow.com / [email protected] Copyright © 2016 Surgent McCoy CPE, LLC – FMIS/16/01
Table of Contents
Focus on the Mission ...................................................... 1 Distinguishing Contributions from Exchange Transactions .................................................................... 2 Conditional and Unconditional Promises to Give ........ 3 Contributed Services, Collection Items and Other Unique Items .................................................................... 4 Special Events ................................................................. 5 Classification of Expenses ............................................. 6 Financial Reporting Today ............................................. 7 Financial Reporting Tomorrow ...................................... 8 Latest Developments ...................................................... 9
NOTES
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Focus on the Mission
Learning Objectives 1 I. A mission focus 1
A. Exercise 1-1 2 II. Using the proper lens to focus on the mission 2
A. A unique accounting lens 2 1. Accounting for contributions 2 2. Accounting for certain expenses 2 3. Accounting for net assets 3 4. Exercise 1-2 3 5. Exercise 1-3 3
B. A unique reporting lens 4 1. The statement of financial position 5 2. The statement of activities 5 3. Exercise 1-4 5 4. The statement of cash flows 6 5. The statement of functional expenses 6
III. An increased need to focus on the mission 6 A. Increased attention from the media 7
1. The Wounded Warrior Project 7 2. The American Red Cross 7 3. The ALS Association 8
B. A more competitive and ever changing fundraising environment 8 1. Exercise 1-5 9
IV. Our approach for this course 9 V. Suggested solutions to exercises 10
A. Suggested solution to Exercise 1-1 10 B. Suggested solution to Exercise 1-2 11 C. Suggested solution to Exercise 1-3 12 D. Suggested solution to Exercise 1-4 13 E. Suggested solution to Exercise 1-5 13
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Focus on the Mission
Learning Objectives
Upon completing this chapter, you will be able to:
Perceive the three defining characteristics of not-for-profit entities and how
they directly affect not-for-profit accounting and reporting; and
Identify some of the key pressures that not-for-profit entities are experiencing.
I. A mission focus
This course is on not-for-profit (NFP) accounting and reporting. When we are talking about the
accounting and reporting requirements for NFPs, it is obviously important to know what types of entities
the FASB considers to be NFPs. The following chart contains the definition of an NFP found in FASB
ASC 958, Not-for-Profit Entities.
The FASB ASC 958 definition of an NFP
An NFP is an entity that possesses the following characteristics, in varying
degrees, that distinguish it from a business entity: (1) contributions of
significant amounts of resources from resource providers who do not expect
commensurate or proportionate pecuniary return; (2) operating purposes
other than to provide goods or services at a profit; and (3) absence of
ownership interests like those of business entities.
In looking at the above definition, the FASB has identified three primary characteristics that NFPs have (in
varying degrees) that distinguish them from business entities. These characteristics are important as they
directly and indirectly get to the fact that NFPs are focused on mission fulfillment instead of profitability.
The following chart illustrates the contrast between NFPs and business entities (e.g., Taco Bell) using the
three characteristics.
Contrasting NFPs from business entities (e.g., Taco Bell)
NFP characteristic: An illustration of how NFPs differ from business entities:
Contributions of significant amounts of resources from
resource providers who do not expect commensurate or
proportionate pecuniary return
Individuals often hand NFPs cash without receiving or expecting
anything in return. However, individuals never go to Taco Bell and
hand Taco Bell cash without expecting something of commensurate or
proportionate pecuniary return.
Operating purposes other than to provide goods or
services at a profit
NFPs often provide goods or services without receiving anything in
return (i.e., goods or services are being provided without regard to
profitability). However, Taco Bell does not exist to serve tacos (e.g., it
does not make a practice of handing out tacos for free just for the
sake of making tacos). Instead, Taco Bell exists to make a profit.
Absence of ownership interests like those of
business entities
NFPs exist to serve the interests of society at large or aspects of
society. However, Taco Bell ultimately serves the interests of the
stockholders of its parent company (i.e., Yum! Brands, Inc.).
Not-For-Profit Entity
(NFP)
HELLO my name is
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A. Exercise 1-1
Please answer the following true or false questions.
True or False
1 Under the FASB definition of an NFP, a credit union would be considered to be an
NFP.
2
Entity X is an NFP business-oriented health care entity (i.e., it has no ownership
interests and is essentially self-sustaining from fees charged for goods and
services). Entity X would be considered to be an NFP and follow guidance in
FASB ASC 958, Not-for-Profit Entities.
II. Using the proper lens to focus on the mission
In the prior section, we discussed that the FASB has identified three primary characteristics that NFPs
have (in varying degrees) that distinguish them from business entities. We also discussed that these
characteristics are important as they directly and indirectly get to the fact that NFPs are focused on
mission fulfillment instead of profitability. Thus, it only makes sense that the FASB has developed
different accounting and reporting requirements for NFPs that help measure: (1) the NFP’s progress in
the current period towards the mission; and (2) the NFP’s ability to make progress towards the mission in
the future. In this section, we will briefly overview the unique accounting and reporting lens (i.e.,
requirements) that the FASB has developed for NFPs.
A. A unique accounting lens
NFPs are involved in certain transactions that business entities simply are not engaged in. As illustrated
below, the FASB has developed specialized accounting requirements for the treatment of such
transactions.
Unique accounting requirements for a unique animal (i.e., NFPs)
The FASB has developed specialized accounting requirements for the treatment of
transactions/accounts that are found in NFPs but not business entities [e.g., the
accounting for: (1) contributions, (2) certain expenses, and (3) net assets].
1. Accounting for contributions
NFPs often receive contributions of significant amounts of resources from resource providers who do not
expect commensurate or proportionate pecuniary return. Contributions are transactions which are unique
to the NFP sector. Contributions are also unique in that they may come in many different forms which
affect how and if they are reported [e.g., are the contributions: (1) conditional or unconditional,
(2) restricted or unrestricted, (3) cash or noncash]. The FASB has developed requirements for these
unique transactions which we will discuss in Chapters 2, 3, 4, and 5.
2. Accounting for certain expenses
NFPs have certain types of expenses (e.g., fundraising expenses) that are unique to the NFP sector and
sometimes the accounting issues can become complicated (e.g., joint activities). Also, due to the
emphasis on mission fulfillment, NFPs are required to be able to categorize their expenses by function
(e.g., program services, management and general, fundraising, and membership development). The
FASB has developed requirements related to these unique expenses that we will discuss in Chapter 6.
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3. Accounting for net assets
Because NFPs have an absence of ownership interests like those of business entities, they do not have
traditional equity accounts like retained earnings and common stock. Instead, NFPs utilize net assets to
account for the equity portion of their statement of financial position. Currently, NFPs break down their
total net assets into three classifications based on the presence or absence of donor restrictions. We will
discuss net assets in further detail in Chapter 7. However, the following provides a summarized overview
of the three classifications of net assets.
A summarized overview of the three classifications of net assets
Unrestricted net assets (i.e., the net
assets of the NFP that are free of donor imposed
restrictions)
+
Temporarily restricted net assets (i.e., the net assets of
the NFP that are subject to donor imposed
restrictions that are temporary in nature)
+
Permanently restricted net assets (i.e., the net assets of
the NFP that are subject to donor imposed
restrictions that are permanent in nature)
=
Total net assets
Note. Currently, NFPs may provide information about board designations of unrestricted net assets on the face of the financial statements or in the notes.
4. Exercise 1-2
Please answer the following question related to net assets.
Can you explain this to me?
You are attending the annual board meeting for NFP Z. The CEO of NFP Z has just given a glowing
five-minute report on the annual financial statements and has opened the floor to questions. Dr. Brown
is new to NFP Z’s board and does not have a financial background or a background in working with
NFPs. She asks for someone to explain net assets to her. She is particularly curious about
unrestricted net assets as the CEO just said that in a moment the board needs to make some
designations regarding how they want to spend those amounts. Silence fills the room and all eyes turn
to the lone CPA in the room (i.e., you). How would you explain the terms net assets and
unrestricted net assets in plain English to Dr. Brown?
5. Exercise 1-3
Please answer the following question related to net assets.
What do you think of this?
Recently, the course author observed the following in the net assets section of an NFP’s statement of
financial position. What do you think of this presentation?
Net assets:
Unrestricted (Note 8):
Operating fund (732,149)
Board designated fund 6,348,338
Total unrestricted net assets 5,616,189
Temporarily restricted net assets 7,581,594
Permanently restricted net assets 28,027,354
Total net assets 41,225,137
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B. A unique reporting lens
The basic purpose of all financial reporting is to provide meaningful financial information to the financial
statement user. The user of the financial statements should be able to utilize the information provided
within the financial statements to answer basic questions they have about the financial performance of
the entity. The financial statements of an NFP look different from those of a business entity because:
(1) an NFP has a different set of financial statement users than a business entity does; and (2) the users
of an NFP’s financial statements have different questions about the NFP’s financial performance than
those of a business entity. The following discusses the common users of an NFP’s financial statements
and the questions that they typically have.
An NFP’s financial statements need to provide relevant information to meet the common interests of donors, members, creditors, and others who provide resources to NFPs. Users of NFP financial statements typically have the following questions:
?
What are the services that the NFP provides in attaining its mission, what efforts has it made in
providing those services, and what is the NFP’s ability to continue to provide those services?
?
How has the NFP’s management satisfied its stewardship responsibilities and other aspects of
its performance?
? What are the amounts and nature of the NFP’s assets, liabilities, and net assets?
?
What are the effects of transactions and other events and circumstances that change the
amount and nature of net assets?
?
What are the amounts and kinds of inflows and outflows of economic resources during the
period and the relationship between the inflows and outflows?
?
How does the NFP obtain and spend cash, its borrowing and repayment of borrowing, and
other factors that may affect its liquidity?
In addition to resource providers, NFPs have additional users of their financial statements. Examples of such users include regulatory bodies, governing boards, NFP management, and affiliated organizations. These users are also interested in the above questions.
NFPs attempt to answer the above questions through their financial statements. The following illustrates
the financial statements prepared by NFPs.
The financial statements prepared by NFPs include:
In addition, voluntary health and welfare entities prepare:
In the following sections, we will discuss how each of the above financial statements assist financial
statement users in understanding the NFP and in Chapter 7 we will look at the current requirements
related to each of the statements.
The Statement of Financial Position or
Balance Sheet
The Statement
of Activities
The Statement
of Cash Flows
The Statement of Functional
Expenses
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1. The statement of financial position
A statement of financial position is the financial statement of an NFP that resembles the balance sheet of
a business entity. While the statement of financial position may resemble the balance sheet of a
business entity there certainly are some differences particularly in the equity section. The statement of
financial position provides relevant information about an NFP’s assets, liabilities, and net assets and
about their relationships to each other at a moment in time (i.e., it is really a point in time measurement
instead of a period of time measurement).
How much fuel does the NFP have in its tank?
The information provided in a statement of financial position helps donors,
members, creditors, and others to assess: (1) the NFP’s ability to continue to
provide services; and (2) the NFP’s liquidity, financial flexibility, ability to meet
obligations, and needs for external financing. This information is essential in
assessing the NFP’s resources or fuel on hand to be able to fulfill its mission
going forward.
Note. Some NFPs prefer to use the title balance sheet instead of statement of financial position as that
terminology is more comfortable to some board members.
2. The statement of activities
A statement of activities for an NFP is the financial statement that an NFP issues in lieu of a business
entity’s income statement. However, while the primary focus of a business entity’s income statement is
the entity’s net income or bottom line, the primary focus of an NFP’s statement of activities is how the
NFP’s activities related to mission fulfillment. Unlike the statement of financial position, the statement of
activities is more of a period of time measurement of the NFP instead of a point in time measurement.
Which direction did the NFP go last year?
The information provided in a statement of activities helps donors, members,
creditors, and others to: (1) evaluate the NFP’s performance during a period;
(2) assess an NFP’s service efforts and its ability to continue to provide services;
and (3) assess how an NFP’s managers have discharged their stewardship
responsibilities and other aspects of their performance. This information is
essential in assessing how an NFP used its resources towards mission
fulfillment during the period and how successful the NFP was in attaining
resources.
3. Exercise 1-4
Please answer the following true or false question.
True or False
1
The best way to measure how an NFP used its resources during the period is to
compare the percentages that the NFP spent on program services, management
and general activities, and fundraising activities to those percentages for all
NFPs.
Gasoline
N
S
E W
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4. The statement of cash flows
A statement of cash flows is one of the required financial statements for NFPs. The statement of cash
flows for an NFP is very similar to the statement of cash flows prepared for a business entity.
Where did all the cash go (and come from)?
The information provided in a statement of cash flows helps donors,
members, creditors, and others to assess: (1) the NFP’s ability to generate
positive future net cash flows; (2) the NFP’s ability to meet its obligations,
its ability to provide resources, and its needs for external financing; (3) the
reasons for differences between the change in net assets and associated
cash receipts and payments; and (4) the effects on an NFP’s financial
position of both its cash and noncash investing and financing transactions
during the period. While the statement of cash flows may not be used as
heavily as the other financial statements to measure an NFP’s progress
towards its mission, it nevertheless provides useful information about the
NFP’s operations to certain user groups.
5. The statement of functional expenses
The statement of functional expenses is an additional financial statement that voluntary health
and welfare entities are required to present. As we will see in Chapter 7, the statement of functional
expenses provides information about the functional and natural classification of expenses. Other NFPs
are encouraged, but not required, to provide information about expenses by their natural classification.
Helping to put the pieces of the puzzle together
The information provided in a statement of functional expenses helps donors,
members, creditors, and others in associating expenses with service efforts and
accomplishments. The statement of functional expenses does this by breaking down
the functional expense categories (e.g., program services) into natural categories (e.g.,
salaries, travel, utilities). This information helps users put the pieces of the puzzle
together in terms of understanding how the NFP prioritizes and allocates its resources
within natural expense categories to fulfill its mission.
III. An increased need to focus on the mission
In this chapter, we have discussed that the FASB has identified three primary characteristics that NFPs
have (in varying degrees) that distinguish them from business entities and that these characteristics are
important as they directly and indirectly get to the fact that NFPs are focused on mission fulfillment
instead of profitability. We have also discussed that the FASB has developed unique mission-related
accounting and reporting requirements for NFPs. For at least a couple of reasons, NFPs are facing an
increased need for financial reporting that successfully communicates mission fulfillment.
An increased need to focus on the mission
Increased attention from the media
+ A more competitive and ever changing fundraising environment
An increased need for financial reporting that successfully communicates mission fulfillment
$
$
$ $
$
$ $ $ $
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A. Increased attention from the media
As discussed in the following chart, NFPs are now operating in an environment which includes
increasingly more attention from the media.
Getting more attention from the media
Not all that long ago, NFPs operated in a media environment that rarely questioned
how they operated or their progress towards their mission. Barring an incident of
fraud, NFPs seldom made the news except for perhaps some localized reporting
about good works being done in the community. However, in recent years, the
media has become much more inclined to question NFPs and their operations.
To illustrate how things have changed, we will now look at recent media reports related to three nationally
known NFPs. It is interesting to note that in none of the reporting we will discuss was the media alleging
that fraud had occurred at the NFP. However, for good or bad the media was certainly questioning the
NFPs and their operations. Please note that the intention of this is not to pile onto the media reports but
rather to illustrate the media environment that NFPs are now operating in. The NFPs discussed are:
(1) the Wounded Warrior Project; (2) the American Red Cross; and (3) the ALS Association.
1. The Wounded Warrior Project
In early 2016, The New York Times published a rather long article entitled “Wounded Warrior Project
Spends Lavishly on Itself, Insiders Say.” The story began by stating “In 2014, after 10 years of rapid
growth, the Wounded Warrior Project flew its roughly 500 employees to Colorado Springs for an all hands
meeting at the five-star Broadmoor hotel. They were celebrating their biggest year yet: $225 million
raised and a work force that had nearly doubled. On the opening night, before three days of strategy
sessions and team-building field trips, the staff gathered in the hotel courtyard. Suddenly, a spotlight
focused on a 10-story bell tower where the chief executive stepped off the edge and rappelled toward the
cheering crowd.” The story went on to say that in its rapid growth since its inception in 2003 the
Wounded Warrior Project has “embraced aggressive styles of fundraising, marketing and personnel
management that have many current and former employees questioning whether it has drifted from its
mission” and added that “it has spent millions a year on travel, dinners, hotels and conferences that often
seemed more lavish than appropriate, more than four dozen current and former employees said in
interviews.” In the article, the Wounded Warrior Project countered by saying that spending on fundraising
and other expenses not directly related to veterans programs has enabled the Wounded Warrior Project
to grow faster and serve more people and that it estimated that 80,000 veterans have used its services.
2. The American Red Cross
In 2015, NPR published a report entitled “In Search of the Red Cross’ $500 Million in Haiti Relief.” The
report began by stating “When a devastating earthquake leveled Haiti in 2010, millions of people donated
to the American Red Cross. The charity raised almost half a billion dollars. It was one of its most
successful fundraising efforts ever. The American Red Cross vowed to help Haitians rebuild, but after
five years the Red Cross’ legacy in Haiti is not new roads, or schools, or hundreds of new homes. It’s
difficult to know where all the money went.” The report went on to say that the “Red Cross says it has
provided homes to more than 130,000 people, but the number of permanent homes the charity has built
is six.” In the report, the American Red Cross countered by saying that it has provided clean water,
sanitation, vaccinations, disaster preparedness, cholera prevention and that all of the money that has
been spent has been focused on benefiting the people of Haiti.
I didn’t expect so much attention!
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3. The ALS Association
In 2015, CNN ran a story entitled “One year later, your ALS Ice Bucket money goes to...” The story
began by stating that “More than 17 million people participated in the Ice Bucket Challenge to support
ALS and other causes. Nationally, 2.5 million people donated $115 million to the ALS Association. The
organization says the event was probably the single largest episode of giving outside of a disaster or
emergency. So, whatever happened to all that money?” After the story’s beginning, the story went on to
primarily detail out how the ALS Association has either spent the Ice Bucket Challenge funds to date or
intends to spend the funds in the future. This story was much more favorable to the NFP than the prior
two we have discussed. The story is interesting in that it displays the high level of focus that NFPs may
be subject to today. The story also had an interesting statement at the end ascribed to the president of
the Center for Effective Philanthropy who expressed a concern that donors will pay attention only to
diseases with the cleverest social media marketing campaigns.
B. A more competitive and ever changing fundraising environment
As discussed in the following chart, NFPs are now operating in a more competitive and ever changing
fundraising environment. In this environment, financial reporting which communicates an NFP’s progress
towards the mission is critical.
NFPs are operating in a more competitive and ever changing fundraising environment
Different fundraising tools are being used
and nationalized competition for donor dollars
exists
20 years ago the NFP landscape looked much different. There were some large
national NFPs (e.g., the American Cancer Society, MDA, March of Dimes) and
many smaller more localized NFPs. The fundraising tools that NFPs used differed
between the two groups. The larger national NFPs used tools like television ads
and mail solicitations and the smaller more localized NFPs used tools like golf
outings, dinners, walk-a-thons, etc. Today, NFPs still use these fundraising tools
while also using tools like their websites, email campaigns, crowd-funding sites,
texting campaigns, and partnerships with retailers asking customers to donate at
checkout. These newer fundraising tools simply did not exist 20 years ago and they
have made the fundraising environment more competitive as an NFP in Savannah,
Georgia may now be competing with an NFP in Spokane, Washington for donor
dollars in these types of campaigns.
The growth of NFP rating agencies
The fundraising environment has also been affected by the growth of websites like
Charity Navigator (www.charitynavigator.org), GuideStar (www.guidestar.org), and
Charity Watch (www.charitywatch.org), that rate and/or provide information on
NFPs. The upside to such websites is that they provide more information to donors.
The downside to such websites is that to some degree they can overly simplify how
donors look at NFPs (e.g., some websites assign ratings and/or post lists like “10
consistently low rated charities” or “10 inefficient fundraisers”). These websites tend
to focus on numbers from the IRS Form 990 or analytics based on those numbers
instead of numbers from audited financial statements. Also, the progress that the
NFP has made towards its mission is often ignored due to the emphasis on the IRS
Form 990.
An ever changing economy
Since 2008-09 the economy has not been as robust as many NFPs would like.
While some improvement may have occurred in recent years, the stock market is
still very unpredictable which can cause donors to be more reluctant to give.
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1. Exercise 1-5
Please answer the following question.
How might this change affect NFPs?
NFPs that have expenditures of federal awards of $750,000 or more during the year are required to
have a single audit. At the end of a single audit a reporting package is submitted to the Federal Audit
Clearinghouse. One change contained in the Uniform Guidance for Federal Awards (i.e., the new
single audit requirements) is that the Federal Audit Clearinghouse is required to make all submitted
reporting packages available to the public (with the exception of certain Indian tribes). The Federal
Audit Clearinghouse will achieve this through a website so users can readily search for the reporting
packages of various entities. How might this change affect NFPs?
IV. Our approach for this course
In this chapter, we have discussed the importance of communicating mission fulfillment in financial
reporting. In the remainder of the course, we will examine the key accounting and reporting rules that
NFPs follow to tell their story of mission fulfillment today. Then, in Chapter 8, we will discuss how some
of these rules will change in the future with the FASB’s Financial Statements of Not-for-Profit Entities
project.
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V. Suggested solutions to exercises
This section contains the suggested solutions to the exercises presented in the chapter.
A. Suggested solution to Exercise 1-1
True or False
1 Under the FASB definition of an NFP,
a credit union would be considered to
be an NFP.
False. FASB ASC 958 states that entities which clearly
fall outside the definition of an NFP include: (1) all
investor-owned entities; and (2) entities that provide
dividends, lower costs, or other economic benefits directly
and proportionately to their owners, members, or
participants, such as mutual insurance entities, credit
unions, farm and rural electric cooperatives, and
employee benefit plans.
2
Entity X is an NFP business-oriented
health care entity (i.e., it has no
ownership interests and is essentially
self-sustaining from fees charged for
goods and services). Entity X would
be considered to be an NFP and
follow the guidance in FASB ASC
958, Not-for-Profit Entities.
True. The guidance in FASB ASC 958 applies to all
NFPs regardless of whether the entity is essentially self-
sustaining from fees charged for goods and services.
NFP business-oriented health care entities also follow the
incremental guidance in FASB ASC 954, Health Care
Entities (Note. NFP non-business-oriented health care
entities are voluntary health and welfare entities and
follow FASB ASC 958 but not FASB ASC 954).
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B. Suggested solution to Exercise 1-2
Can you explain this to me?
You are attending the annual board meeting for NFP Z. The CEO of NFP Z has just given a glowing
five-minute report on the annual financial statements and has opened the floor to questions. Dr. Brown
is new to NFP Z’s board and does not have a financial background or a background in working with
NFPs. She asks for someone to explain net assets to her. She is particularly curious about
unrestricted net assets as the CEO just said that in a moment the board needs to make some
designations regarding how they want to spend those amounts. Silence fills the room and all eyes turn
to the lone CPA in the room (i.e., you). How would you explain the terms net assets and
unrestricted net assets in plain English to Dr. Brown?
In a situation like this, the author recommends taking a simplified approach rather than getting caught
up in the FASB’s terminology. Net assets can be explained as either: [1] the difference between what
the NFP owns (i.e., its assets) and what it owes (i.e., its liabilities); or [2] the cumulative difference
between the NFP’s revenues and expenses since inception. You can then explain that the FASB
requires NFPs to break nets assets down into three classifications based on the presence or absence
of existing donor restrictions. Unrestricted net assets can simply be explained as the portion of net
assets that are free and clear of donor restrictions. Sometimes board members (and others!)
incorrectly interpret unrestricted net assets as being “cash in the bank” that the NFP can go out and
spend today. It is important for board members to understand that this is not the case and that much of
an NFP’s unrestricted net assets are tied up in assets that are not available to be spent (e.g., property
and equipment). Thus, an NFP could not really spend all of the unrestricted net assets balance unless
it liquidated all of its assets and paid all of its liabilities. This is an important concept for governing
boards to understand particularly when it comes to making internal board designations.
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C. Suggested solution to Exercise 1-3
What do you think of this?
Recently, the course author observed the following in the net assets section of an NFP’s statement of
financial position. What do you think of this presentation?
Net assets:
Unrestricted (Note 8):
Operating fund (732,149)
Board designated fund 6,348,338
Total unrestricted net assets 5,616,189
Temporarily restricted net assets 7,581,594
Permanently restricted net assets 28,027,354
Total net assets 41,225,137
The interesting item about the above presentation is that the NFP’s board has designated more
unrestricted net assets than it presently has (that is why we see a negative amount in the “operating
fund”). Such a presentation may raise questions on the part of financial statement users as to whether
the board is perhaps overly aggressive in designating amounts or perhaps lacks confidence in day to
day management. The NFP did provide some rationale for this presentation in Note 8 to the financial
statements. Part of Note 8 stated that:
The Board of Trustees approved lending $3,220,000 from the Board Designated Fund to assist in
financing operating deficits between December 2008 and November 2011. On November 20, 2013,
the board amended the original terms of the loan. Currently the loan is non-interest bearing and is
required to be repaid in 10 equal annual installments beginning August 31, 2019. For the year
ended August 31, 2015 the board designated a $150,600 gift to pay down the board loan. The
balance of the loan as of August 31, 2015 was $2,669,400.
The Board Designated Fund consists of funds with no donor or legal restrictions, but through Board
resolutions it has been set aside for specific purposes. As of August 31, the fund consists of the
following:
2015 Board Designated Reserve Fund $4,058,528 NFP X Surplus Endowment Fund 2,287,656 Guild Operations 2,154
$6,348,338
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D. Suggested solution to Exercise 1-4
True or False
1
The best way to measure
how an NFP used its
resources during the
period is to compare
the percentages that the
NFP spent on program
services, management
and general activities,
and fundraising activities
to those percentages for
all NFPs.
False. It is not fair to lump all NFPs together in using simple across
the NFP sector expense ratios. Three examples of how such ratios
may be unfair just in the area of fundraising are: [1] an NFP that relies
primarily on contributions will naturally spend more on fundraising than
an NFP that primarily relies on fees from services it provides or
investment earnings; [2] some NFPs support causes that affect fewer
people (e.g., it has been estimated that well less than 1% of
Americans will be diagnosed with ALS during their lifetimes) so it may
cost them more in fundraising per dollar raised than a disease that
affects more people (e.g., it has been estimated that approximately
40% of Americans will be diagnosed with a type of cancer during their
lifetimes); and [3] an NFP may have been blessed with an unusually
large gift from an individual which will naturally make its ratio of
contributions to fundraising expenses appear better than an NFP that
did not receive such a gift.
E. Suggested solution to Exercise 1-5
How might this change affect NFPs?
NFPs that have expenditures of federal awards of $750,000 or more during the year are required to
have a single audit. At the end of a single audit a reporting package is submitted to the Federal Audit
Clearinghouse. One change contained in the Uniform Guidance for Federal Awards (i.e., the new
single audit requirements) is that the Federal Audit Clearinghouse is required to make all submitted
reporting packages available to the public (with the exception of certain Indian tribes). The Federal
Audit Clearinghouse will achieve this through a website so users can readily search for the reporting
packages of various entities. How might this change affect NFPs?
There are at least a couple of key impacts to NFPs that undergo single audits as a result of this change
including: [1] the ease of public access to single audit information and the audited financial statements
(which are part of the reporting package) will greatly expand particularly as many NFPs have
previously not made their audited financial statements readily available to the public online; and
[2] under the Uniform Guidance for Federal Awards, subrecipients (e.g., an NFP that receives a federal
award from a state or local government) are no longer required to submit a copy of the reporting
package to pass-through entities since the reporting package will be available to pass-through entities
via the Federal Audit Clearinghouse website. (Note. As discussed in §200.512 of the Uniform
Guidance for Federal Awards, certain Indian tribes will continue to have submission requirements
related to pass-through entities. Also, some pass-through entities may impose notification/submission
requirements on subrecipients that go beyond what the Uniform Guidance for Federal Awards
requires.)
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Distinguishing Contributions from Exchange Transactions
Learning Objectives 1 I. What are we talking about? 1 II. So why is this important? 1 III. How do we tell the difference? 2
A. Difficult determinations 3 1. Exercise 2-1 3
B. Part contribution, part exchange transaction 4 1. Exercise 2-2 4 2. Some special guidance related to premiums 4 3. Some special guidance related to items donated for use in fundraising 5 4. Exercise 2-3 5
C. Helpful indicators in distinguishing contributions from exchange transactions 5 1. Exercise 2-4 6
D. Membership dues 6 1. Exercise 2-5 8 2. Exercise 2-6 8
IV. What about agency transactions? 9 V. An issue on the horizon: revenue recognition 9
A. A brief look at how the new revenue recognition standard works 10 1. The 1st hurdle: Identifying the contract with a customer 10 2. Exercise 2-7 10 3. The 2nd hurdle: Identifying the performance obligations in the contract 11 4. The 3rd hurdle: Determining the transaction price 11 5. The 4th hurdle: Allocating the transaction price to the performance obligations in the contract 11 6. The 5th hurdle: Recognizing revenue when (or as) each performance obligation is satisfied 11
B. A developing area 12 VI. Suggested solutions to exercises 13
A. Suggested solution to Exercise 2-1 13 B. Suggested solution to Exercise 2-2 13 C. Suggested solution to Exercise 2-3 14 D. Suggested solution to Exercise 2-4 15 E. Suggested solution to Exercise 2-5 16 F. Suggested solution to Exercise 2-6 17 G. Suggested solution to Exercise 2-7 17
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Distinguishing Contributions from Exchange Transactions
Learning Objectives
Upon completing this chapter, you will be able to:
Perceive the importance of properly distinguishing contributions from
exchange transactions;
Differentiate contributions from exchange transactions.
Assess the proper classification of membership dues.
I. What are we talking about?
In this chapter, we are going to discuss the importance of properly distinguishing contributions from
exchange transactions and key aspects of the current guidance provided for how this is done. Note.
Distinguishing contributions from exchange transactions is really not an area that the FASB chose to
address/change in the Financial Statements of Not-for-Profit Entities project.
II. So why is this important?
Contributions are a significant source of revenue for many if not most NFPs. Many NFPs also rely heavily
on revenue from exchange transactions. NFPs may even be involved in transactions that consist of both
contribution and exchange transaction components. It might be tempting to just say that revenue is
revenue. However, for NFPs the categorization of a transaction as: (1) contribution revenue;
(2) exchange transaction revenue; or (3) a transaction with components of both contribution and
exchange transaction revenue is important. As reflected below, the accounting and reporting for
contributions differs from the accounting and reporting used for exchange transactions.
Distinguishing contributions from exchange transactions is important because…
Except for certain contributed services and collection items, contributions received are
recognized as revenues or gains in the period received and as assets, decreases of
liabilities, or expenses depending on the form of the benefits received. The classification
of contributions received as revenues or gains depends on whether the transactions are
part of the NFP’s ongoing major or central activities (revenues), or are peripheral or
incidental to the NFP (gains). NFPs distinguish between contributions received with
permanent restrictions, those received with temporary restrictions, and those received
without donor-imposed restrictions.
Revenue from exchange transactions follow traditional accrual generally accepted
accounting principles (e.g., revenue derived from membership dues in exchange
transactions is recognized over the period to which the dues relate). Resources
received in exchange transactions are classified as unrestricted revenues and net
assets, even in circumstances in which resource providers place limitations on the use
of the resources (although there are some disclosure considerations see FASB ASC
958-210-50-2).
Contribution
$
$
$ $
$ $
$
$
$
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Whether an NFP considers a transaction to be a contribution or an exchange transaction can have a
dramatic impact on its financial statements as reflected below.
III. How do we tell the difference?
The distinction between a contribution and an exchange transaction can be found in the FASB ASC
definitions of the terms contribution and inherent contribution.
Contribution - An unconditional transfer of cash or other assets to an entity or a
settlement or cancellation of its liabilities in a voluntary nonreciprocal transfer by
another entity acting other than as an owner. Those characteristics distinguish
contributions from exchange transactions, which are reciprocal transfers in which each
party receives and sacrifices approximately equal value; from investments by owners
and distributions to owners, which are nonreciprocal transfers between an entity and
its owners; and from other nonreciprocal transfers, such as impositions of taxes or
legal judgments, fines, and thefts, which are not voluntary transfers. In a contribution
transaction, the value, if any, returned to the resource provider is incidental to potential
public benefits. In an exchange transaction, the potential public benefits are
secondary to the potential proprietary benefits to the resource provider. The term
contribution revenue is used to apply to transactions that are part of the entity’s
ongoing major or central activities (revenues), or are peripheral or incidental to the
entity (gains).
If NFP A determines the grant to be an
exchange transaction its 6/30/X1
statement of activities will likely reflect
$100,000 in revenues and the statement
of financial position will reflect $100,000 in
deferred revenues (a liability). This is
because revenues from exchange
transactions are generally recognized
based on accrual accounting principles.
If NFP A determines the grant to be a contribution
its 6/30/X1 statement of activities will likely reflect
$200,000 in revenues (either as $100,000 in
unrestricted revenues and $100,000 in temporarily
restricted revenues or $200,000 in temporarily
restricted revenues and a reclassification of $100,000
to unrestricted net assets depending on the NFP’s
policy). This is because revenues from contributions
are generally recognized when received.
NFP A has a 6/30 year end. On 1/1, NFP A received $200,000 from a grant to support program X
for the calendar year 20X1. At 6/30/X1, NFP A had incurred $100,000 in expenses related to
program X which were not funded by other sources.
A dramatic impact
In the above example, the NFP’s classification of the grant as either a contribution or an exchange
transaction results in a $100,000 difference one way or the other in the revenues reported at
6/30/X1. The NFP’s decision would hinge on whether reciprocity occurred or did not occur as part of
the grant.
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Inherent Contribution - A contribution that results if an entity voluntarily transfers
assets (or net assets) or performs services for another entity in exchange for either no
assets or for assets of substantially lower value and unstated rights or privileges of a
commensurate value are not involved.
A. Difficult determinations
It is not always easy to distinguish between a contribution and an exchange transaction. Certain transfers
of assets that are exchange transactions may appear to be contributions if the services or other assets
given in exchange are perceived to be a sacrifice of little value and the exchanges are compatible with
the recipient’s mission. NFPs may receive resources under grants, awards, or sponsorships from
foundations, business entities, and other types of entities. Those asset transfers are contributions if the
resource providers receive no value in exchange for the assets transferred or if the value received by the
resource providers is incidental to the potential public benefit from using the assets transferred. A careful
assessment of the characteristics of the transaction, from the perspectives of both the resource provider
and the recipient, is necessary to determine whether a contribution has occurred.
An illustration of assessing the characteristics of the transaction
A grant made by a resource provider to an NFP would likely be a
contribution if the activity specified by the grant is to be planned and
carried out by the NFP and the NFP has the right to the benefits of
carrying out the activity.
If, however, the grant is made by a resource provider that provides
materials to be tested in the activity and that retains the right to any
patents or other results of the activity, the grant would likely be an
exchange transaction.
1. Exercise 2-1
Please review and complete the below.
Is this a contribution or an exchange transaction?
University A’s school of veterinary medicine recently received $75,000 from a dog food company to
perform a clinical trial of an experimental dog food product. The dog food company specified the
protocol for testing and requires a detailed report within 12 months. University A immediately recorded
the $75,000 cash received and temporarily restricted contribution revenue for $75,000. If you were the
auditor of University A would you agree or disagree with this treatment? If you disagree, how
would you record the receipt of the $75,000?
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B. Part contribution, part exchange transaction
As illustrated below, a single transaction may be in part an exchange transaction and in part a
contribution.
What is this?
A single transaction may be in part an exchange transaction and in part a contribution.
An example of this would be where a donor transfers property to an NFP at a price
significantly lower than its market value and no unstated rights or privileges are
involved. In this scenario, the transaction is in part an exchange of assets and in part
a contribution and accounted for as such.
1. Exercise 2-2
Please answer the following question related to transactions that are part contribution and part exchange.
Is this a contribution and/or an exchange transaction?
NFP Z holds a golf outing as a fundraising event. Each player gives NFP Z $250 to play in the event.
NFP Z pays the golf course $50 per player in greens fees plus an additional $25 per player for meals
and beverages. NFP Z also provides each player with a golf shirt worth $25. Do you believe that
this transaction is in part an exchange transaction and in part a contribution? If so, how would
you allocate the $250 paid per player between the contribution and exchange transaction
components?
2. Some special guidance related to premiums
NFPs may provide potential donors and resource providers small rewards (premiums) for donating or
potentially donating to the NFP. FASB ASC 958-720-45 provides special guidance in this area.
Premiums
The cost of premiums (e.g., postcards or calendars) given to potential donors as
part of a mass fundraising appeal is fundraising expense, and the classification of
the donations received from the appeal as contributions is unaffected by the fact
that premiums were given to potential donors. The premiums are not provided to
potential donors in exchange for the assets contributed; they can be kept by all
those from whom funds are solicited, irrespective of whether a contribution is
made.
The cost of premiums (e.g., coffee mugs) that are given to resource providers to
acknowledge receipt of a contribution is also reported as fundraising expense if
those costs are nominal in value compared with the value of the goods or services
donated by the resource provider. As an example, an NFP may provide a coffee
mug to people making a contribution of $100 or more; the mug costs the NFP $2.
The NFP recognizes contributions for the total amount contributed and fundraising
expense of $2 for each mug provided to donors. The cost of premiums that are
greater than nominal in value are reported as cost of sales. If premiums are
greater than nominal in value, transactions are reported as part exchange
transaction and part contribution.
Enclosed are your mailing labels!
We’re wild about our donors!
Thank
you!
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3. Some special guidance related to items donated for use in fundraising
The FASB ASC also carves out special guidance for items donated for use in fundraising. FASB ASC
958-605-25 discusses that NFPs occasionally receive items (e.g., tickets, gift certificates, works of art,
and merchandise) that are to be used for fundraising purposes by transferring them to other resource
providers (the ultimate resource provider or recipient) during fundraising events. Those gifts in kind can
be linked to asset transfers from the original resource providers to the ultimate resource providers
(recipients) because they are, in substance, part of the same transaction; those gifts in kind are reported
as contributions and measured at fair value when originally received by an NFP. The difference between
the amount received for those items from the ultimate resource providers (recipients) and the fair value of
the gifts in kind when originally contributed to the NFP are recognized as adjustments to the original
contributions when the items are transferred to the ultimate resource providers (recipients).
4. Exercise 2-3
Please answer the following related to items donated for use in fundraising.
All I have to give
NFP Z is holding its annual 1990s themed fundraiser. As part of the fundraiser, NFP Z requests and
receives donated items which it auctions off to the highest bidder. This year, NFP Z received a ticket to
a future concert that former pop icons Backstreet Ice are holding in the area. The fair value of the ticket
is believed to be $100. Thus, when NFP Z received the ticket it recorded a $100 contribution and an
asset for $100. Please answer the following questions related to the results of the auction under
two different scenarios.
The auction goes well
Many attendees at the auction are Backstreet Ice
fans and a bidding war erupts. The ticket is
auctioned off for $150. What entry would NFP Z
record?
The auction does not go well
Few attendees at the auction are Backstreet Ice
fans (or they are afraid to publicly admit it by
bidding on the ticket). The ticket is auctioned off
for $50 to the cleaning crew which wants to turn off
the lights and go home. What entry would NFP Z
record?
C. Helpful indicators in distinguishing contributions from exchange transactions
The following chart discusses indicators that may be helpful in determining whether individual asset
transfers are contributions, exchange transactions, or a combination of both.
Helpful indicators
Indicators that may be helpful in determining whether individual asset transfers are
contributions, exchange transactions, or a combination of both include: (1) the
resource provider’s expressed intent about the purpose of the asset or service to be
provided by the recipient NFP; (2) the recipient NFP’s intent in soliciting the asset or
service; (3) the method of delivery; (4) the method of determining the amount of
payment; (5) whether penalties are assessed if the NFP fails to make timely delivery of
assets; and (6) the delivery of assets or services to be provided by the recipient NFP.
Exchange Transaction Contribution
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Some indicators may be more significant than others depending on the facts and circumstances. No
single indicator is determinative of the classification of a particular transaction. Indicators of a contribution
tend to describe transactions in which the value, if any, returned to the resource provider is incidental to
potential public benefits. Indicators of an exchange tend to describe transactions in which the potential
public benefits are secondary to the potential proprietary benefits to the resource provider.
1. Exercise 2-4
Please read the fact presented in the left column below and place an X in the right column as to whether
the fact presented is indicative of a contribution or an exchange transaction.
Contribution
Exchange transaction
1 Resource Provider A asserts that it is making a donation to support NFP B’s programs.
2 Resource Provider A asserts that it is transferring resources in exchange for specified benefits.
3 Recipient NFP B asserts that it is soliciting an asset as a contribution.
4 Recipient NFP B asserts that it is seeking resources in exchange for specified benefits.
5 The method of delivery of the asset to be provided by Recipient NFP B to third-party recipients is specified by Resource Provider A.
6 The time or place of delivery of the asset to be provided by Recipient NFP B to third-party recipients is at the discretion of Recipient NFP B.
7 Resource Provider A determines the amount of the payment.
8 Payment by Resource Provider A equals the value of the assets to be provided by Recipient NFP B, or the assets’ cost plus markup; the total payment is based on the quantity of assets to be provided.
9 Penalties are limited to the delivery of assets already produced and the return of the unspent amount. NFP B is not penalized for nonperformance.
10 Provisions for economic penalties exist beyond the amount of payment. NFP B is penalized for nonperformance.
11 Assets are to be delivered to Resource Provider A or to individuals or organizations closely connected to Resource Provider A.
12 Assets are to be delivered to individuals or organizations other than Resource Provider A.
D. Membership dues
Some NFPs use the term members to refer to their donors and other NFPs use the term to refer to
individuals or other entities that pay dues in exchange for a defined set of benefits. The determination of
whether membership dues are contributions, exchange transactions, or a combination of both is important
and sometimes difficult for the reasons we have been discussing. The illustration on the following page
discusses membership dues.
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Membership dues
NFPs may receive dues from their members. These transfers often have elements of
both a contribution and an exchange transaction because members receive tangible or
intangible benefits from their membership in the NFP. Usually, the determination of
whether membership dues are contributions rests on whether the value received by
the member is commensurate with the dues paid. As an example, NFP Z has annual
dues of $200 and the only benefit members receive is a year-long, unrestricted access
to an informational website with a fair value of $50. For NFP Z, $50 of the dues are
received in an exchange transaction and are recognized as revenue as the earnings
process is completed and $150 of the dues are a contribution.
As discussed earlier, revenue derived from membership dues in exchange transactions is recognized
over the period to which the dues relate. Nonrefundable initiation and life membership fees received in
exchange transactions are recognized as revenues in the period in which the fees become receivable if
future fees are expected to cover the costs of future services to be provided to members. If
nonrefundable initiation and life membership fees, rather than future fees, are expected to cover those
costs, nonrefundable initiation and life member fees received in exchange transactions are recognized as
revenue over the average duration of membership, the life expectancy of members, or other appropriate
time periods.
Must member benefits be used to have value?
Regardless of how often (or whether) the benefits are used, member benefits
generally have value. For example, a health club membership is an exchange
transaction, even if the member stops using the facilities before the completion
of the membership period.
The following chart discusses indicators that may be helpful in determining whether membership dues are
contributions, exchange transactions, or a combination of both.
Helpful indicators
Indicators that may be helpful in determining whether membership dues are
contributions, exchange transactions, or a combination of both include: (1) the
recipient NFP’s expressed intent concerning the purpose of the dues payment; (2) the
extent of benefits to members; (3) the NFP’s service efforts; (4) the duration of
benefits; (5) the expressed agreement concerning refundability of the payment; and
(6) the qualifications for membership.
Depending on the facts and circumstances, some of the above indicators may be more significant than
others. However, no single indicator is determinative of the classification of a particular transaction.
Join us!
I had good intentions!
Exchange Transaction Contribution
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1. Exercise 2-5
Please read the fact presented in the left column below and place an X in the right column as to whether
the fact presented is indicative of a contribution or an exchange transaction.
Contribution
Exchange transaction
1 NFP A’s request for dues payment describes the dues as providing economic benefits to members or to other organizations or individuals designated by or related to the members.
2 NFP A’s request for dues payment describes the dues as being used to provide benefits to the general public or to NFP A’s service beneficiaries.
3 The benefits to members are negligible.
4 The substantive benefits to members (e.g., publications, admissions, educational programs, and special events) may be available to nonmembers for a fee.
5 NFP A provides service to members and nonmembers.
6 NFP A’s benefits are provided to members only.
7 Membership benefits are provided for a defined period; additional payment of dues is required to extend benefits.
8 The duration of membership benefits is not specified.
9 The dues payment is fully or partially refundable if the resource provider withdraws from membership.
10 The dues payment is not refundable to the resource provider.
11 Membership in NFP A is available to the general public.
12 Membership in NFP A is available only to individuals who meet certain criteria (e.g., requirements to pursue a specific career or to live in a certain area).
2. Exercise 2-6
Please answer the following question related to membership dues.
What should I record at year end?
Trade Association X believes that all of its annual membership dues are exchange transaction revenue.
So, Trade Association X originally records a deferred revenue amount and then recognizes the revenue
on a monthly basis throughout the year for which the dues relate. Trade Association X has a 9/30 year
end and bills its members for the upcoming year (i.e., 10/1 to 9/30) around 7/31 each year. This year at
7/31, Trade Association X invoiced its existing members in total for $10,000,000 for the upcoming year
which it recorded in its subsidiary ledger as accounts receivable (dr.) and deferred revenue (cr.).
Between 7/31 and 9/30 members paid $7,000,000 in dues for the upcoming year for which Trade
Association X recorded cash (dr.) and reduced the receivable (cr.). In its 9/30 financial statements,
what amount of deferred revenue and accounts receivable would you suggest that Trade
Association X report related to these dues on its statement of financial position?
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IV. What about agency transactions?
In this chapter we have discussed how to distinguish a contribution from an exchange transaction. Some
NFPs also receive transfers of resources in an agency, trustee, or intermediary role. Federated
fundraising organizations, community foundations, and institutionally related entities are examples of
NFPs that ordinarily serve as agents, trustees, or intermediaries, but any NFP can function in those roles.
Just passing through
A transfer of assets may appear to be a contribution when a donor uses an agent, a trustee, or an
intermediary to transfer assets to a donee. Receipts of resources as an agent, trustee, or
intermediary of a donor are not contributions received to the agent because the recipient of
assets who is an agent or trustee has little or no discretion in determining how the assets
transferred will be used. For the same reason, deliveries of resources as an agent, trustee, or
intermediary of a donor are not contributions made by the agent. Similarly, contributions of
services (time, skills, or expertise) between donors and donees that are facilitated by an intermediary
are not contributions received or contributions made by the intermediary. FASB ASC 958-605 contains
guidance for NFPs or charitable trusts that raise or hold contributions for others.
V. An issue on the horizon: revenue recognition
In this chapter, we have discussed the importance of and some of the key determinations involved in
distinguishing contributions from exchange transactions. Before ending the chapter, we also want to
touch on a potentially significant issue on the horizon for NFPs. FASB ASU No. 2014-09, Revenue from
Contracts with Customers (Topic 606), (i.e., the new revenue recognition standard) will impact most NFPs
for annual reporting periods beginning after December 15, 2018. Certain NFPs with public debt will be
impacted for annual reporting periods beginning after December 15, 2017. While we are still a few years
from implementing the standard, and the implementation guidance for NFPs is still very much in the
developmental stage, it is not too early to begin thinking about the new revenue recognition standard.
The degree to which the new revenue recognition standard will impact an NFP depends upon the types of
revenues that the NFP receives and the timing of when the revenues are received (i.e., to some degree,
the closer the revenue stream aligns to the fiscal year of the NFP the lesser the potential impact may be).
The good news and bad news for NFPs
The main good news related to the new revenue recognition standard for NFPs is that
contributions and investment income are not subject to the standard. The bad news is
that many other revenues will be covered by the new revenue recognition standard (e.g.,
membership dues, subscriptions, tuition, fees for services, retail sales, licensing, and
potentially government grants and contracts).
$ Resource provider or donor Recipient entity Specified beneficiary
$ $ $ $ $ $
I made it here!
I’m just passing through.
Wait for me.
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A. A brief look at how the new revenue recognition standard works
As illustrated below, under the new revenue recognition standard, revenue will be recognized after five
hurdles are cleared.
Under the new revenue recognition standard revenue will be recognized after five hurdles are cleared:
The 1st hurdle The NFP will identify the contract with a customer.
The 2nd hurdle The NFP will identify the performance obligations in the contract.
The 3rd hurdle The NFP will determine the transaction price.
The 4th hurdle The NFP will allocate the transaction price to the performance obligations in the contract.
The 5th hurdle The NFP will recognize revenue when (or as) each performance obligation is satisfied.
In the following sections, we will look at aspects of each of the five hurdles.
1. The 1st hurdle: Identifying the contract with a customer
When the new revenue recognition standard refers to a contract with a customer it does not have to be a
written contract. A contract may be oral or even implied by the entity’s customary business practices, but
it needs to create rights and obligations that are legally enforceable against the parties. A contract does
not exist if a party can terminate the contract prior to any performance occurring without compensating
the other party. A critical part of the 1st hurdle for some NFPs will be distinguishing transactions that are
part exchange transaction and part contribution between the two components. This will be important
because the exchange transaction component will likely be considered to be a contract with a customer
(and thus subject to the new revenue recognition standard) while the contribution component will not (and
thus not subject to the new revenue recognition standard).
An illustration related to the 1st hurdle
Zoo X offers memberships to its supporters. The annual memberships go for $250
each. Zoo X has determined that $100 of this amount is a contribution and that $150 is
an exchange transaction for benefits that members receive. In applying the 1st hurdle,
Zoo X will likely conclude that $100 of the membership is a contribution and thus not
subject to the new revenue recognition standard and $150 of the membership is an
exchange transaction (i.e., a contract) subject to the new revenue recognition standard.
2. Exercise 2-7
Please review and answer the following question.
When do I have a contract?
In Exercise 2-6 we discussed Trade Association X which believes that all of its annual membership
dues are exchange transaction revenue. We also saw that Trade Association X has a 9/30 year end
and bills its members for the upcoming year (i.e., 10/1 to 9/30) around 7/31 each year. Under the new
revenue recognition standard do you believe Trade Association X would say it has a contract
with the customer on: (1) 7/31 when it bills the customer; or (2) when it actually receives the
renewal payment?
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3. The 2nd hurdle: Identifying the performance obligations in the contract
A performance obligation is a promise in a contract with a customer to transfer a good or service to the
customer. At the inception of a contract, the entity will assess the goods or services promised to be
transferred to the customer and identify as a performance obligation each promise to transfer to the
customer either: (1) a good or service, or bundle of goods or services, that is distinct; or (2) a series of
distinct goods or services that are substantially the same and that have the same pattern of transfer to the
customer.
An illustration related to the 2nd hurdle
The annual memberships at Zoo X go for $250 each. Zoo X has determined that $100
of this amount is a contribution and that the remaining $150 is a contract for benefits
that members receive (i.e., the performance obligations). In the 2nd hurdle, Zoo X will
identify the specific performance obligations and their characteristics. For example,
Zoo X determines that the benefits provided consist of: (1) an annual pass to Zoo X;
(2) a monthly newsletter; and (3) attendance at the annual Zoofest Gala.
4. The 3rd hurdle: Determining the transaction price
The transaction price is the amount of consideration that the entity expects to be entitled to in exchange
for transferring the promised goods or services to the customer.
An illustration related to the 3rd hurdle
Zoo X determines that the benefits provided (i.e., the annual pass to Zoo X; the monthly
newsletter; and attendance at the annual Zoofest Gala) are valued at $150.
5. The 4th hurdle: Allocating the transaction price to the performance obligations in the contract
When a contract has only one performance obligation, the entire transaction price is attributed to that
performance obligation. If the contract has more than one performance obligation, the transaction price
will be allocated among the individual performance obligations. That allocation is done based on the
stand-alone selling price of each of the distinct goods or services underlying the performance obligations.
An illustration related to the 4th hurdle
Zoo X determines that the $150 exchange transaction (i.e., contract) component of the
membership consists of: (1) an annual pass to Zoo X valued at $50; (2) a monthly
newsletter valued at $25; and (3) attendance at the annual Zoofest Gala valued at $75.
6. The 5th hurdle: Recognizing revenue when (or as) each performance obligation is satisfied
The 5th hurdle in the new revenue recognition standard is to recognize revenue. Recognition of revenue
occurs when or as each performance obligation is satisfied by transferring the promised good or service
to the customer.
An illustration related to the 5th hurdle
In the example of Zoo X, the annual pass to the zoo and monthly newsletter would likely
be recognized as revenue over the 12 months and the amount allocated to the annual
Zoofest Gala would likely be recognized after the event.
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B. A developing area
As we mentioned at the start of our discussion of the new revenue recognition standard, the
implementation guidance for NFPs is still very much in the developmental stage. The FASB, AICPA, and
others will hopefully be putting out a fair amount of implementation guidance over the next few years.
One area that NFPs will want to watch carefully is how the new revenue recognition standard will
potentially impact the accounting for government grants and contracts. This is an area of continuing
discussion.
A significant area to watch
Traditionally, most government grants and contracts received by NFPs have been
treated as exchange transactions instead of contributions. This is essentially based on
the concept that the government is not making a contribution. Instead, in receiving the
grant, the NFP is essentially fulfilling a function that the government has assigned to it.
However, deeming a government grant or contract to be an exchange transaction
in the future would likely result in that transaction being subject to the new revenue
recognition standard including its disclosure requirements. Many feel that this was not
the FASB’s intention and that applying the new revenue recognition standard to
government grants and contracts would be problematic. Some believe a possible
solution is for NFPs to treat government grants and contracts as conditional
contributions in the future. However, as this course was written in the spring of 2016,
the issue was still very much unresolved and NFPs should watch for additional
guidance to be issued in this and other areas.
Caution!
Contentious Area
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VI. Suggested solutions to exercises
This section contains the suggested solutions to the exercises presented in the chapter.
A. Suggested solution to Exercise 2-1
Is this a contribution or an exchange transaction?
University A’s school of veterinary medicine recently received $75,000 from a dog food company to
perform a clinical trial of an experimental dog food product. The dog food company specified the
protocol for testing and requires a detailed report within 12 months. University A immediately recorded
the $75,000 cash received and temporarily restricted contribution revenue for $75,000. If you were the
auditor of University A would you agree or disagree with this treatment? If you disagree, how
would you record the receipt of the $75,000?
In the author’s opinion, the transaction appears to be an exchange transaction instead of a contribution
based upon the reciprocity involved (e.g., the dog food company is getting a clinical trial of their product,
the trial is based upon the dog food company’s protocol, and the university is required to submit a
detailed report). The author would have recorded the transaction as a debit to cash for $75,000 and a
credit to a liability account (deferred revenue or refundable advance) for $75,000.
B. Suggested solution to Exercise 2-2
Is this a contribution and/or an exchange transaction?
NFP Z holds a golf outing as a fundraising event. Each player gives NFP Z $250 to play in the event.
NFP Z pays the golf course $50 per player in greens fees plus an additional $25 per player for meals
and beverages. NFP Z also provides each player with a golf shirt worth $25. Do you believe that
this transaction is in part an exchange transaction and in part a contribution? If so, how would
you allocate the $250 paid per player between the contribution and exchange transaction
components?
In this scenario, there certainly appears to be reciprocity involved as each player is paying $250 to play
in the event and is receiving a benefit in exchange worth $100 (i.e., the $50 per player in greens fees,
$25 per player for meals and beverages, and the golf shirt worth $25). Based on the level of reciprocity
involved, NFP Z would likely say that $150 is a contribution and $100 is an exchange transaction.
Note. Later in the course, we will discuss the presentation of special events in the statement of
activities.
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C. Suggested solution to Exercise 2-3
All I have to give
NFP Z is holding its annual 1990s themed fundraiser. As part of the fundraiser, NFP Z requests and
receives donated items which it auctions off to the highest bidder. This year, NFP Z received a ticket to
a future concert that former pop icons Backstreet Ice are holding in the area. The fair value of the ticket
is believed to be $100. Thus, when NFP Z received the ticket it recorded a $100 contribution and an
asset for $100. Please answer the following questions related to the results of the auction under
two different scenarios.
The auction goes well
Many attendees at the auction are Backstreet Ice
fans and a bidding war erupts. The ticket is
auctioned off for $150. What entry would NFP Z
record?
NFP Z would credit an additional $50 in
contributions, credit the ticket asset for $100, and
debit cash for $150.
The auction does not go well
Few attendees at the auction are Backstreet Ice
fans (or they are afraid to publicly admit it by
bidding on the ticket). The ticket is auctioned off
for $50 to the cleaning crew which wants to turn off
the lights and go home. What entry would NFP Z
record?
NFP Z would debit (i.e., reduce) contributions by
$50, credit the ticket asset for $100, and debit
cash for $50.
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D. Suggested solution to Exercise 2-4
Contribution
Exchange transaction
1 Resource Provider A asserts that it is making a donation to support NFP B’s programs.
X
2 Resource Provider A asserts that it is transferring resources in exchange for specified benefits.
X
3 Recipient NFP B asserts that it is soliciting an asset as a contribution. X
4 Recipient NFP B asserts that it is seeking resources in exchange for specified benefits.
X
5 The method of delivery of the asset to be provided by Recipient NFP B to third-party recipients is specified by Resource Provider A.
X
6 The time or place of delivery of the asset to be provided by Recipient NFP B to third-party recipients is at the discretion of Recipient NFP B.
X
7 Resource Provider A determines the amount of the payment. X
8 Payment by Resource Provider A equals the value of the assets to be provided by Recipient NFP B, or the assets’ cost plus markup; the total payment is based on the quantity of assets to be provided.
X
9 Penalties are limited to the delivery of assets already produced and the return of the unspent amount. NFP B is not penalized for nonperformance.
X
10 Provisions for economic penalties exist beyond the amount of payment. NFP B is penalized for nonperformance.
X
11 Assets are to be delivered to Resource Provider A or to individuals or organizations closely connected to Resource Provider A.
X
12 Assets are to be delivered to individuals or organizations other than Resource Provider A.
X
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E. Suggested solution to Exercise 2-5
Contribution
Exchange transaction
1 NFP A’s request for dues payment describes the dues as providing economic benefits to members or to other organizations or individuals designated by or related to the members.
X
2 NFP A’s request for dues payment describes the dues as being used to provide benefits to the general public or to NFP A’s service beneficiaries.
X
3 The benefits to members are negligible. X
4 The substantive benefits to members (e.g., publications, admissions, educational programs, and special events) may be available to nonmembers for a fee.
X
5 NFP A provides service to members and nonmembers. X
6 NFP A’s benefits are provided to members only. X
7 Membership benefits are provided for a defined period; additional payment of dues is required to extend benefits.
X
8 The duration of membership benefits is not specified. X
9 The dues payment is fully or partially refundable if the resource provider withdraws from membership.
X
10 The dues payment is not refundable to the resource provider. X
11 Membership in NFP A is available to the general public. X
12 Membership in NFP A is available only to individuals who meet certain criteria (e.g., requirements to pursue a specific career or to live in a certain area).
X
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F. Suggested solution to Exercise 2-6
What should I record at year end?
Trade Association X believes that all of its annual membership dues are exchange transaction revenue.
So, Trade Association X originally records a deferred revenue amount and then recognizes the revenue
on a monthly basis throughout the year for which the dues relate. Trade Association X has a 9/30 year
end and bills its members for the upcoming year (i.e., 10/1 to 9/30) around 7/31 each year. This year at
7/31, Trade Association X invoiced its existing members in total for $10,000,000 for the upcoming year
which it recorded in its subsidiary ledger as accounts receivable (dr.) and deferred revenue (cr.).
Between 7/31 and 9/30 members paid $7,000,000 in dues for the upcoming year for which Trade
Association X recorded cash (dr.) and reduced the receivable (cr.). In its 9/30 financial statements,
what amount of deferred revenue and accounts receivable would you suggest that Trade
Association X report related to these dues on its statement of financial position?
This is an area where some divergence in practice exists today. Trade Association X would most likely
report deferred revenue in the amount of $7,000,000 (i.e., the actual amount that members had paid at
9/30) and not reflect a receivable. However, some NFPs may try to pursue a somewhat more
aggressive position of reporting the entire $10,000,000 in deferred revenue and the remaining
$3,000,000 in accounts receivable if they believe that they will actually receive these amounts shortly
after year end.
G. Suggested solution to Exercise 2-7
When do I have a contract?
In Exercise 2-6 we discussed Trade Association X which believes that all of its annual membership
dues are exchange transaction revenue. We also saw that Trade Association X has a 9/30 year end
and bills its members for the upcoming year (i.e., 10/1 to 9/30) around 7/31 each year. Under the new
revenue recognition standard do you believe Trade Association X would say it has a contract
with the customer on: (1) 7/31 when it bills the customer; or (2) when it actually receives the
renewal payment?
Under the new revenue recognition standard, Trade Association X would most likely say that it has a
contract when it actually receives the renewal payment as until that occurs rights and obligations do not
exist between the parties as the member has not accepted the “contract.” Note. In the solution to
Exercise 2-6 we saw that some NFPs today try to record deferred revenues and accounts receivable for
billed amounts instead of billed and received amounts. Under the new revenue recognition standard,
this position will be much more difficult to take as a contract is not in place just based on the billing.
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Conditional and Unconditional Promises to Give
Learning Objectives 1 I. What are we talking about? 1 II. So why is this important? 1 III. Understanding the terminology 2
A. Exercise 3-1 3 IV. Conditional versus unconditional promises to give 4
A. Unconditional promises to give 4 B. Conditional promises to give 4 C. Exercise 3-2 5 D. A difficult determination 6 E. Exercise 3-3 6
V. Valuing unconditional promises to give when received 7 A. Exercise 3-4 9
VI. Key disclosures related to promises to give 9 VII. Common auditing procedures related to contributions 10
A. The importance of controls related to contributions receivable 11 VIII. Suggested solutions to exercises 12
A. Suggested solution to Exercise 3-1 12 Suggested solution to Exercise 3-1 (continued) 13 B. Suggested solution to Exercise 3-2 14 C. Suggested solution to Exercise 3-3 15 D. Suggested solution to Exercise 3-4 16
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Conditional and Unconditional Promises to Give
Learning Objectives
Upon completing this chapter, you will be able to:
Explain the importance of properly distinguishing between donor-imposed
conditions and donor-imposed restrictions;
Identify key FASB ASC terminology related to contributions;
Discern conditional promises to give from unconditional promises to give;
Value unconditional promises to give when received;
Perceive selected disclosure considerations; and
Identify common auditing procedures employed related to contributions.
I. What are we talking about?
In this chapter, we are going to discuss the importance of properly discerning conditional promises to give
from unconditional promises to give and key aspects of the current guidance provided for how this is
done. Note. Distinguishing conditional promises to give from unconditional promises to give is really not
an area that the FASB chose to address/change in the Financial Statements of Not-for-Profit Entities
project.
II. So why is this important?
As stated in the last chapter, contributions are a significant source of revenues for many if not most NFPs.
Sometimes donors impose conditions, restrictions, or both in their communications to NFPs. As reflected
below, it is important to distinguish donor-imposed conditions from donor-imposed restrictions.
Distinguishing between donor-imposed conditions and donor-imposed restrictions is important because…
Conditional transfers are not contributions yet; they may become contributions
upon the occurrence of one or more future and uncertain events. Due to the
uncertainty about whether they will be met, conditions imposed by resource
providers may cast doubt on whether the resource provider’s intent was to
make a contribution, to make a conditional contribution, or to make no
contribution. Because of this uncertainty, donor-imposed conditions should
be substantially met by the entity before the receipt of assets (including
contributions receivable) is recognized as a contribution. In contrast to
donor-imposed conditions, donor-imposed restrictions limit the use of the
contribution, but they do not change the fundamental nature of the
contribution transaction or conclusions about when to recognize the
underlying event.
So you kind of, sort of, maybe, might, plan to donate something to us?
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III. Understanding the terminology
Before we delve into the topic of distinguishing between conditional and unconditional promises to give, it
is important to understand the following terminology from the FASB ASC upfront.
Conditional Promise to Give - A promise to give that depends on the occurrence of a
specified future and uncertain event to bind the promisor.
Donor-Imposed Condition - A donor stipulation that specifies a future and uncertain
event whose occurrence or failure to occur gives the promisor a right of return of the
assets it has transferred or releases the promisor from its obligation to transfer its assets.
Donor-Imposed Restriction - A donor stipulation that specifies a use for a contributed
asset that is more specific than broad limits resulting from the following: (1) the nature of
the NFP; (2) the environment in which it operates; and (3) the purposes specified in its
articles of incorporation or bylaws or comparable documents for an unincorporated
association.
A donor-imposed restriction on an NFP’s use of the asset contributed may be temporary
or permanent. Some donor-imposed restrictions impose limits that are permanent, for
example, stipulating that resources be invested in perpetuity (not used up). Others are
temporary, for example, stipulating that resources may be used only after a specified
date, for particular programs or services, or to acquire buildings and equipment.
Promise to Give - A written or oral agreement to contribute cash or other assets to
another entity. A promise carries rights and obligations - the recipient of a promise to
give has a right to expect that the promised assets will be transferred in the future, and
the maker has a social and moral obligation, and generally a legal obligation, to make the
promised transfer. A promise to give may be either conditional or unconditional.
Stipulation - A statement by a donor that creates a condition or restriction on the use of
transferred resources.
Unconditional Promise to Give - A promise to give that depends only on passage of
time or demand by the promisee for performance.
In addition to the above, it should also be noted that a restriction on an NFP’s use of contributed assets
may result either from a donor’s explicit stipulation or from circumstances surrounding the receipt of the
contribution that make clear the donor’s implicit restriction on use. Receipts of unconditional promises to
give with payments due in future periods are reported as restricted support unless explicit donor
stipulations or circumstances surrounding the receipt of a promise make clear that the donor intended it to
be used to support activities of the current period. It is reasonable to assume that by specifying future
payment dates donors indicate that their gift is to support activities in each period in which a payment is
scheduled. As an example, receipts of unconditional promises to give cash in future years generally
increase temporarily restricted net assets.
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A. Exercise 3-1
Please review and complete the following exercise related to promises to give.
Is this a promise to give?
You are the auditor of NFP Z and are having lunch with the CFO. The CFO mentions that earlier in the
morning, the CEO of NFP Z stopped by her office and relayed some information regarding a possible
promise to give. A few months ago, the CEO was attending a basketball game with NFP Z’s board of
directors and at one point during the game one of the board members told the CEO that he would give
NFP Z $25,000 at the end of the year if NFP Z really needed it. The CEO did not obtain any written
documentation of the “promise to give” and said that he honestly does not remember which board
member made the promise as it was made when the game was in double overtime. It is now late in the
year and NFP Z does need the $25,000. The CEO would like to have the $25,000 recognized now.
When pressed for more details, the CEO stated that he did not want to call the board members to ask
which one made the offer as it might be embarrassing. The CEO is confident the board member who
made the offer will come forward and donate to NFP Z once they see NFP Z’s financial statements.
The CFO asks for your thoughts as to whether NFP Z has received a promise to give that should
be recognized in the financial statements. How would you answer the CFO?
Pledges
Congratulations, you are the recently hired controller of NFP W. As you examine NFP W’s general
ledger and previous financial statements you notice that NFP W has never recorded any unconditional
promises to give in the past. When you ask the accounting and development staff about this, they state
that the prior controller said that NFP W receives “pledges” instead of “promises to give” and since the
terminology “pledges” is not utilized in FASB ASC 958 there is nothing to record until the cash is
received.
What is the difference between “pledges” and “promises to give” and was the former controller
right?
When might this occur?
We saw earlier that receipts of unconditional promises to give with payments due in future periods are
reported as restricted support unless explicit donor stipulations or circumstances surrounding the
receipt of a promise make clear that the donor intended it to be used to support activities of the current
period.
Please provide a scenario where a donor might make an unconditional promise to give with
payments due in future periods and specify that they intend it to be used to support activities of
the current period?
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IV. Conditional versus unconditional promises to give
Thus far, we have discussed the differences between restrictions and conditions and key terminology, we
will now discuss how those concepts relate to conditional and unconditional promises to give.
A. Unconditional promises to give
As illustrated below, since unconditional promises to give depend only on the passage of time or demand
by the promisee for performance, they are recognized when received.
Recognizing unconditional promises to give
Since unconditional promises to give depend only on the passage of time or
demand by the promisee for performance, they are recognized when received.
To be recognized, there must be sufficient evidence in the form of verifiable
documentation that a promise was made and received.
A communication that does not indicate clearly whether it is a promise is
considered an unconditional promise to give if it indicates an unconditional
intention to give that is legally enforceable. Legal enforceability refers to the
availability of legal remedies, not the intent to use them.
Solicitations for donations that clearly include wording such as information to be used for budget
purposes only or that clearly and explicitly allow resource providers to rescind their indications that they
will give are intentions to give rather than promises to give and are not reported as contributions.
B. Conditional promises to give
As illustrated below, conditional promises to give are recognized when the conditions on which they
depend are substantially met.
Not recognizing conditional promises to give
Conditional promises to give, which depend on the occurrence of a specified
future and uncertain event to bind the promisor, are recognized when the
conditions on which they depend are substantially met, that is, when the
conditional promise becomes unconditional. Imposing a condition creates a
barrier that must be overcome before the recipient of the transferred assets
has an unconditional right to retain those promised assets. For example, a
transfer of cash with a promise to contribute that cash if a like amount of new
gifts are raised from others within 30 days and a provision that the cash be
returned if the gifts are not raised imposes a condition on which a promised
gift depends.
A conditional promise to give is considered unconditional if the possibility that the condition will not be met
is remote. As an example, a stipulation that an annual report must be provided by the donee to receive
subsequent annual payments on a multiyear promise is not a condition if the possibility of not meeting
that administrative requirement is remote.
Hey, I recognize that!
Dude, I just don’t recognize that.
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A transfer of assets with a conditional promise
A transfer of assets with a conditional promise to contribute them is accounted
for as a refundable advance (a liability) until the conditions have been
substantially met or explicitly waived by the donor. When the conditions are
substantially met, the refundable advance is recognized as revenue or gain.
Some entities transfer cash or other assets with both donor-imposed restrictions and stipulations that
impose a condition on which a gift depends. If a restriction and a condition exist, the transfer is
accounted for as a refundable advance until the condition on which it depends is substantially met. A
transfer of assets after a conditional promise to give is made and before the conditions are met is the
same as a transfer of assets with a conditional promise to contribute those assets. A change in the
original conditions of the agreement between the promisor and promisee is not implied without an explicit
waiver.
C. Exercise 3-2
Please review and complete the following exercise.
Is this a conditional or unconditional promise to give?
On June 27, Benefactor B promises to contribute $1 for every $2 of contributions received by NFP A
prior to October 1, up to $50,000. From June 27 to June 30, NFP A did not receive any contributions
from other resource providers.
Should any of the amounts promised by Benefactor B be recognized in the financial statements
as of June 30?
During July, NFP A receives contributions of $17,000 from other resource providers. Should
any of the amounts promised by Benefactor B be recognized in the financial statements as of
July 31?
$
I wonder if they are coming back for me?
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D. A difficult determination
Determining whether a promise is conditional or unconditional can be difficult if it contains donor
stipulations that do not clearly state whether the right to receive payment or delivery of the promised
assets depends on meeting those stipulations. It may be difficult to determine whether those stipulations
are conditions or restrictions.
When unclear donor stipulations are present…
Professionals will review the facts and circumstances surrounding the
gift and communicate with the donor. If the ambiguity cannot be
resolved as a result of those efforts, a promise containing stipulations
that are not clearly unconditional is presumed to be a conditional
promise. However, if the possibility that the condition will not be met
is remote, a conditional promise to give is considered unconditional.
The absence of a specified time for transfer of cash or other assets, by itself, does not necessarily lead to
a determination that a promise to give is ambiguous. If the parties fail to express the time or place of
performance and performance is unconditional, performance within a reasonable time after making a
promise is an appropriate expectation; likewise, if a promise is conditional, performance within a
reasonable time after fulfilling the condition is an appropriate expectation. Promises to give that are silent
about payment terms but otherwise are clearly unconditional are accounted for as unconditional promises
to give.
E. Exercise 3-3
Please review and complete the following exercise.
Two More Cases
Situation
Should the promise to give be recognized in the financial statements?
1
Benefactor Z owns a retail shopping space that
presently is unoccupied. Benefactor Z promises
to give NFP A free use of the space for as long
as it is available. NFP A needs the space and
accepts the offer. Benefactor Z says she expects
to give NFP A 30 days advance notice before
they need to vacate although Benefactor Z may
discontinue providing space at any time.
2
Benefactor K promises to give NFP J his entire
estate when he dies and provides a written copy
of the will. Benefactor K states that his estate will
be worth $4,000,000.
Pick me! Pick me!
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V. Valuing unconditional promises to give when received
After an NFP has determined that it has received a communication from a donor that is both unconditional
and a promise to give, its attention turns to recording the transaction. Unconditional promises to give are
recorded at fair value when received. As shown in the following, a critical factor in determining fair value
for unconditional promises to give depends on the expected collection date of the promise.
Determining the fair value of unconditional promises to give cash
Unconditional promises to give cash expected to be collected in less than one year are
recorded at fair value. Unconditional promises to give that are expected to be collected in less
than one year may be measured at net realizable value because that amount results in a
reasonable estimate of fair value. In most cases, the net realizable value is the face value of the
promise net of any estimated uncollectible amount.
Author’s Note: Different NFPs have differing methodologies for estimating the uncollectible
amount of unconditional promises to give. Some NFPs set a certain dollar threshold and for
promises over that threshold the promises are evaluated individually (i.e., an allowance is
determined based on the individual donor and his/her ability to pay) and for the portfolio of
promises below the threshold, a uniform percentage is used based on the history and experience
of the NFP.
Unconditional promises to give cash expected to be collected in more than one year are
recorded at fair value. The present value of the future cash flows is one valuation technique for
measuring the fair value of contributions arising from unconditional promises to give cash; other
valuation techniques are also available (see FASB ASC 820, Fair Value Measurement). FASB
ASC 958-605-55-22 provides the following illustration of the use of present value techniques for
initial recognition and measurement of unconditional promises to give cash that are expected to
be collected one year or more after the financial statement date.
Facts: NFP A receives a promise (or promises from a group of homogeneous donors) to give
$100 in five years, that the anticipated future cash flows from the promise(s) are $70, and that
the present value of the future cash flows is $50.
Solution:
dr. Contributions receivable $70
cr. Contribution revenue – temporarily restricted $50
cr. Discount on contributions receivable $20
(Note: Some NFPs maintain a subsidiary ledger to retain information concerning the $100 face
amount of contributions promised in order to monitor collections of contributions promised.)
Author’s Note: Different NFPs have differing methodologies for selecting the discount rate for
unconditional promises to give in more than one year. The discount rate is supposed to be
based upon the risks involved. Some NFPs begin by estimating the allowance for the
uncollectible amounts and spreading that allowance to the receivables (i.e., to arrive at an
estimated stream of cash flows) and then applying the discount using a risk-free rate with a
minor adjustment to get to a risk-adjusted discount rate.
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FASB ASC 820 describes factors to be taken into account in determining an appropriate risk-adjusted
discount rate if present value techniques are used for measuring fair value. The discount rate utilized in
the fair value measurement of a promise to give will be determined at the time the unconditional promise
to give is initially recognized and not subsequently revised unless the NFP has elected the fair value
option (FASB ASC 825-10, Financial Instruments) to measure the promise to give.
Determining the fair value of unconditional promises to give noncash assets
Unconditional promises to give noncash assets expected to be collected in less than one
year are recorded at fair value. Unconditional promises to give that are expected to be collected
in less than one year may be measured at net realizable value as an estimate of their fair value.
Unconditional promises to give noncash assets expected to be collected in more than
one year are recorded at fair value. FASB ASC 820 provides that present value techniques are
one method of measuring fair value and that other methods are possible. When present value
techniques are used, the fair value of an unconditional promise to give noncash assets could be
based on the present value of the projected fair values of the noncash assets at the date and in
the quantities that those assets are to be received. The fair value of the noncash assets today
might not necessarily represent the projected fair values of those assets at the date they are
expected to be received. The fair value of the noncash assets at the date the promise is
received could be used to measure the fair value of the contribution if it is hard to determine the
projected fair value of the underlying assets. A discount would not be recorded in that situation.
Between the time that an unconditional promise to give is initially recorded and the time it is actually
collected, the fair value of the promise can change. Thus, until unconditional promises to give are
collected, they are reevaluated in each subsequent period.
Reevaluations
Recorded unconditional promises to give cash or noncash assets may require periodic
adjustment for: (a) accrual of the interest element for a promise to give measured using
present value techniques; (b) changes in the quantity or nature of assets expected to be
received; (c) changes in the projected fair value of the underlying noncash assets at the
date that those assets are expected to be received; (d) changes in the timing of assets
expected to be received; (e) changes in the time value of money; and (f) changes in fair
value that are required to be recognized if the NFP has elected the fair value option.
NFPs have disclosure requirements related to the valuation of unconditional promises to give (e.g., NFPs
present a schedule of unconditional promises to give showing: the total amount of unconditional promises
separated into amounts receivable in less than one year, in one to five years, and in more than five years;
the amount of the allowance for uncollectible promises receivable; and the unamortized discount).
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A. Exercise 3-4
Please review and complete the following exercise. (Note. NFPs may take different approaches to
recording the below entry in their ledger and in this exercise we are trying to simplify things.)
Book it
Last year NFP Z received an unconditional promise to give from Tom Morrow for $500,000. The
promise contained no purpose restrictions and stated that the amount would be paid over a five-year
period at $100,000 per year. NFP Z determined that the present value of the promise was $450,000.
The $50,000 discount was broken down into the following elements: year 1 = $15,000; year 2 =
$12,500; year 3 = $10,000; year 4 = $7,500; and year 5 = $5,000. When NFP Z recorded the
contribution it made the following journal entry:
dr. Contributions receivable $500,000
cr. Contribution revenue – temporarily restricted $450,000
cr. Discount on contributions receivable $50,000
It is now one year after the promise was made and Tom Morrow has just made the first
payment. Nate is the controller for NFP Z and is trying to record the entry for the receipt of the
first payment. Nate is confident of the below amounts but is unsure what the remaining credit
for $15,000 should be called. Please fill in the blank below:
dr. Cash $100,000
dr. Discount on contributions receivable $15,000
cr. Contributions receivable $100,000
cr. __________________________ $15,000
VI. Key disclosures related to promises to give
The following chart discusses several key disclosure requirements related to promises to give.
Key disclosure requirements related to promises to give include:
Recipients of unconditional promises to give are required to disclose all of the following:
• The amounts of promises receivable in less than one year, in one to five years, and
in more than five years.
• The amount of the allowance for uncollectible promises receivable.
• The discount that arises if measuring a promise to give at present value, if that
discount is not separately disclosed by reporting it as a deduction from contributions
receivable on the face of a statement of financial position pursuant to FASB ASC
958-310-45-1.
Note. If unconditional promises to give are subsequently measured at fair value, several
disclosure requirements exist (see discussion at FASB ASC 958-310-50).
Recipients of conditional promises to give are required to disclose both of the following:
• The total of the amounts promised.
• A description and amount for each group of promises having similar characteristics,
such as amounts of promises conditioned on establishing new programs,
completing a new building, and raising matching gifts by a specified date.
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We should also note that contributions with donor-imposed restrictions are reported as restricted support;
however, donor-restricted contributions whose restrictions are met in the same reporting period may be
reported as unrestricted support provided that an NFP has a similar policy for reporting investment gains
and income, reports consistently from period to period, and discloses its accounting policy. Also, an
NFP is required to disclose its policy regarding whether or not the entity implies a time restriction that
expires over the useful life of the donated assets if those long-lived assets are received without
stipulations about how long the donated asset must be used or are acquired with gifts of cash or other
assets restricted for those acquisitions.
VII. Common auditing procedures related to contributions
Before ending the chapter, we want to briefly discuss some of the common auditing procedures employed
related to contributions. Chapter 5 of the AICPA Audit and Accounting Guide Not-for-Profit Entities
contains helpful information related to auditing contributions received.
Common auditing procedures employed related to contributions include:
Examining the documentation that supports the recognition of contribution revenue noting
information such as the absence of conditions.
Selecting items from data accumulated and maintained by the fundraising function, determining
whether a contribution should have been recognized and, if so, vouching it to a recognized
contribution, investigating any reconciling items.
Reviewing and testing the methods and assumptions used to measure contribution revenue at
the time of initial recognition.
Examining contributions reported before and after fiscal period end to determine if they are
reported in the proper period.
Reviewing documentation that supports the recognition of contributed services, utilities, facilities,
and use of long-lived assets for completeness and propriety of amounts recognized.
Examining documentation supporting recognition of promises to give, noting information such as
the absence of conditions and the periods over which the promises to give become due.
Comparing the detail of contributions receivable with data accumulated and maintained by the
fundraising function and investigating reconciling items.
Reviewing and testing the methods and assumptions used to measure promises to give at the
time of initial recognition.
Reviewing promises to give for collectibility, and, if appropriate, changes in fair value of the
underlying asset.
Reviewing the documentation that supports contributions and promises to give (including donor
correspondence and governing board minutes) for proper classification.
Determining the appropriateness of disclosures for conditional and unconditional promises to
give.
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The auditor may decide to request confirmation of contributions receivable. Confirming recorded
promises to give (contributions receivable) may provide additional evidence about the existence of
promises to give, the existence or absence of restrictions, the existence or absence of conditions, and the
periods over which the promises to give become due. If the auditor confirms promises to give the AICPA
SASs provide requirements and guidance regarding the confirmation process.
A. The importance of controls related to contributions receivable
An NFP receiving contributions needs to have an internal control system that provides effective controls
to ensure that: (1) all contributions received are recorded and that suitable collection efforts are pursued
for unconditional promises to give; and (2) revenues arising from conditional promises to give are
recognized when the conditions have been substantially met and that restrictions on contributions are
recognized in the appropriate net asset class. Although contributions can be a significant revenue source
for many NFPs, their controls are not always as strong as they should be. The following chart contains
an example audit finding for an NFP with an internal control deficiency related to contributions receivable.
A real-world example of an internal control deficiency related to contributions
The below Yellow Book (i.e., financial statement level) finding was recently reported by an auditor as a
significant deficiency in the audit of a college.
Criteria
Under accounting principles generally accepted in the United States of
America, pledges receivable should be recognized as revenue when an
unconditional promise to give is received and recorded at the stated pledge
receivable amount.
Condition
During testing of pledges receivable, it was noted that three pledge amounts
were incorrectly recorded at double the pledged amount. There was also
one pledge that did not have adequate documentation to determine if an
unconditional promise to give was made.
Context
The amount of the pledges improperly recorded as of June 30, 2014 was
approximately $937,000.
Cause
The College did not perform the proper review over the query that is
exported out of the College’s accounting system that is used to accumulate
the pledge listing. Also, there was a lack of communication between the
advancement and accounting departments concerning the pledge with
inadequate documentation.
Effect
An adjusting entry was made to reduce pledges receivable and contribution
revenues to the proper amount as of June 30, 2014.
Recommendation
The College should implement controls to ensure pledges receivable are
properly recorded in accordance with generally accepted accounting
principles.
Views of responsible
officials
Management agrees with the recommendations and has developed
procedures and controls to enhance the pledge listing review and
communications between the advancement and accounting departments.
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VIII. Suggested solutions to exercises
This section contains the suggested solutions to the exercises presented in the chapter.
A. Suggested solution to Exercise 3-1
Is this a promise to give?
You are the auditor of NFP Z and are having lunch with the CFO. The CFO mentions that earlier in the
morning, the CEO of NFP Z stopped by her office and relayed some information regarding a possible
promise to give. A few months ago, the CEO was attending a basketball game with NFP Z’s board of
directors and at one point during the game one of the board members told the CEO that he would give
NFP Z $25,000 at the end of the year if NFP Z really needed it. The CEO did not obtain any written
documentation of the “promise to give” and said that he honestly does not remember which board
member made the promise as it was made when the game was in double overtime. It is now late in the
year and NFP Z does need the $25,000. The CEO would like to have the $25,000 recognized now.
When pressed for more details, the CEO stated that he did not want to call the board members to ask
which one made the offer as it might be embarrassing. The CEO is confident the board member who
made the offer will come forward and donate to NFP Z once they see NFP Z’s financial statements.
The CFO asks for your thoughts as to whether NFP Z has received a promise to give that should
be recognized in the financial statements. How would you answer the CFO?
Based on the current facts, it would be very difficult to justify recognizing the promise to give in the
financial statements. While a promise to give can be a written or oral agreement to contribute cash or
other assets to another entity, communications received from potential donors must be carefully
evaluated to determine if they are indeed a promise to give. Pursuant to FASB ASC 958-605-25-8, to
be recognized in financial statements there must be sufficient evidence in the form of verifiable
documentation that a promise to give was made and received. That requirement does not preclude
recognition of verifiable oral promises, such as those documented by tape recordings, written registers,
or other means that permit subsequent verification. To record the “promise to give” in this situation,
NFP Z needs to determine which board member is making the promise and obtain some form of
verifiable documentation that a promise to give was made and received.
Note. The suggested solution to Exercise 3-1 is continued on the following page.
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Suggested solution to Exercise 3-1 (continued)
Pledges
Congratulations, you are the recently hired controller of NFP W. As you examine NFP W’s general
ledger and previous financial statements you notice that NFP W has never recorded any unconditional
promises to give in the past. When you ask the accounting and development staff about this, they state
that the prior controller said that NFP W receives “pledges” instead of “promises to give” and since the
terminology “pledges” is not utilized in FASB ASC 958 there is nothing to record until the cash is
received.
What is the difference between “pledges” and “promises to give” and was the former controller
right?
The term “pledges” has long been an area of confusion in the NFP sector. When the FASB initially
issued the exposure draft for FASB No. 116 (which is the source of much of the current contribution
guidance found in FASB ASC 958) it proposed using the term “pledge” to describe a “promise to give”.
However, in the final standard, the FASB did not use the term “pledge” as some use that term to
describe plans or intentions to give that fall short of being an actual promise to give (Note. In the Basis
for Conclusions to FASB No. 116 the FASB did state that it believes that most “pledges” are “promises
to give”). The bottom line here is that you need to avoid getting wrapped up in the word “pledges” and
evaluate the actual written or oral communications from donors and determine whether they represent
promises to give. To the extent they represent unconditional promises to give you generally have a
recordable event.
When might this occur?
We saw earlier that receipts of unconditional promises to give with payments due in future periods are
reported as restricted support unless explicit donor stipulations or circumstances surrounding the
receipt of a promise make clear that the donor intended it to be used to support activities of the current
period.
Please provide a scenario where a donor might make an unconditional promise to give with
payments due in future periods and specify that they intend it to be used to support activities of
the current period?
In the author’s experience, it is somewhat unusual for a donor to make an unconditional promise to give
with payments due in future periods and specify that they intend it to be used to support activities of the
current period. However, one scenario the author has seen is where a dedicated donor or board
member specifies that they want to help eliminate a current year deficit and promises to pay the
contribution off over a couple of years.
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B. Suggested solution to Exercise 3-2
Is this a conditional or unconditional promise to give?
On June 27, Benefactor B promises to contribute $1 for every $2 of contributions received by NFP A
prior to October 1, up to $50,000. From June 27 to June 30, NFP A did not receive any contributions
from other resource providers.
Should any of the amounts promised by Benefactor B be recognized in the financial statements
as of June 30?
No. The offer from Benefactor B is a conditional promise to give and none of the conditions have been
met as of June 30.
During July, NFP A receives contributions of $17,000 from other resource providers. Should
any of the amounts promised by Benefactor B be recognized in the financial statements as of
July 31?
Yes. As contributions are received from other resource providers, the conditions would be met and the
promise would become unconditional. If NFP A received $17,000 in the first month from donors, $8,500
of the conditional promise would become unconditional and recognized as contribution revenue.
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C. Suggested solution to Exercise 3-3
Two More Cases
Situation
Should the promise to give be recognized in the financial statements?
1
Benefactor Z owns a retail shopping space
that presently is unoccupied. Benefactor Z
promises to give NFP A free use of the space
for as long as it is available. NFP A needs the
space and accepts the offer. Benefactor Z
says she expects to give NFP A 30 days
advance notice before they need to vacate
although Benefactor Z may discontinue
providing space at any time.
NFP A would recognize the fair value of the
contributed use of facilities as both revenue and
expense in the period it is received and used. If
Benefactor Z explicitly and unconditionally
promises the use of the facility for a specified
period of time the promise would be an
unconditional promise to give.
2
Benefactor K promises to give NFP J his entire
estate when he dies and provides a written
copy of the will. Benefactor K states that his
estate will be worth $4,000,000.
Benefactor K’s promise to give is really an
intention to give. Benefactor K has the ability to
modify the will at any point during his lifetime.
NFP J has not received a promise to give and will
not recognize a contribution received. When the
probate court declares the will valid, NFP J would
recognize contribution revenue and a receivable at
the fair value of its interest in the estate, unless
the promise is conditioned upon a future and
uncertain event, in which case a contribution will
not be recognized until the conditions are
substantially met. A conditional promise in a valid
will should be disclosed in the notes to the
financial statements.
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D. Suggested solution to Exercise 3-4
Book it
Last year NFP Z received an unconditional promise to give from Tom Morrow for $500,000. The
promise contained no purpose restrictions and stated that the amount would be paid over a five-year
period at $100,000 per year. NFP Z determined that the present value of the promise was $450,000.
The $50,000 discount was broken down into the following elements: year 1 = $15,000; year 2 =
$12,500; year 3 = $10,000; year 4 = $7,500; and year 5 = $5,000. When NFP Z recorded the
contribution it made the following journal entry:
dr. Contributions receivable $500,000
cr. Contribution revenue – temporarily restricted $450,000
cr. Discount on contributions receivable $50,000
It is now one year after the promise was made and Tom Morrow has just made the first
payment. Nate is the controller for NFP Z and is trying to record the entry for the receipt of the
first payment. Nate is confident of the below amounts but is unsure what the remaining credit
for $15,000 should be called. Please fill in the blank below:
dr. Cash $100,000
dr. Discount on contributions receivable $15,000
cr. Contributions receivable $100,000
cr. Contribution revenue – unrestricted $15,000
Author’s Note. Under FASB ASC 958-310-35-6 if a present value technique is used to measure the
fair value of unconditional promises to give cash, subsequent accruals of the interest element are
accounted for as contribution revenue. NFP Z would also reclassify $85,000 from temporarily
restricted net assets to unrestricted net assets.
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Contributed Services, Collection Items and Other Unique Items
Learning Objectives 1 I. What are we talking about? 1 II. Contributed services 1
A. Specialized skills 2 1. Exercise 4-1 2
B. Additional considerations related to contributed services 2 C. ASU No. 2013-06 on contributed services from an affiliate 3 D. Key disclosures related to contributed services 4 E. Exercise 4-2 4 F. An opportunity sometimes missed 5
III. Contributed collection items 6 IV. Contributions of other unique items 6 V. Suggested solutions to exercises 8
A. Suggested solution to Exercise 4-1 8 B. Suggested solution to Exercise 4-2 9
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Contributed Services, Collection Items and Other Unique Items
Learning Objectives
Upon completing this chapter, you will be able to:
Identify key issues related to the recognition of contributed services,
collection items and other unique items that NFPs may receive from donors;
Determine whether and how such contributed items should be reflected in the
financial statements; and
Understand disclosure considerations related to such contributions.
I. What are we talking about?
In this chapter, we are going to explore key issues related to the recognition of contributed services,
collection items and other unique items that NFPs may receive from donors. Note. The treatment of
contributed services, collection items and other unique items that NFPs may receive from donors is really
not an area that the FASB chose to address/change in the Financial Statements of Not-for-Profit Entities
project.
II. Contributed services
Contributed services are critical to NFPs. Without the countless hours and skills volunteers provide
where would America be? Americans are a giving people, each day we drive past homeless shelters,
family crisis centers, food banks, animal shelters, boys and girls clubs, churches, synagogues, and
endless other NFPs which need and receive volunteer services to fulfill their mission. So we know
contributed services are critical to NFPs, but how are they reflected in the financial statements and notes?
Should a medical school receiving donated services from a doctor and a soccer association receiving
donated coaching hours both measure and reflect the donated services in their financial statements?
These are the types of issues that NFPs face regarding the accounting and reporting of contributed
services. The following chart discusses the recognition of contributed services.
When do we recognize contributed services in the financial statements?
Contributions of services are recognized if the services received meet any of the
following criteria:
• They create or enhance nonfinancial assets.
• They require specialized skills, are provided by individuals possessing
those skills, and would typically need to be purchased if not provided by
donation. Services requiring specialized skills are provided by
accountants, architects, carpenters, doctors, electricians, lawyers,
nurses, plumbers, teachers, and other professionals and craftsmen.
Contributed services and promises to give services that do not meet the above criteria
are not recognized except for services received from personnel of an affiliate covered
by ASU No. 2013-06 which we will cover in a moment.
0
1
2
3
4
5
6
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A. Specialized skills
Since the criteria for recognition of contributed services involves either the creation or enhancement of
nonfinancial assets or services requiring specialized skills, provided by individuals possessing those
skills, and would typically need to be purchased if not provided by donation it is important to understand
the meaning of specialized skills.
What are specialized skills?
The FASB ASC discusses that services requiring specialized skills are provided
by accountants, architects, carpenters, doctors, electricians, lawyers, nurses,
plumbers, teachers, and other professionals and craftsmen. The FASB ASC
Glossary also defines specialized skills as services that require expertise that is
not possessed by most members of the general public or that require an
individual to be licensed to practice the profession or craft.
1. Exercise 4-1
Please review and complete the following exercise.
Is this a specialized skill?
As part of its mission, NFP R provides services to help adults learn to read. Many of NFP R’s volunteer
instructors do not have the specialized skills that a reading teacher possesses. For those volunteers,
NFP R provides some training on how to help adults learn to read.
In the financial statements for NFP R, would you recognize the contributed services of the
volunteers without a teaching background that NFP R provides training for on how to help
adults learn to read?
B. Additional considerations related to contributed services
The following chart discusses several additional considerations related to contributed services.
Additional considerations related to contributed services include:
FASB ASC 958-605-55-20 discusses that promises to give services generally involve personal
services that, if not explicitly conditional, are often implicitly conditioned upon the future and
uncertain availability of specific individuals whose services have been promised.
In 2013, the FASB issued ASU No. 2013-06 which has brought changes in the area of services
received from personnel of an affiliate.
FASB ASC 958-605-30-10 discusses that contributions of services that create or enhance
nonfinancial assets may be measured by referring to either the fair value of the services received
or the fair value of the asset or of the asset enhancement resulting from the services. Fair value
should be used for the measure regardless of whether the NFP could afford to purchase the
services at their fair value.
FASB ASC 958-605-55-71 discusses that contributions of services (time, skills, or expertise)
between donors and donees that are facilitated by an intermediary are not contributions received
or contributions made by the intermediary.
I sure thought my skills were special!
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C. ASU No. 2013-06 on contributed services from an affiliate
In April 2013, the FASB issued Accounting Standards Update No. 2013-06, Not-for-Profit Entities (Topic
958): Services Received from Personnel of an Affiliate (ASU No. 2013-06). The scope of ASU No. 2013-
06 applies to NFPs (including NFP business-oriented health care entities) that receive services from
personnel of an affiliate that directly benefit the recipient NFP and for which the affiliate does not charge
the recipient NFP. NFPs within an affiliate group often operate under arrangements that provide for the
engagement of personnel and their deployment or use for common purposes and projects among the
affiliate entities. As an example, an entity within an affiliate group may engage personnel who provide
services to affiliate NFPs. Such personnel may provide core program services for the recipient NFP or
may be involved in supporting management or fundraising activities. While the compensation and
benefits of these personnel are paid for by the contributing entity, it does not seek compensation from the
recipient NFP for those personnel costs.
ASU No. 2013-06 made changes to the requirements related to services received from personnel of an
affiliate as shown in the below.
ASU No. 2013-06 made changes to the requirements related to services received from personnel of an affiliate. The changes include…
All services received from personnel of any affiliate that directly benefit the recipient NFP and for
which the affiliate does not charge the recipient NFP will be recognized by the recipient NFP.
Services received from personnel of an affiliate within the scope of ASU No. 2013-06 should be
measured at the cost recognized by the affiliate for the personnel providing those services.
However, in situations in which recording the service received from personnel of an affiliate at the
cost recognized by the affiliate would significantly overstate or understate the value of the service
received, the recipient NFP could elect to recognize that service at either: (1) the cost recognized
by the affiliate for the personnel providing that service; or (2) the fair value of that service.
A recipient NFP within the scope of FASB ASC 954, Health Care Entities, that is required to
provide a performance indicator, should report as an equity transfer the increase in net assets
associated with services received from personnel of an affiliate within the scope of ASU No. 2013-
06. For other recipient NFPs, ASU No. 2013-06 does not prescribe presentation guidance for the
increase in net assets associated with services received from personnel of an affiliate other than
prohibiting reporting as a contra-expense or a contra-asset. All recipient NFPs should report the
corresponding decrease in net assets or the creation or enhancement of an asset resulting from
the use of services received from personnel of an affiliate in a way that is similar to how other such
expenses or assets are reported.
The disclosures in FASB ASC 850, Related Party Disclosures, apply to services received from
personnel of an affiliate within the scope of ASU No. 2013-06, and no additional recurring
disclosures are required by ASU No. 2013-06.
The guidance in ASU No. 2013-06 became effective prospectively for fiscal years beginning after June
15, 2014.
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D. Key disclosures related to contributed services
As illustrated in the following chart, NFPs have several disclosure requirements related to contributed
services.
NFPs have several disclosure requirements related to contributed services including:
FASB ASC 958-605-50-1 discusses that an entity receiving contributed services will describe the
programs or activities for which those services were used, including the nature and extent of
contributed services received for the period and the amount recognized as revenues for the
period. Entities are encouraged to disclose the fair value of contributed services received but not
recognized as revenues if that is practicable. The nature and extent of contributed services
received can be described by nonmonetary information, such as the number and trends of
donated hours received or service outputs provided by volunteer efforts, or other monetary
information, such as the dollar amount of contributions raised by volunteers. Disclosure of
contributed services is required regardless of whether the services received are recognized as
revenue in the financial statements.
E. Exercise 4-2
Please review and complete the following exercise.
Issues and Answers Related to Contributed Services
Issue: Answer:
1
At University Y uncompensated faculty members who are associated with
religious orders and contribute their services to the university account for
about 15% of the faculty. The remaining faculty members are
compensated. Both compensated and uncompensated faculty members
are regularly and equally evaluated for performance; both must meet the
university’s standards and both provide services in the same way. Would
University Y recognize the contributed services?
2
NFP B constructs a building on its property for after school programming.
During the construction process, NFP B spent $100,000 on architectural
services, materials, permits, and etc. Construction Company C contributed
labor and equipment for the building. Company C was assisted on the
project by a number of volunteers. An independent appraisal of the
structure was obtained and it estimated the fair value to be $250,000
(without the land). Would NFP B recognize the contributed services?
3
One of NFP Z’s board of directors is a CPA. Occasionally, in her role as a
board member, the CPA provides advice on general business matters. The
advice provided is of a routine nature and provided in the role of a board
member. The CPA suggests that NFP Z seeks the advice of its CPA firm
on substantive or complex accounting, audit, or taxation issues. NFP Z’s
board members serve without compensation. Several board members
have specialized expertise in various fields that allows them to provide
helpful advice to NFP Z. Would NFP Z recognize the contributed
services of the CPA board member?
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F. An opportunity sometimes missed
Before leaving the topic of contributed services, we wanted to discuss a branding opportunity sometimes
missed by NFPs. While many may feel that the cost of preparing certain of today’s note disclosures
outweighs the benefits achieved, this is really not the case when it comes to disclosing the contributed
services that the NFP received (even if those services are not recognized in the financial statements).
A branding opportunity to donors
Below are note disclosures from three real-world financial statements where the contributed services
received did not meet the criteria for recognition. In looking at the following disclosures, notice the
difference in how: (1) the first NFP essentially just described that no volunteer amounts were being
recognized; (2) the second NFP went beyond the first and gave the estimated volunteer hours worked
which might be appealing to potential donors; and (3) the third NFP gave a feel for the hours, value,
and types of services donated which really lets potential donors know the level and type of involvement
by the community in terms of time.
Okay
A substantial number of volunteers have contributed significant amounts of time in
conjunction with the program services and administration of the NFP for which no
amount has been recorded in the financial statements because the services did not
meet the criteria for recognition under accounting principles generally accepted in
the United States of America.
Better
Many individuals volunteer their time to perform a variety of tasks that assist the
NFP. During the years ended December 31, 2014, and 2013, the NFP received
more than 12,000 and 10,000 volunteer hours for services performed for the NFP,
respectively. The value of these donated services, although clearly substantial,
does not meet the requirements for recognition and is not reflected in the financial
statements.
Best
Contributions of donated services are recognized if the services received (a) create
or enhance long-lived assets; or (b) require specialized skills, are provided by
individuals possessing those skills and would typically need to be purchased if not
provided by donation.
NFP X receives a significant amount of contributed time from volunteers that does
not meet the recognition criteria described above. Accordingly, the value of this
contributed time is not reflected in the accompanying financial statements. NFP X
receives donated services in the form of kitchen assistants, drivers, Board of
Directors and committee members, creative consultants, event volunteers, and office
assistants. The hours contributed is estimated by management to be 37,000 hours
valued at $500,000.
It should also be noted that in addition to the wording used to describe the contributed services received,
the placement of the disclosure can also be used as a branding opportunity. NFPs can have a very well
written disclosure which provides very useful information to donors. However, if that disclosure is buried
at the back of the notes it may be much less likely to be read by potential donors. By placing this
disclosure in a much more prominent position, NFPs can emphasize the importance of contributed
services to the entity.
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III. Contributed collection items
Some NFPs maintain collections and receive contributions of works of art, historical treasures, and similar
items for the collection. When discussing contributions of collection items, it is important to understand
the definition of a collection. The following contains the FASB ASC definition of a collection.
What is a collection?
Collections are works of art, historical treasures, or similar assets that meet all of the
following criteria: (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; and (3) they are subject to an organizational policy that requires the
proceeds of items that are sold to be used to acquire other items for collections.
Collections generally are held by museums, botanical gardens, libraries, aquariums,
arboretums, historic sites, planetariums, zoos, art galleries, nature, science, and technology
centers, and similar educational, research, and public service organizations that have those
divisions; however, the definition is not limited to those entities nor does it apply to all items
held by those entities.
NFPs that hold a collection have the following three alternatives for reporting the collection: (1)
capitalization of all collection items; (2) capitalization of all collection items on a prospective basis [i.e., all
items acquired after a stated date]; or (3) no capitalization. Capitalization of selected collections or items
is not allowed. NFPs disclose the capitalization policy chosen for collections (i.e., capitalization,
prospective capitalization, or no capitalization).
The recognition and measurement principles for contributions of collection items depend on the
collections-capitalization policy adopted by the NFP. Contributions of works of art, historical treasures,
and similar items that are not part of a collection are recognized as assets and as revenue or gains. An
NFP need not recognize contributions of works of art, historical treasures, and similar assets if the
donated items are added to collections that meet all three of the criteria in the definition of a collection.
Contributed collection items are recognized as revenues or gains if collections are capitalized and are not
recognized as revenues or gains if collections are not capitalized. An NFP that does not recognize and
capitalize its collections or that capitalizes collections prospectively does have additional disclosure
requirements.
IV. Contributions of other unique items
Contributions can come in a variety of forms and contributions of certain unique items carry distinctive
accounting treatments with them as discussed in the following table.
Be on the watch for contributions of certain unique items that carry distinctive accounting treatments with them including…
NFPs may receive contributions of items such as inventory, equipment, and property which
are commonly referred to as gifts in kind. Gifts in kind that can be used or sold are measured
at fair value. In determining fair value, NFPs consider the quality and quantity of the gifts,
including applicable discounts. Gifts in kind that cannot be sold or used internally have no
value and are not recognized.
continued
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Be on the watch for contributions of certain unique items that carry distinctive accounting treatments with them including…
Inputs for measuring fair value of contributed inventory items can be obtained from published
catalogs, vendors, independent appraisals, and other sources. When methods such as
estimates, averages, or computational approximations, such as average value per pound or
subsequent sales, can reduce the cost of measuring fair value, use of those methods is
allowed provided the methods are consistently applied and are not reasonably expected to be
materially different from a detailed fair value measurement.
Sometimes entities other than an NFP use for the NFP’s benefit (or provide at no charge to the
NFP) certain nonfinancial assets that encourage the public to contribute to the NFP or assist
the NFP in communicating its message or mission. Examples of these include fundraising
material, informational material, or advertising, including media time or space for public service
announcements or other purposes. When such nonfinancial assets are used for the NFP’s
benefit (or provided to the NFP at no charge) and they encourage the public to contribute to an
NFP or help the NFP communicate its message or mission, NFPs should consider whether
they have received a contribution. If they have received a contribution, it will be measured at
fair value.
An NFP may receive unconditional contributions of the use of electric, telephone, and other
utilities and of long-lived assets (e.g., a building or the use of facilities) in which the donor
retains legal title to the long-lived asset. An NFP will recognize the fair value of the use of
utilities or property as contribution revenue in the period the contribution is received. If the
transaction is an unconditional promise to give for a specified number of periods, the promise
is reported as contributions receivable and as restricted support that increases temporarily
restricted net assets.
Contributions received by NFPs under irrevocable split-interest agreements are recorded
when received at fair value. The date when an NFP is considered to have received an
irrevocable split-interest agreement often depends on whether the NFP or a third party is the
trustee for the agreement. If an NFP is the trustee or fiscal agent of the assets, the gift is
considered received when the donor executes the agreement. If an unrelated third party (e.g.,
a trust company, bank, foundation, or private individual) is the trustee or fiscal agent of the
assets, the split-interest agreement is recorded when the NFP is notified of the gift’s existence.
The following disclosure is an example from an NFP’s financial statements disclosing the contribution of
the use of a building. Note. This NFP also broke out the donated rent receivable on its financial
statements.
An example disclosure of the donated use of a building from an NFP’s financial statements
Donated Rent
NFP Z received a contribution of the use of facilities through January 20X1. The fair value of the
donated rent, adjusted for consumer price index increases, is recorded as donated rent receivable and
temporarily restricted net assets. Donated rent is amortized to in kind rent expense on a monthly basis
and shown as net assets released from restriction.
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V. Suggested solutions to exercises
This section contains the suggested solutions to the exercises presented in the chapter.
A. Suggested solution to Exercise 4-1
Is this a specialized skill?
As part of its mission, NFP R provides services to help adults learn to read. Many of NFP R’s volunteer
instructors do not have the specialized skills that a reading teacher possesses. For those volunteers,
NFP R provides some training on how to help adults learn to read.
In the financial statements for NFP R, would you recognize the contributed services of the
volunteers without a teaching background that NFP R provides training for on how to help
adults learn to read?
No. FASB ASC 958-605-55-28 discusses that an individual who receives some training does not
necessarily possess a specialized skill. If a volunteer receives some training from an NFP to learn how
to help other people learn to read, that volunteer does not possess the specialized skills that a reading
teacher possesses.
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B. Suggested solution to Exercise 4-2
Issues and Answers Related to Contributed Services
Issue: Answer:
1
At University Y uncompensated faculty
members who are associated with religious
orders and contribute their services to the
university account for about 15% of the faculty.
The remaining faculty members are
compensated. Both compensated and
uncompensated faculty members are regularly
and equally evaluated for performance; both
must meet the university’s standards and both
provide services in the same way. Would
University Y recognize the contributed
services?
University Y would recognize both revenue and
expense for the services contributed by the
uncompensated faculty members. Instructing
requires specialized skills; the religious personnel
are qualified and trained to provide those skills; and
University Y typically would hire paid instructors if
the religious personnel did not donate their
services. University Y could refer to the salaries it
pays similarly qualified compensated faculty
members to determine the fair value of the services
received.
2
NFP B constructs a building on its property for
after school programming. During the
construction process, NFP B spent $100,000
on architectural services, materials, permits,
and etc. Construction Company C contributed
labor and equipment for the building.
Company C was assisted on the project by a
number of volunteers. An independent
appraisal of the structure was obtained and it
estimated the fair value to be $250,000
(without the land). Would NFP B recognize
the contributed services?
NFP B would recognize the contributed services
because the services created or enhanced a
nonfinancial asset. Contributions of services that
create or enhance nonfinancial assets may be
measured by referring to either the fair value of the
services received or the fair value of the asset or of
the asset enhancement resulting from the services.
For example, the fair value of the contributed
services received could be determined by
subtracting the cost of the purchased services,
materials, and permits ($100,000) from the fair
value of the asset created ($250,000), which results
in contributed services received of $150,000.
3
One of NFP Z’s board of directors is a CPA.
Occasionally, in her role as a board member,
the CPA provides advice on general business
matters. The advice provided is of a routine
nature and provided in the role of a board
member. The CPA suggests that NFP Z
seeks the advice of its CPA firm on
substantive or complex accounting, audit, or
taxation issues. NFP Z’s board members
serve without compensation. Several board
members have specialized expertise in various
fields that allows them to provide helpful
advice to NFP Z. Would NFP Z recognize
the contributed services of the CPA board
member?
NFP Z would not recognize the contributed services
it receives from the CPA board member. The
advice provided by board members typically would
not be purchased if not provided by donation. The
advice provided by the CPA is of a routine nature
and NFP Z seeks the advice of its CPA firm on
substantive or complex accounting, audit, or
taxation issues.
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Special Events
Learning Objectives 1 I. What are we talking about? 1 II. Gross versus net reporting in the statement of activities 1 III. How are special events presented? 2
A. Three possible methods to display ongoing major or central special events 2 1. Facts common to each illustration 2 2. Illustration 1: Direct benefits to donors displayed on a line below gross revenue from the
special event 3 3. Illustration 2: Special event revenues reported as part exchange and part contribution 3 4. Illustration 3: Direct benefits to donors displayed as a line with other expenses 4
B. Exercise 5-1 4 C. Exercise 5-2 4
IV. Suggested solutions to exercises 5 A. Suggested solution to Exercise 5-1 5 B. Suggested solution to Exercise 5-2 5
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Special Events
Learning Objectives
Upon completing this chapter, you will be able to:
Explain when gross reporting (as opposed to net reporting) is used in the
statement of activities; and
Perceive how special events are presented in the statement of activities.
I. What are we talking about?
In this chapter, we are going to explore key issues related to the reporting of special events. Note. The
reporting of special events is really not an area that the FASB chose to address/change in the Financial
Statements of Not-for-Profit Entities project. However, the project certainly has ramifications on the
statement of activities that we will discuss in Chapter 8.
II. Gross versus net reporting in the statement of activities
The following chart discusses key concepts related to gross versus net reporting in the statement of
activities.
Gross versus net reporting in the statement of activities
NFPs use gross reporting for… However, net reporting may be used for…
An NFP’s ongoing major or
central operations and activities.
(1) Gains and losses resulting from peripheral or incidental
transactions or from other events and circumstances that may be
largely beyond the control of the NFP and its management; and
(2) investment revenues and expenses provided that the amount of
investment expense (e.g. custodial fees and internal and external
investment advisory costs) is disclosed either on the face of the
statement of activities or in notes to the financial statements.
Due to the presentation implications discussed above, the determination of whether events are ongoing
major or central or peripheral or incidental is an important one. Similar events may be reported
differently by different NFPs based on the NFP’s overall activities.
The frequency of the events and the significance of the gross revenues and expenses distinguish major or central events from peripheral or incidental events.
Events are ongoing major or central activities if they are normally part
of an NFP’s strategy and it normally carries on such activities or if the
event’s gross revenues or expenses are significant in relation to the
NFP’s annual budget.
Events are peripheral or incidental if they are not an integral part of
an NFP’s usual activities or if their gross revenues or expenses are
not significant in relation to the NFP’s annual budget.
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III. How are special events presented?
As one might expect, the treatment of special events in the statement of activities follows the guidance we
have just discussed related to gross versus net reporting.
Under FASB ASC 958-225-45-17 the presentation of special events depends on the nature of the special event as provided below:
Special events are often ongoing major or central activities; if so, an
NFP will report the gross revenues and expenses of those activities.
An NFP may report net amounts for its special events if they result from
peripheral or incidental transactions. Costs netted against receipts from
peripheral or incidental special events are limited to direct costs.
A. Three possible methods to display ongoing major or central special events
As discussed above, special events are often ongoing major or central activities. Thus, an NFP will
frequently report the gross revenues and expenses of those activities. FASB ASC 958-225-55-11
provides three possible methods to display a special event that is an ongoing major or central activity in
the statement of activities. The following illustrations are based off that guidance.
1. Facts common to each illustration
Please review the below facts common to each of the following illustrations:
NFP J has a special event that is an ongoing major activity with ticket revenue of $20,000.
All costs of the activity, other than the direct donor benefits, should be reported as fundraising.
The event includes a dinner that costs NFP J $5,000 and that has a fair value of $7,000.
NFP J also incurs other direct costs for the event of $4,000 in connection with promoting and
conducting the event, including incremental direct costs incurred in transactions with independent third
parties and the payroll and payroll-related costs for the activities of employees who are directly
associated with, and devote time to, the event. The other direct costs are unrelated to the direct
benefits to donors and, accordingly, should not be included as costs of benefits to donors. The other
direct costs include $1,000 that otherwise might be considered management and general costs if they
had been incurred in a different activity, and fundraising costs of $3,000.
NFP J also has the following transactions, which are unrelated to the special event:
Unrestricted contributions of $50,000
Program expenses of $35,000
Management and general expenses of $15,000
Fundraising expenses of $10,000
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2. Illustration 1: Direct benefits to donors displayed on a line below gross revenue from the
special event
NFP J may report the gross revenues of special events and other fundraising activities with the cost of
direct benefits to donors (meals and facilities rental) displayed as a line item deducted from the special
event revenues, as follows:
Changes in unrestricted net assets:
Contributions $50,000
Special event revenue 20,000
Less: Costs of direct benefits to donors (5,000)
Net revenues from special events 15,000
Contributions and net revenues from special events 65,000
Other expenses:
Program 35,000
Management and general 15,000
Fundraising 14,000
Total other expenses 64,000
Increase in unrestricted net assets $ 1,000
3. Illustration 2: Special event revenues reported as part exchange and part contribution
NFP J may report the gross revenue from special events and other fundraising activities as part exchange
(for the fair value the participant received) and part contribution (for the excess of the payment over that
fair value), as follows:
Changes in unrestricted net assets:
Contributions $63,000
Dinner sales 7,000
Less: Costs of direct benefits to donors (5,000)
Gross profit on special events 2,000
Contributions and net revenues from special events 65,000
Other expenses:
Program 35,000
Management and general 15,000
Fundraising 14,000
Total other expenses 64,000
Increase in unrestricted net assets $ 1,000
Note. In the above, the contribution revenue of $63,000 consists of: (1) the unrestricted contributions of
$50,000 that were unrelated to the special event; and (2) the ticket revenue for the special event less the
fair value of the dinner [i.e., $20,000 - $7,000 = $13,000].
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4. Illustration 3: Direct benefits to donors displayed as a line with other expenses
NFP J may report the gross revenues of special events and other fundraising activities with the cost of
direct benefits to donors (meals and facilities rental) displayed in the same section of the statement of
activities as are other programs or supporting services and allocated, if necessary, among those various
functions, as follows:
Changes in unrestricted net assets:
Revenues:
Contributions $50,000
Special event revenue 20,000
Total revenues 70,000
Expenses:
Program 35,000
Costs of direct benefits to donors 5,000
Management and general 15,000
Fundraising 14,000
Total other expenses 69,000
Increase in unrestricted net assets $ 1,000
B. Exercise 5-1
Please review and complete the below.
Fundraising Costs
In the three illustrations just presented, the fact pattern stated that NFP J incurred $4,000 in connection
with promoting and conducting the special event. We also saw that these costs were reported as
fundraising expense. Assume that as part of the event, NFP J compiles a listing of attendees it
will use for fundraising activities in future years. Can a portion of the $4,000 be capitalized and
expensed in future years?
C. Exercise 5-2
Please review and complete the below.
Where do they go?
Each year NFP E holds an annual pancake breakfast as a fundraising activity. The event is open to the
community and there is no charge to attend. Attendees are encouraged to make contributions only if
they desire to. The annual pancake breakfast is not program related. NFP E spends $5,000 in
marketing and holding the event. In which functional category should the costs of the event be
presented in the statement of activities?
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IV. Suggested solutions to exercises
This section contains the suggested solutions to the exercises presented in the chapter.
A. Suggested solution to Exercise 5-1
Fundraising Costs
In the three illustrations just presented, the fact pattern stated that NFP J incurred $4,000 in connection
with promoting and conducting the special event. We also saw that these costs were reported as
fundraising expense. Assume that as part of the event, NFP J compiles a listing of attendees it
will use for fundraising activities in future years. Can a portion of the $4,000 be capitalized and
expensed in future years?
No. Costs of fundraising activities, including the cost of special fundraising events, are expensed as
incurred. Costs are incurred when the item or service has been received. Fundraising costs incurred in
one period, such as those made to obtain bequests, compile a mailing list of prospective contributors, or
solicit contributions in a direct-response activity, may result in contributions that will be received in
future periods. Those costs also are expensed as incurred.
B. Suggested solution to Exercise 5-2
Where do they go?
Each year NFP E holds an annual pancake breakfast as a fundraising activity. The event is open to the
community and there is no charge to attend. Attendees are encouraged to make contributions only if
they desire to. The annual pancake breakfast is not program related. NFP E spends $5,000 in
marketing and holding the event. In which functional category should the costs of the event be
presented in the statement of activities?
There is not a great deal of guidance in this area. However, Technical Questions and Answers section
6140.08, “Functional Category of the Costs of Direct Donor Benefits” (AICPA, Technical Practice Aids)
in part provides that:
“The costs of donor benefits that are not program related and that are provided in transactions that
are other than exchange transactions, such as a fundraising dinner for which there is no charge to
attend, should be reported as fundraising.”
Based on the above, the costs of NFP E’s pancake breakfast should be reported as fundraising.
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Classification of Expenses
Learning Objectives 1 I. What are we talking about? 1 II. The classification of expenses 1
A. Program services 2 B. Supporting activities 3
III. Getting from natural expenses to functional expenses 4 IV. Classification of expenses that include fundraising 6
A. Important terminology 6 B. Three important criteria 6 C. What is the purpose criterion? 7
1. The compensation or fees test 8 2. The separate and similar activities test 8 3. The other evidence test 9 4. Exercise 6-1 9 5. Exercise 6-2 10
D. What is the audience criterion? 10 E. What is the content criterion? 11 F. Allocation methods 11 G. Incidental activities 11 H. Key disclosures related to joint costs 12 I. Exercise 6-3 13
V. Suggested solutions to exercises 14 A. Suggested solution to Exercise 6-1 14 B. Suggested solution to Exercise 6-2 15 C. Suggested solution to Exercise 6-3 16
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Classification of Expenses
Learning Objectives
Upon completing this chapter, you will be able to:
Understand key issues related to the classification of expenses in the
statement of activities;
Apply the requirements related to the classification of expenses that include
fundraising; and
Explain the disclosure considerations related to joint costs.
I. What are we talking about?
In this chapter, we are going to explore key issues related to the current classification of expenses. Note.
In Chapter 8, we will discuss the impacts of the Financial Statements of Not-for-Profit Entities project on
expense classification in the statement of activities.
II. The classification of expenses
Earlier in the course, we discussed that FASB ASC 958 defines an NFP as an entity that possesses three
characteristics, in varying degrees, that distinguish it from a business entity. The second of those
characteristics is that NFPs have operating purposes other than to provide goods or services at a profit.
The framework for an NFP’s reporting of expenses for program services and supporting activities was
established back in 1993 with FASB No. 117. The FASB kept that second NFP characteristic closely in
mind when developing the current FASB No. 117 based framework.
Trying to measure more than just the bottom line
In the basis for conclusions to FASB No. 117, the FASB stated that “information about
expenses by function, such as major programs or services and major classes of
supporting services, is necessary to an understanding of an NFP’s service efforts and
that a set of financial statements should include that information. Requiring that information
also is a step toward providing information that may be useful in associating an NFP’s
expenses with its accomplishments. The Board concluded that information about an NFP’s
expenses by function may be meaningfully communicated either in a statement of activities
or in notes to financial statements.”
Thus, to assist users in understanding an NFP’s service efforts (i.e., its mission fulfillment), including the
costs of its services and how it allocates its resources, the statement of activities or the notes to the
financial statements provide information about expenses reported by their functional classification such as
major classes of program services and supporting activities.
Se
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1
2
3
4
5
6
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The types of activities that make up program services and supporting activities are described below.
Activities that make up program services and supporting activities
FASB ASC 958-720-45 provides more detailed descriptions and guidance related to program services,
management and general activities, fundraising activities, and membership development activities.
A. Program services
As we saw in the prior chart, program services are the activities that result in goods and services being
distributed to beneficiaries, customers, or members that fulfill the purposes or mission for which the NFP
exists. Those services are the major purpose for and the major output of the NFP and often relate to
several major programs. Because there are many different types of NFPs and also the flexibility allowed
within the current standards, there is a great deal of variance in the categories of program services that
appear in NFP financial statements as reflected in the following.
Singing to a different tune - Examples of program services presented in three different musical NFP financial statements
New York Philharmonic Sarasota Orchestra Fort Worth Symphony Orchestra Association
Subscription and other concerts
Student concerts
Free park concerts
Concerts on tour
Recording and broadcasting
Symphony and chamber orchestras/ensembles
Music festival
Music education programs
Program
Program service expenses are the direct and indirect costs of providing the program(s). Providing
information about program services expenses provides important information to donors and others. For
example, in the case of the Sarasota Orchestra, some donors may be interested in the amounts
expended on symphony and chamber orchestras/ensembles as compared to amounts spent on music
education programs.
Activities that result in
goods and services
being distributed to
beneficiaries, members,
or customers that fulfill
the purposes or mission
for which the NFP
exists.
Supporting Activities
Activities that are not
identifiable with a single
program, fundraising
activity, or membership
development activity but
that are indispensable to
the conduct of those
activities and to an
entity’s existence.
Include soliciting for
prospective members
and membership dues,
membership relations,
and similar activities.
Program Services
Management
and General Membership
Development
Activities undertaken
to induce potential
donors to contribute
money, securities,
services, materials,
facilities, other
assets, or time.
Fundraising
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As discussed in the following illustration, many NFPs have tremendous pressure to have a high ratio of
expenses in the program services category and a low ratio of expenses in the supporting activities
category.
Pressure to have a high ratio of program services expenses
For many NFPs, there is tremendous pressure to have a high ratio of
expenses in the program services category and a low ratio of expenses in
the supporting activities category. There are several websites available
to donors and others to readily compare the amounts expended on
program services to other expenses and also with other organizations
(e.g., www.charitynavigator.org or www.guidestar.org). Such websites
use the percentage of expenses devoted to program services as a
significant element in how they rate and compare NFPs.
Note. The websites discussed above can also be a tool for auditors in comparing a particular NFP client
to other NFPs with a similar mission.
B. Supporting activities
FASB ASC 958-720-45 provides three common categories of supporting activities and examples of
activities occurring within the categories as reflected in the following.
Examples of supporting activities
Management and General Fundraising Membership Development
All management and administration except for direct conduct of program services or fundraising activities
Preparing and distributing fundraising manuals, instructions, and other materials
Soliciting for prospective members and membership dues
Business management Maintaining donor mailing lists Membership relations
Financing, including interest costs that cannot be allocated
Conducting special fundraising events
Similar activities
Announcements concerning appointments
Publicizing and conducting fundraising campaigns
Note. If there are no significant benefits or duties connected with membership, however, the substance of membership development activities may, in fact, be fundraising, and the related costs reported as fundraising costs.
Soliciting funds other than contributions, including exchange transactions (whether program-related or not), such as government contracts, and related administrative activities
Conducting other activities involved with soliciting contributions from individuals, foundations, government agencies, and others
Disseminating information to inform the public of the NFP’s stewardship of contributed funds
Oversight
The annual report
Related administrative activities
Budgeting
General recordkeeping
Program services
$$
Supporting activities
$
$$ $ $
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In some cases, it may be difficult to determine which functional category an expense belongs to.
Some expenses relate to more than one functional category
For example, the costs of oversight and management usually include the salaries and expenses of the
governing board, the chief executive officer of the NFP, and the supporting staff. If such staff spend a
portion of their time directly supervising program services or categories of other supporting services,
however, their salaries and expenses are allocated among those functions.
III. Getting from natural expenses to functional expenses
Earlier, we discussed that the current NFP framework for the reporting of expenses is based on the
premise that providing information about expenses by function is necessary to an understanding of an
NFP’s service efforts. Thus, FASB ASC 958 requires all NFPs to report information about expenses by
their functional classification in either the statement of activities or the notes to the financial statements.
The majority of NFPs choose to present this information in the statement of activities. Providing expense
information by functional classification is different from providing information by the more traditional
natural expense classification. The following provides the FASB ASC definitions of natural expense
classification and functional classification.
The FASB ASC definitions of natural expense classification and functional classification
The FASB ASC defines natural expense classification as a method of grouping expenses
according to the kinds of economic benefits received in incurring those expenses.
Examples of natural expense classifications include salaries and wages, employee
benefits, supplies, rent, and utilities.
The FASB ASC defines functional classification as a method of grouping expenses
according to the purpose for which costs are incurred. The primary functional
classifications are program services and supporting activities.
Typically, expenses originate in their natural expense classification. For example, an NFP pays an
electricity bill and records utilities expense (i.e., a natural expense classification). Some natural expenses
are relatively easy to directly convert to functional expenses (e.g., travel expenses incurred in connection
with a program are easily assigned to that program functionally). Other natural expenses require
allocation in order to arrive at functional expenses (e.g., rent for a building that houses both program and
supporting activities).
I belong over here! Program Activities
Management
and General
$ $ $
I’m not sure where to go!
I’m on this side!
$ $
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How do we get from natural expenses to functional expenses?
Getting from natural expenses to functional expenses involves: (1) where
natural expenses can be specifically identified with a program or supporting
service assigning those expenses directly to that function; and (2) where natural
expenses cannot be specifically identified with a program or supporting service
reasonably allocating the natural expenses among the applicable functions.
A reasonable allocation of expenses among functions can be made on a variety of bases. Objective
methods of allocating expenses are preferable to subjective methods. The allocation may be based on
related financial or nonfinancial data. The allocation methods utilized by NFPs affect more than just the
presentation of functional expenses. For example, the allocation methods may also affect the
reclassification of net assets from temporarily restricted to unrestricted if purpose restrictions exist.
The following chart contains some additional comments/guidance related to the allocation of expenses.
Additional comments/guidance related to the allocation of expenses include…
%
Under FASB ASC 958-720-45, interest costs, including interest on a building’s mortgage, should
be allocated to specific programs or supporting services to the extent possible. Interest costs
that cannot be allocated are reported as part of the management and general function.
% Under FASB ASC 958-720-45, occupying and maintaining a building is not a separate
supporting service.
%
The AICPA Audit & Accounting Guide, Not-for-Profit Entities, provides that the expenses
associated with occupying and maintaining a building, such as depreciation, utilities,
maintenance, and insurance, may be allocated among the NFP’s functions based on the square
footage of space occupied by each program and supporting service. If floor plans are not
available and the measurement of the occupied space is impractical, an estimate of the relative
portion of the building occupied by each function may be made.
%
An NFP should periodically (e.g., annually) review the allocation methods utilized and revise
them when necessary to reflect significant changes in the nature or level of the NFP’s current
activities. In reviewing the allocation methods, the NFP may look at items such as time records
or activity reports of key personnel, the utilization of space, and the consumption of supplies and
postage.
NFPs often use account coding in the general ledger to collect and group expenses on both a natural and
functional basis. Allocations may occur through several means such as: (1) through a computerized
program; (2) coding assigned when invoices are submitted/entered into the accounts payable system;
and (3) adjusting journal entries. At different times, expense information on both a natural and functional
basis is needed for internal budgeting, compliance with grant and donor restrictions, and financial
reporting.
Natural Expenses
Functional expenses
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IV. Classification of expenses that include fundraising
NFPs frequently solicit support through a variety of fundraising activities, including: (1) direct mail;
(2) telephone solicitation; (3) door-to-door canvassing; (4) telethons; (5) special events; and (6) other
activities. Sometimes fundraising activities are conducted with activities related to other functions.
Special rules (found in FASB ASC 958-720) apply for reporting the costs of activities that are part of the
fundraising function and also have elements of one or more other functions, such as program,
management and general, membership development, or any other functional category used by the entity.
A. Important terminology
In analyzing the FASB ASC 958-720 requirements for accounting for costs of activities that include
fundraising, it is important to understand certain terminology upfront.
Joint Activity - An activity that is part of the fundraising function and has elements of one
or more other functions, such as program, management and general, membership
development, or any other functional category used by the entity.
Costs of Joint Activities - Costs incurred for a joint activity. Costs of joint activities may
include joint costs and costs other than joint costs. Costs other than joint costs are costs
that are identifiable with a particular function, such as fundraising, program, management
and general, and cost of sales. For example, some costs incurred for printing, paper,
professional fees, and salaries to produce donor cards are not joint costs, although they
may be incurred in connection with conducting joint activities.
Joint Costs - The costs of conducting joint activities that are not identifiable with a
particular component of the activity. For example, the cost of postage for a letter that
includes both fundraising and program components is a joint cost. Joint costs may include
the following costs: (1) salaries; (2) contract labor; (3) consultants; (4) professional fees;
(5) paper; (6) printing; (7) postage; (8) event advertising; (9) telephones; (10) airtime; and
(11) facility rentals.
B. Three important criteria
FASB ASC 958-720-45 contains three criteria that are applied to joint activities to determine how these
activities are reported.
Classification of the costs of a joint activity based on FASB ASC 958-720-45-29
If…
If the criteria of purpose, audience, and content are met, the costs of a joint activity are
classified as follows: (1) the costs that are identifiable with a particular function are charged
to that function; and (2) joint costs are allocated between fundraising and the appropriate
program or management and general function.
If not…
If any of the criteria (i.e., purpose, audience, or content) are not met, all costs of the joint
activity are reported as fundraising costs, including costs that otherwise might be considered
program or management and general costs if they had been incurred in a different activity,
subject to the exception in the following sentence. Costs of goods or services provided in
exchange transactions that are part of joint activities, such as costs of direct donor benefits
of a special event (e.g., a meal), are not reported as fundraising.
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In circumstances in which an NFP that conducts joint activities has a functional structure that includes
functional classifications other than fundraising, program, and management and general, all costs of
those joint activities are charged to fundraising (or the category in which fundraising is reported), unless
the purpose, audience, and content of those joint activities are appropriate for achieving those other
functions.
We will now look at each of the three criteria (i.e., purpose, audience, and content) that are applied to
joint activities to determine how these activities are reported.
C. What is the purpose criterion?
The purpose criterion is used to determine whether the purpose of the joint activity includes
accomplishing program or management and general functions. The purpose criterion is met if the
purpose of the joint activity includes accomplishing program or management and general
functions. The following will be considered in determining whether the purpose criterion is met:
If the joint activity combines program functions with fundraising activities:
To accomplish program functions, the activity will call for specific action by the audience that will
help accomplish the NFP’s mission. Actions that help accomplish the NFP’s mission are actions
that do either of the following: (1) benefit the recipient (e.g., by improving the recipient’s physical,
mental, emotional, or spiritual health and well-being); or (2) benefit society (by addressing societal
problems).
In circumstances in which joint activities are conducted, a presumption exists that expenses are
reported as fundraising rather than as program or management and general. The following
circumstances are insufficient to overcome that presumption: (1) the purpose of the activity
includes educating the public about causes; (2) the audience has a need or reasonable potential
for use of any educational component of the activity pertaining to causes; and (3) the audience
has the ability to assist the NFP in meeting the goals of the program component of the activity by
becoming educated about causes.
To conclude that the criteria of purpose, audience, and content are met, program activities will call
for specific action by the recipient (other than becoming educated about causes) that will help
accomplish the NFP’s mission.
If the activity calls for specific action by the audience that will help accomplish the NFP’s mission,
the guidance in the next section of the chart will also be considered in determining whether the
purpose criterion is met. Note. FASB ASC 958-720-55-4 to 958-720-55-5 provides
implementation guidance for determining whether an activity includes a call for a specific action.
If the joint activity combines program functions, management and general functions, or both with fundraising activities:
The following factors will be considered, in the order in which they are listed, to determine whether
the purpose criterion is met: (1) the compensation or fees test; (2) the separate and similar
activities test; and (3) the other evidence test. Note. FASB ASC 958-720-55-36 to 958-720-55-
159 provides implementation guidance for these three tests.
We will now look at each of the three tests just mentioned (i.e., the compensation or fees test; the
separate and similar activities test; and the other evidence test).
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1. The compensation or fees test
The compensation or fees test:
The purpose criterion is not met if a majority of compensation or fees for any party’s performance
of any component of the discrete joint activity varies based on contributions raised for that discrete
joint activity.
Some compensation contracts provide that compensation for performing the activity is based on a
factor other than contributions raised, but not to exceed a specified portion of contributions raised.
For example, a contract may provide that compensation for performing the activity is $15 per
contact hour, but not to exceed 70 percent of contributions raised. In such circumstances,
compensation is not considered based on amounts raised, unless the stated maximum
percentage is met. In situations in which it is not yet known whether the stated maximum
percentage is met, compensation is not considered based on amounts raised, unless it is probable
that the stated maximum percentage will be met.
The compensation or fees test is a negative test in that it either: (1) results in failing the purpose
criterion; or (2) is not determinative of whether the purpose criterion is met.
In considering the three purpose criterion tests (i.e., the compensation or fees test; the separate
and similar activities test; and the other evidence test), the compensation or fees test is the
dominant guidance. Therefore, if the activity fails the compensation or fees test, the activity fails
the purpose criterion and the separate and similar activities test is not considered.
If the purpose criterion is not failed based on the compensation or fees test, this factor is not
determinative of whether the purpose criterion is met, and the factors in the separate and similar
activities test are considered.
2. The separate and similar activities test
The separate and similar activities test:
The purpose criterion is met if a similar program or management and general activity is
conducted separately and on a similar or greater scale. That is, the purpose criterion is met if
either of the following conditions is met:
The first condition (i.e., similar program) is met if both of the following are true: (1) the program
component of the joint activity calls for specific action by the recipient that will help accomplish the
NFP’s mission; and (2) a similar program component is conducted without the fundraising
component using the same medium and on a scale that is similar to or greater than the scale on
which it is conducted with the fundraising. Determining the scale on which an activity is conducted
may be subjective. Factors to consider in determining the scale on which an activity is conducted
may include dollars spent, the size of the audience reached, and the degree to which the
characteristics of the audience are similar to the characteristics of the audience of the activity
being evaluated.
The second condition (i.e., management and general activity) is met if a management and
general activity that is similar to the management and general component of the joint activity being
accounted for is conducted without the fundraising component using the same medium and on a
scale that is similar to or greater than the scale on which it is conducted with the fundraising.
If the purpose criterion is met based on the separate and similar activities test, the other evidence
test is not considered. If the separate and similar activities test is not determinative, the other
evidence test is considered.
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3. The other evidence test
The other evidence test:
The compensation or fees test and the separate and similar activities test may not always be
determinative because the attributes that they consider may not be present. If the factors in the
compensation or fees test or the separate and similar activities test do not determine whether the
purpose criterion is met, other evidence may determine whether the criterion is met. All available
evidence, both positive and negative, is considered to determine whether, based on the weight of
that evidence, the purpose criterion is met. FASB ASC 958-720-55-6 to 958-720-55-9 provides
implementation guidance for applying the other evidence test.
4. Exercise 6-1
As we discussed, if program functions are combined with fundraising activities, it is important to determine
whether the activity includes a call for specific action by the audience that will help accomplish the NFP’s
mission. Please review and complete the below related to this.
Fact Pattern:
Does the fact pattern presented include a call for a specific action?
1
NFP C’s mission includes improving individuals’
physical health. As part of a joint activity, NFP C
sends a brochure that urges recipients to stop
smoking and suggests specific methods, instructions,
references, and resources that may be used to stop
smoking.
2
NFP D’s mission includes improving individuals’
physical health. As part of a joint activity, NFP D
sends a brochure educating recipients about NFP
D’s mission and asking for contributions to further the
mission.
3
NFP T’s mission includes improving the environment.
As part of a joint activity, NFP T sends a brochure
educating recipients about environmental problems
caused by not recycling and implicitly calling for the
recipients to increase recycling.
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5. Exercise 6-2
As we discussed, the compensation or fees test and the separate and similar activities test may not
always be determinative because the attributes that they consider may not be present. If the factors in
the compensation or fees test or the separate and similar activities test do not determine whether the
purpose criterion is met, other evidence may determine whether the criterion is met. All available
evidence, both positive and negative, is considered to determine whether, based on the weight of that
evidence, the purpose criterion is met. Please review the facts presented in the left column below and
draw a line as to whether the facts indicate that the purpose criterion may or may not have been met.
D. What is the audience criterion?
A rebuttable presumption exists that the audience criterion is not met if the audience includes
prior donors or is otherwise selected based on its ability or likelihood to contribute to the NFP.
That presumption can be overcome if the audience is also selected for any of the reasons in the
following chart. In determining whether that presumption is overcome, an NFP considers the extent to
which the audience is selected based on its ability or likelihood to contribute to the NFP and contrasts that
with the extent to which it is selected for one or more of the reasons in the following chart. As an
example, if the audience’s ability or likelihood to contribute is a significant factor in its selection and it has
a need for the action related to the program component of the joint activity, but having that need is an
insignificant factor in its selection, the presumption would not be overcome.
In circumstances in which the audience includes no prior donors and is not otherwise selected based on its ability or likelihood to contribute to the NFP, the audience criterion is met if the audience is selected for any of the following reasons:
The audience’s need to use or
reasonable potential for use of
the specific action called for by
the program component of the
joint activity.
The audience’s ability to take
specific action to assist the
NFP in meeting the goals of
the program component of
the joint activity.
The NFP is required to direct the
management and general component
of the joint activity to the particular
audience or the audience has
reasonable potential for use of the
management and general component.
NFP K conducts a joint activity with the assistance of a third party
marketing firm. NFP K evaluates the marketing firms’ performance
(for potential future activities) based on contributions raised from the
activity.
The fact provides
evidence that the purpose
criterion may
be met.
The fact provides
evidence that the purpose
criterion may not be met.
NFP O conducts a joint activity. NFP O measures program results
and accomplishments of the activity (other than measuring the
extent to which the public was educated about causes).
NFP Y conducts a joint activity involving a direct mailing. The
program component of the direct mailing calls for specific action by
the recipient that will help accomplish NFP Y’s mission. NFP Y also
conducts the program component without a significant fundraising
component in a series of radio spots.
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E. What is the content criterion?
The content criterion:
The content criterion is met if the joint activity supports program or management and
general functions, as follows:
Program. The joint activity calls for specific action by the recipient that will help accomplish the
NFP’s mission. If the need for and benefits of the action are not clearly evident, information
describing the action and explaining the need for and benefits of the action is provided.
Management and general. The joint activity fulfills one or more of the NFP’s management and
general responsibilities through a component of the joint activity.
Information identifying and describing the NFP, its causes, or how the contributions provided will
be used is considered in support of fundraising.
Activities that are undertaken as a result of receiving contributions are management and general
activities (e.g., activities conducted to comply with requirements of regulatory bodies concerning
contributions that have been received are management and general activities).
Activities that are undertaken in order to solicit contributions are fundraising activities. As an
example, activities conducted to comply with requirements of regulatory bodies concerning
soliciting contributions, such as the requirement by some states or other regulatory bodies that
certain disclosures be included when soliciting contributions, are fundraising activities. For
purposes of applying this guidance, communications that include such required disclosures are
considered fundraising activities and are not considered management and general activities.
F. Allocation methods
The cost allocation methodology used shall be rational and systematic, it shall result in an allocation of
joint costs that is reasonable, and it shall be applied consistently given similar facts and circumstances.
FASB ASC 958-720-55-25 to 958-720-55-31 provides explanations and illustrations of some acceptable
allocation methods. The methods shown are the standalone joint cost allocation method, the relative
direct cost method, and the physical units method. The allocation of joint costs is based on the degree to
which costs were incurred for the functions to which the costs are allocated (i.e., program, management
and general, or fundraising). For purposes of determining whether the allocation methodology for a
particular joint activity is consistent with methodologies used for other particular joint activities, facts and
circumstances that may be considered include factors related to the content and relative costs of the
components of the activity. The audience is not considered in determining whether the facts and
circumstances are similar for purposes of determining whether the allocation methodology for a particular
joint activity is consistent with methodologies used for other particular joint activities. A change in cost
allocation methodology is evaluated in accordance with FASB ASC 250 to determine if it is a change in
accounting principle.
G. Incidental activities
Some fundraising activities conducted in conjunction with program or management and general activities
are incidental to such program or management and general activities. For example, NFP D conducts a
fundraising activity by including a generic message, “Contributions to NFP D may be sent to 123 Main
Street, Hometown, Indiana” on a small area of a message that would otherwise be considered a program
activity based on its purpose, audience, and content. That fundraising activity probably would be
considered incidental to the program activity being conducted.
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In situations in which a fundraising, program, or management and general activity is conducted in
conjunction with another activity and is incidental to that other activity, and the criteria in FASB ASC 958-
720-45-29 (see discussion at page 6-6) for allocation are met, joint costs are permitted but not required to
be allocated and may therefore be charged to the functional classification related to the activity that is not
the incidental activity. However, in situations in which the program or management and general activities
are incidental to the fundraising activities, it is unlikely that the criteria in FASB ASC 958-720-45-29 to
permit allocation of joint costs would be met.
H. Key disclosures related to joint costs
NFPs that allocate joint costs have several disclosure requirements as discussed in the following chart.
NFPs that allocate joint costs disclose all of the following in the notes to the financial statements:
The types of activities for which joint costs have been incurred.
A statement that such costs have been allocated.
The total amount allocated during the period and the portion allocated to each functional expense
category.
Note. NFPs are encouraged, but not required, to disclose the amount of joint costs for each kind of joint
activity, if practical.
The financial statements will also disclose total fundraising expenses.
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I. Exercise 6-3
Please review and answer the following true or false questions related to the classification of expenses
that include fundraising.
True or False
1
If the criteria of purpose, audience, and content are met, the costs
of a joint activity are classified as follows: (1) the costs that are
identifiable with a particular function are charged to that function;
and (2) joint costs are allocated between fundraising and the
appropriate program or management and general function.
2
If the joint activity combines program functions, management and
general functions, or both with fundraising activities the following
factors will be considered, in the order in which they are listed, to
determine whether the purpose criterion is met: (1) the separate and
similar activities test; (2) the compensation or fees test; and (3) the
other evidence test.
3
If the purpose criterion is not failed based on the compensation or
fees test, this factor is not determinative of whether the purpose
criterion is met, and the factors in the separate and similar activities
test are considered.
4
If the purpose criterion is met based on the separate and similar
activities test, this factor is not determinative of whether the purpose
criterion is met, and the factors in the other evidence test are
considered.
5 A rebuttable presumption exists that the audience criterion is not
met if the audience includes prior donors or is otherwise selected
based on its ability or likelihood to contribute to the NFP.
6 The content criterion is met if the joint activity supports program or
management and general functions.
7
The cost allocation methodology used shall be rational and
systematic, it shall result in an allocation of joint costs that is
reasonable, and it shall be applied consistently given similar facts
and circumstances.
8
In situations in which a fundraising, program, or management and
general activity is conducted in conjunction with another activity and
is incidental to that other activity, and the criteria in FASB ASC 958-
720-45-29 for allocation are met, joint costs must be allocated.
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V. Suggested solutions to exercises
This section contains the suggested solutions to the exercises presented in the chapter.
A. Suggested solution to Exercise 6-1
Fact Pattern:
Does the fact pattern presented include a call for a specific action?
1
NFP C’s mission includes improving individuals’
physical health. As part of a joint activity, NFP C
sends a brochure that urges recipients to stop
smoking and suggests specific methods, instructions,
references, and resources that may be used to stop
smoking.
Yes. For NFP C, motivating the audience
to take specific action that will improve their
physical health is a call for specific action
by the audience that will help accomplish
NFP C’s mission.
2
NFP D’s mission includes improving individuals’
physical health. As part of a joint activity, NFP D
sends a brochure educating recipients about NFP
D’s mission and asking for contributions to further the
mission.
No. Simply educating the audience about
NFP D’s mission and asking the audience
to make contributions is not a call for
specific action by the audience that will help
accomplish the NFP's mission. Such
activities are considered in support of
fundraising.
3
NFP T’s mission includes improving the environment.
As part of a joint activity, NFP T sends a brochure
educating recipients about environmental problems
caused by not recycling and implicitly calling for the
recipients to increase recycling.
Yes. Some educational activities that might
otherwise be considered as educating the
audience about causes may implicitly call
for specific action by the audience that will
help accomplish the NFP’s mission. If the
need for and benefits of the specific action
are clearly evident from the educational
message, the message is considered to
include an implicit call for specific action by
the audience that will help accomplish the
NFP’s mission.
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B. Suggested solution to Exercise 6-2
NFP K conducts a joint activity with the assistance of a third party
marketing firm. NFP K evaluates the marketing firms’ performance
(for potential future activities) based on contributions raised from the
activity.
The fact provides
evidence that the purpose
criterion may
be met.
The fact provides
evidence that the purpose
criterion may not be met.
NFP O conducts a joint activity. NFP O measures program results
and accomplishments of the activity (other than measuring the
extent to which the public was educated about causes).
NFP Y conducts a joint activity involving a direct mailing. The
program component of the direct mailing calls for specific action by
the recipient that will help accomplish NFP Y’s mission. NFP Y also
conducts the program component without a significant fundraising
component in a series of radio spots.
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C. Suggested solution to Exercise 6-3
True or False
1
If the criteria of purpose, audience, and content are met, the costs
of a joint activity are classified as follows: (1) the costs that are
identifiable with a particular function are charged to that function;
and (2) joint costs are allocated between fundraising and the
appropriate program or management and general function.
True.
2
If the joint activity combines program functions, management and
general functions, or both with fundraising activities the following
factors will be considered, in the order in which they are listed, to
determine whether the purpose criterion is met: (1) the separate
and similar activities test; (2) the compensation or fees test; and
(3) the other evidence test.
False. The order in which
they are considered is (1) the
compensation or fees test;
(2) the separate and similar
activities test; and (3) the
other evidence test.
3
If the purpose criterion is not failed based on the compensation or
fees test, this factor is not determinative of whether the purpose
criterion is met, and the factors in the separate and similar
activities test are considered.
True.
4
If the purpose criterion is met based on the separate and similar
activities test, this factor is not determinative of whether the
purpose criterion is met, and the factors in the other evidence test
are considered.
False. If the purpose criterion
is met based on the separate
and similar activities test, the
other evidence test is not
considered.
5 A rebuttable presumption exists that the audience criterion is not
met if the audience includes prior donors or is otherwise selected
based on its ability or likelihood to contribute to the NFP.
True.
6 The content criterion is met if the joint activity supports program or
management and general functions. True.
7
The cost allocation methodology used shall be rational and
systematic, it shall result in an allocation of joint costs that is
reasonable, and it shall be applied consistently given similar facts
and circumstances.
True.
8
In situations in which a fundraising, program, or management and
general activity is conducted in conjunction with another activity
and is incidental to that other activity, and the criteria in FASB ASC
958-720-45-29 for allocation are met, joint costs must be allocated.
False. In these situations,
joint costs are permitted but
not required to be allocated.
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Financial Reporting Today
Learning Objectives 1 I. NFP financial reporting 1 II. The statement of financial position 2
A. The classification of assets and liabilities 2 B. Providing information about liquidity 3
1. Exercise 7-1 3 2. Exercise 7-2 4
C. Classification of net assets 4 1. Exercise 7-3 6 2. Exercise 7-4 7
D. Key disclosures related to the statement of financial position 7 E. Example statement of financial position 8
III. The statement of activities 9 A. The classification of revenues, expenses, gains, and losses 9
1. Exercise 7-5 10 2. The presentation of contributions in the statement of activities 10 3. Exercise 7-6 10
B. Sequencing the statement of activities 10 C. Including a measure of operations 11
1. Exercise 7-7 11 D. Reporting expenses by function 12
1. Exercise 7-8 12 E. Reclassifications of net assets 12
1. Exercise 7-9 13 F. Gross versus net reporting in the statement of activities 14
1. Exercise 7-10 14 G. Key disclosures related to the statement of activities 15 H. Statement of activities examples 15
1. The single-column format 15 2. The multi-column format 17 3. Exercise 7-11 17
IV. The statement of cash flows 18 A. Cash and cash equivalents 18 B. Cash flows from operating, investing, and financing activities 20
1. Exercise 7-12 21 C. Reconciling the change in net assets to cash flow from operating activities 22 D. Key disclosures related to the statement of cash flows 22
1. Exercise 7-13 22 E. Statement of cash flows examples 22
1. The direct method 23 2. The indirect method 24 3. Exercise 7-14 24
V. The statement of functional expenses 25 A. A financial statement with an unusual history 25 B. What is a voluntary health and welfare entity? 25
1. Exercise 7-15 26 C. The matrix format for the statement of functional expenses 26
1. Exercise 7-16 27 D. Statement of functional expenses example 27
VI. Suggested solutions to exercises 28 A. Suggested solution to Exercise 7-1 28 B. Suggested solution to Exercise 7-2 29 C. Suggested solution to Exercise 7-3 30 D. Suggested solution to Exercise 7-4 30 E. Suggested solution to Exercise 7-5 31 F. Suggested solution to Exercise 7-6 31
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G. Suggested solution to Exercise 7-7 32 H. Suggested solution to Exercise 7-8 32 I. Suggested solution to Exercise 7-9 33 J. Suggested solution to Exercise 7-10 33 K. Suggested solution to Exercise 7-11 33 L. Suggested solution to Exercise 7-12 34 M. Suggested solution to Exercise 7-13 35 N. Suggested solution to Exercise 7-14 35 O. Suggested solution to Exercise 7-15 35 P. Suggested solution to Exercise 7-16 35
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Financial Reporting Today
Learning Objectives
Upon completing this chapter, you will be able to:
Recognize the financial statements that NFPs prepare (i.e., the statement of
financial position, the statement of activities, the statement of cash flows, and
the statement of functional expenses); and
Apply today’s financial reporting requirements for NFPs (i.e., what is required,
what is optional, and what are some best practices for communicating
mission fulfillment).
I. NFP financial reporting
This chapter is all about how NFPs prepare their financial statements under today’s requirements. NFP
financial reporting differs from the financial reporting that business entities utilize due to the mission focus
of NFPs.
Financial statements with a mission!
In Chapter 1, we discussed that the FASB has identified three primary
characteristics that NFPs have which distinguish them from business entities
(i.e., contributions, operating purposes, and the absence of ownership
interests). These characteristics are important as they directly and indirectly get
to the fact that NFPs are focused on mission fulfillment instead of profitability
and the financial statements that NFPs prepare reflect that focus.
NFPs attempt to answer questions about mission fulfillment through their financial statements. The
following illustrates the financial statements prepared by NFPs and the mission focus.
The financial statements prepared by NFPs include:
In addition, voluntary health and welfare entities prepare:
Provides a point in time measurement of the NFP’s resources on hand to achieve its mission going
forward
Primarily provide a period of time measurement of how the NFP’s resources were used in pursuing the mission and how successful the NFP was in attaining resources
The Statement of Financial Position or
Balance Sheet
The Statement
of Activities
The Statement
of Cash Flows
The Statement of Functional
Expenses
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II. The statement of financial position
When trying to understand the statement of financial position an important starting point is recognizing
what the statement reports.
The statement of financial position focuses on the NFP as a whole and reports all of the following amounts:
NFPs are not prevented from displaying interfund items in a statement of financial position. However, the
requirement to display total assets and liabilities results in certain practical limits on how interfund items
are displayed. For example, because receivables and payables between fund groups are not entity
assets or liabilities, a statement of financial position clearly labels and arranges those interfund items to
eliminate their amounts when displaying total assets or liabilities.
FASB ASC 958 does not emphasize or prevent specific statement formats. It permits a left-to-right
or top-to-bottom balanced format as well as single-column, multicolumn, single-page, or
multipage formats (i.e., an NFP is allowed to use the approach that is most helpful to its users).
FASB ASC 958-210 describes the unique standards relating to a statement of financial position. An NFP
should follow the industry-specific guidance found in FASB ASC 958 and all effective provisions of the
FASB ASC unless the specific provision explicitly exempts NFPs or its subject matter precludes such
applicability. For example, NFPs should apply the guidance contained in FASB ASC 210, Balance Sheet,
that does not conflict with the industry guidance.
A. The classification of assets and liabilities
It is important to properly classify and aggregate assets and liabilities within the statement of financial
position.
Aggregating assets and liabilities that possess similar characteristics
A statement of financial position, including the accompanying notes to the financial
statements, provides relevant information about liquidity, financial flexibility, and the
interrelationship of an NFP’s assets and liabilities. That information generally is provided by
aggregating assets and liabilities that possess similar characteristics into reasonably
homogeneous groups that include the effects of donor-imposed restrictions as well as other
contractual restrictions.
Permanently Restricted
Net Assets
Temporarily Restricted
Net Assets
Unrestricted
Net Assets
Statement of
Financial
Position
Total
Assets
Total
Liabilities
Total
Net Assets
$$$$
$$$$ $$$$
$$$$
$$$$ $$$$
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Classifying and aggregating items with similar characteristics into reasonably homogeneous groups and
separating items with differing characteristics improves the usefulness of information. For example,
entities generally report individual items of assets in homogeneous groups, such as cash and cash
equivalents; accounts and notes receivable from patients, students, members, and other recipients of
services; inventories of materials and supplies; deposits and prepayments for rent, insurance, and other
services; marketable securities and other investment assets held for long-term purposes; and land,
buildings, equipment, and other long-lived assets used to provide goods and services. Similarly, cash
collections of receivables from patients, students, or other service recipients may differ significantly in
continuity, stability, and risk from cash collections of pledges made to a special-purpose fundraising
campaign. Classifying and reporting those receivables and collections of receivables as separate groups
of assets and of cash inflows assists in financial statement analysis.
Assets may be restricted by donors. Normally, however, restrictions apply to net assets, not to specific
assets. Assets need not be disaggregated on the basis of the presence of donor-imposed restrictions on
their use (e.g., cash available for unrestricted current use need not be reported separately from cash
received with donor-imposed restrictions that is also available for current use). However, cash or other
assets received with a donor-imposed restriction that limits their use to long-term purposes should not
be classified with cash or other assets that are unrestricted and available for current use. If its nature is
not clear from the description on the face of the statement of financial position, the kind of asset whose
use is limited should be described in the notes to the financial statements.
If not disclosed in the notes to financial statements, the following information will be displayed on the face
of the statement of financial position: (1) relevant information about the nature and amount of limitations
on the use of cash and cash equivalents; and (2) contractual limitations on the use of particular assets.
B. Providing information about liquidity
FASB ASC 958 requires that NFPs provide information about liquidity.
FASB ASC 958 requires that information about the NFP’s liquidity be provided by any of the following three methods:
1 Sequencing assets according to their nearness of conversion to cash and sequencing liabilities
according to the nearness of their maturity and resulting use of cash.
2 Classifying assets and liabilities as current and noncurrent, as defined by FASB ASC 210-10.
3 Disclosing in notes to financial statements relevant information about the liquidity or maturity of
assets and liabilities, including restrictions on the use of particular assets.
1. Exercise 7-1
Please answer the following question related to providing information about an NFP’s liquidity.
Providing information about an NFP’s liquidity
In the prior chart we saw that NFPs currently have three methods of providing information about their
liquidity. The second method involves classifying assets and liabilities as current and noncurrent (i.e.,
presenting a classified statement of financial position). In the author’s experience, most NFPs do not
elect this method today. Why do many NFPs not use this method today?
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2. Exercise 7-2
Please review the issues presented below and answer the questions in the space provided.
Issues and answers related to liquidity
Issue: Answer:
1
NFP A sequences assets and liabilities in the statement of financial
position based on their relative liquidity. At year end, NFP A has
cash and cash equivalents related to permanent endowment funds
which are being held temporarily until suitable long-term investment
opportunities are identified. Where should these cash and cash
equivalents be reported in the statement of financial position?
2
NFP B sequences assets and liabilities in the statement of financial
position based on their relative liquidity. At year end, NFP B has
cash and contribution receivables restricted by donors to
investment in land, buildings, and equipment that are not included
with the line items cash and cash equivalents or contributions
receivable. Where should these cash and contribution receivables
be reported in the statement of financial position?
3
NFP C classifies assets and liabilities as current and noncurrent in
the statement of financial position. At year end NFP C has cash
that is designated for expenditure in the acquisition or construction
of noncurrent assets. Should the cash be classified as a current
asset in the statement of financial position?
C. Classification of net assets
Information about restrictions on net assets is important to the readers of NFP financial statements
whether they be internal or external users. Donor restrictions impose distinct responsibilities on an NFP’s
management to ensure that it uses donated assets as stipulated. Donor restrictions also place limits on
the use of resources which may have a bearing on an NFP’s performance and its ability to provide a
satisfactory level of services. Information about how managers discharge their stewardship
responsibilities for donor-restricted resources is also helpful in assessing an NFP’s performance. The
Basis for Conclusions to FASB No. 117 (i.e., the bellwether standard from which much of the current
FASB ASC 958 reporting guidance came from) outlined why the FASB has required information about
three classifications of net assets since the early 1990s.
The Basis for Conclusions to FASB No. 117 outlined why the FASB has required information about three classifications of net assets
Information about permanent restrictions
is useful in…
Determining the extent to which an organization’s net assets
are not a source of cash for payments to present or prospective
lenders, suppliers, or employees and thus are not expected to
be directly available for providing services or paying creditors.
Information about the extent of unrestricted and temporarily restricted net
assets is useful in…
Assessing an organization’s ability and limitations on its ability
to allocate resources to provide services or particular kinds of
services or to make cash payments to creditors in the future.
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Because the FASB believed that aggregated information about the three components of an NFP’s net
assets is especially important to both donors and creditors and that such information is best provided by
display of their amounts in a statement of financial position, it required the amounts of permanently
restricted, temporarily restricted, and unrestricted net assets be displayed on the statement in addition to
total net assets. The three classes of net assets are described in the below.
The three classes of net assets
Permanently Restricted Net Assets – The part of the net assets of an NFP resulting
from the following:
• Contributions and other inflows of assets whose use by the NFP is limited
by donor-imposed stipulations that neither expire by passage of time nor
can be fulfilled or otherwise removed by actions of the NFP.
• Other asset enhancements and diminishments subject to the same kinds
of stipulations.
• Reclassifications from or to other classes of net assets as a consequence
of donor-imposed stipulations.
Temporarily Restricted Net Assets – The part of the net assets of an NFP resulting
from the following:
• Contributions and other inflows of assets whose use by the NFP is limited
by donor-imposed stipulations that either expire by passage of time or
can be fulfilled and removed by actions of the NFP pursuant to those
stipulations.
• Other asset enhancements and diminishments subject to the same kinds
of stipulations.
• Reclassification from or to other classes of net assets as a consequence
of donor-imposed stipulations, their expiration by passage of time, or their
fulfillment and removal by actions of the NFP pursuant to those
stipulations.
Unrestricted Net Assets – The part of the net assets of an NFP that is neither
permanently restricted nor temporarily restricted by donor-imposed stipulations. The
only limits on the use of unrestricted net assets are the broad limits resulting from the
following:
• The nature of the NFP.
• The environment in which the NFP operates.
• The purposes specified in the NFP’s articles of incorporation or bylaws.
• Limits resulting from contractual agreements with suppliers, creditors, and
others entered into by the NFP in the course of its business.
Unrestricted net assets generally result from revenues from providing services,
producing and delivering goods, receiving unrestricted contributions, and receiving
dividends or interest from investing in income-producing assets, less expenses incurred
in providing services, producing and delivering goods, raising contributions, and
performing administrative functions.
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As seen in the prior chart, the amounts for each of the three classes of net assets are based on the
existence or absence of donor-imposed restrictions. Information about the nature and amounts of
different types of permanent and temporary restrictions is required either by reporting their amounts on
the face of the statement or by including relevant details in the notes to the financial statements.
Separate line items may be reported within permanently restricted net assets or in notes to financial
statements to distinguish between permanent restrictions for both of the following holdings: [1] assets,
such as land or works of art, donated with stipulations that they be used for a specified purpose, be
preserved, and not be sold; and [2] assets donated with stipulations that they be invested to provide a
permanent source of income (these result from gifts and bequests that create permanent endowment
funds).
Separate line items may be reported within temporarily restricted net assets or in notes to financial
statements to distinguish between the following temporary restrictions: (1) support of particular operating
activities; (2) investment for a specified term; (3) use in a specified future period; and (4) acquisition of
long-lived assets. Donors’ temporary restrictions may require that resources be used in a later period or
after a specified date (time restrictions), or that resources be used for a specified purpose (purpose
restrictions), or both.
Self-imposed limits
Information about self-imposed limits may be helpful, including information about
voluntary resolutions by the governing board of an entity to designate a portion of
its unrestricted net assets to function as an endowment (sometimes referred to
as a board-designated endowment). This information may be provided on the
face of the financial statements or in the footnotes.
1. Exercise 7-3
Please answer the following true or false questions.
True or False
1 In today’s environment, the vast majority of NFPs present some level of
additional disaggregation within the three classifications of net assets in the
statement of financial position.
2
The FASB has historically believed that information about a minimum of three
classes of net assets, based on the presence or absence of donor-imposed
restrictions and their nature, generally is necessary to gain an adequate
understanding of the financial position of an NFP.
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2. Exercise 7-4
Please review the below net asset section format. Do you believe that this format is allowable or not
allowable and why?
Donor restricted:
Permanently $XXX
Temporarily XXX
Other:
Designated by the Board for [purpose] $XXX
Undesignated XXX XXX
Net assets $XXX
D. Key disclosures related to the statement of financial position
The following chart discusses several key disclosure requirements related to the statement of financial
position.
NFPs have several statement of financial position related disclosure requirements including:
As discussed earlier, an NFP is required to disclose in the notes to the financial statements
relevant information about the liquidity or maturity of assets and liabilities, including restrictions on
the use of particular items, unless that information is provided on the face of the statement of
financial position.
An NFP is required to disclose all of the following, if present, in the notes to the financial
statements:
• Unusual circumstances, such as special borrowing arrangements, requirements
imposed by resource providers that cash be held in separate accounts, and known
significant liquidity problems.
• The fact that the NFP has not maintained appropriate amounts of cash and cash
equivalents to comply with donor-imposed restrictions.
• Information about significant limits resulting from contractual agreements with
suppliers, creditors, and others, including the existence of loan covenants.
As discussed earlier, the following items are required to be included in the notes to the financial
statements if they are not provided on the face of the statement of financial position:
• A description of the kind of asset whose use is limited.
• Information about the nature and amount of limitations on the use of cash and cash
equivalents.
• Contractual limitations on the use of particular assets.
• Information about the nature and amounts of different types of permanent and
temporary restrictions.
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E. Example statement of financial position
The following is an illustrative statement of financial position (excluding footnotes) that sequences assets
and liabilities based on their relative liquidity.
NFP X Statements of Financial Position
September 30, 2016 and 2015
Assets: 2016 2015
Cash and cash equivalents $ 33,500 $ 42,047
Accounts and interest receivable 22,600 37,800
Inventories and prepaid expenses 5,047 7,058
Contributions receivable 52,740 44,321
Short-term investments 78,235 65,035
Land, buildings, and equipment 236,785 205,786
Long-term investments 356,458 378,256
Total assets $785,365 $780,303
Liabilities and net assets:
Accounts payable 29,053 15,089
Refundable advance 1,520
Grants payable 27,250 20,784
Notes payable 12,030 17,235
Long-term debt 82,035 87,568
Total liabilities 150,368 142,196
Net Assets:
Unrestricted 262,785 247,234
Temporarily restricted 70,430 97,695
Permanently restricted 301,782 293,178
Total net assets 634,997 638,107
Total liabilities and net assets $785,365 $780,303
Having discussed the statement of financial position, we are now ready to examine the statement of
activities.
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III. The statement of activities
As illustrated below, the statement of activities focuses on the NFP as a whole and reports several key
amounts for the period.
The statement of activities focuses on the NFP as a whole and reports all of the following amounts for the period:
FASB ASC 958 requires the change in net assets to articulate to the net assets or equity reported in the
statement of financial position. It also requires the change in net assets to be referred to with a
descriptive term such as change in net assets or change in equity.
FASB ASC 958-225 describes the unique standards relating to a statement of activities of an NFP. An
NFP should follow that industry-specific guidance and all effective provisions of the FASB ASC unless the
specific provision explicitly exempts NFPs or its subject matter precludes such applicability. For example,
NFPs should apply the guidance contained in FASB ASC 225, Income Statement, that does not conflict
with the industry guidance found in FASB ASC 958.
A. The classification of revenues, expenses, gains, and losses
Information about revenues, expenses, gains, losses, and reclassifications generally is provided by
aggregating items that possess similar characteristics into reasonably homogeneous groups.
Which net asset classification does this belong with?
Revenues The statement of activities reports revenues as increases in unrestricted net assets
unless the use of the assets received is limited by donor-imposed restrictions.
Expenses The statement of activities reports expenses as decreases in unrestricted net assets.
Gains and Losses
The statement of activities reports gains and losses recognized on investments and
other assets (or liabilities) as increases or decreases in unrestricted net assets unless
their use is temporarily or permanently restricted by explicit donor stipulations or by
law.1
1 See FASB ASC 958-320-45 for additional guidance about reporting investment gains and losses, and FASB ASC 958-
205-45-13 through 45-27 for additional guidance about reporting gains and losses on endowment funds. See FASB ASC 958-310-45-3 for additional guidance about bad debt expenses and losses.
The change in permanently
restricted net assets
The change in net assets
The change in
unrestricted net assets
The change in temporarily
restricted net assets
The
Statement of
Activities
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1. Exercise 7-5
In this section of the course, we have discussed the classification of revenues, expenses, gains, and
losses. In the below, answer the two questions presented related to this.
Are entitywide totals required for individual line items of revenues, expenses, gains, or losses?
In what level of detail should revenues and expenses be presented?
2. The presentation of contributions in the statement of activities
For many NFPs, contributions represent an essential funding source. The presentation of contributions in
the statement of activities can be involved, as discussed below.
Making the right determinations regarding contribution revenue
In the absence of a donor’s explicit stipulation or circumstances surrounding the receipt
of a contribution that make clear the donor’s implicit restriction on use, contributions are
reported as unrestricted revenues or gains (unrestricted support), which increase
unrestricted net assets. The classification of contributions received as revenues or
gains depends on whether the transactions are part of the NFP’s ongoing major or
central activities (revenues), or are peripheral or incidental to the NFP (gains). Donor-
restricted contributions are reported as restricted revenues or gains (restricted support),
which increase temporarily restricted net assets or permanently restricted net assets
depending on the type of restriction. However, donor-restricted contributions whose
restrictions are met in the same reporting period may be reported as unrestricted
support provided that an NFP has a similar policy for reporting investment gains and
income, reports consistently from period to period, and discloses its accounting policy.
3. Exercise 7-6
Please answer the following question related to providing information about contributions.
Providing information about contributions
In the prior chart, we saw that donor-restricted contributions whose restrictions are met in the same
reporting period may be reported as unrestricted support provided that an NFP has a similar policy for
reporting investment gains and income, reports consistently from period to period, and discloses its
accounting policy. This option is sometimes referred to as the simultaneous release option. What
types of NFPs are most likely to use this option today?
B. Sequencing the statement of activities
FASB ASC 958-205-55-11 suggests three ways that items could be sequenced in the statement of
activities: (1) revenues and gains first, then expenses, then losses, reclassifications, which must be
shown separately, are reported with revenues and gains; (2) revenues, expenses, gains and losses, and
reclassifications shown last; and (3) certain revenues, less directly related expenses, followed by a
subtotal, then other revenues, other expenses, gains and losses, and reclassifications. Those items
could be arranged in other ways, and other subtotals may be included.
Unrestricted
Revenue
Gain
Restricted
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C. Including a measure of operations
As discussed below, currently NFPs have a good deal of flexibility when it comes to the presentation of
additional classifications within the statement of activities.
Financial statement flexibility
Classifying revenues, expenses, gains, and losses within classes of net assets
does not prevent incorporating additional classifications within a statement of
activities. For example, within a class or classes of changes in net assets, an
NFP may classify items as: (1) operating and nonoperating; (2) expendable and
nonexpendable; (3) earned and unearned; (4) recurring and nonrecurring; and
(5) in other ways.
Since terms such as operating income, operating profit, operating surplus, operating deficit, and results of
operations are used with different meanings, if an intermediate measure of operations (e.g., excess or
deficit of operating revenues over expenses) is reported, it is required to be in a financial statement that,
at a minimum, reports the change in unrestricted net assets for the period.
Some limitations on an NFP’s use of an intermediate measure of operations are imposed by certain
sections of the FASB ASC. If a subtotal such as income from operations is presented, it is required to
include: [1] an impairment loss recognized for a long-lived asset (asset group) to be held and used,
pursuant to FASB ASC 360; [2] costs associated with an exit or disposal activity that does not involve a
discontinued operation, pursuant to FASB ASC 420; [3] a gain or loss recognized on the sale of a long-
lived asset (disposal group) that is not a component of an entity, pursuant to FASB ASC 360.
If an NFP’s use of the term operations is not apparent from the details provided on the face of the
statement, a note to the financial statements is required to describe the nature of the reported measure of
operations or the items excluded from operations.
1. Exercise 7-7
Please answer the following questions.
Question: Answer:
NFP Z is considering including a measure of operations within
its statement of activities. The controller of NFP Z asks you
for some examples of activities that NFPs commonly include
in nonoperating activities. What are a couple of examples that
you have seen?
Can you name a sector of the NFP community where the
operating/nonoperating format is frequently seen in the
statement of activities?
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D. Reporting expenses by function
As we discussed in Chapter 6, to assist users in understanding an NFP’s service efforts (i.e., its mission
fulfillment), including the costs of its services and how it allocates its resources, the statement of activities
or the notes to the financial statements provide information about expenses reported by their functional
classification such as major classes of program services and supporting activities (e.g., management and
general, fundraising, and membership development).
1. Exercise 7-8
Please answer the following question.
Why wouldn’t you?
Currently, either the statement of activities or the notes to the financial statements will provide
information about expenses reported by their functional classification such as major classes of program
services and supporting activities. Most NFPs choose to do this on the face of the statement of
activities. However, some NFPs simply disclose functional expense information in the notes. Why
would an NFP choose to not provide functional expense information on the face of the
statement of activities?
E. Reclassifications of net assets
The term reclassification refers to the simultaneous increase of one class of net assets and decrease of
another, usually as a result of the release or lapsing of restrictions. Reclassifications are required to be
reported as separate items.
Reclassifications of net assets are required if any of the following events occur:
The NFP fulfills the purposes for which the net assets were restricted.
Donor-imposed restrictions expire with the passage of time or with the
death of a split-interest agreement beneficiary (if the net assets are not
otherwise restricted).
A donor withdraws, or court action removes, previously imposed
restrictions.
A donor imposes restrictions on otherwise unrestricted net assets. For
example, a donor may make a restricted contribution that is conditioned
on the NFP restricting a stated amount of its unrestricted net assets.
Such restrictions that are not reversible without donors’ consent result
in a reclassification of unrestricted net assets to restricted net assets.
Unrestricted Restricted
Unrestricted Restricted
Unrestricted Restricted
Unrestricted Restricted
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On some occasions, it may be difficult to determine when donor-imposed restrictions have expired. The
following provides additional guidance regarding the expiration of donor-imposed restrictions.
Expirations of donor-imposed restrictions
An NFP will recognize the expiration of a donor-imposed restriction on a contribution in the period
in which the restriction expires. A restriction expires when the stipulated time has elapsed, when
the stipulated purpose for which the resource was restricted has been fulfilled, or both. If two or
more temporary restrictions are imposed on a contribution, the effect of the expiration of those
restrictions will be recognized in the period in which the last remaining restriction has expired.
For example, a gift of a term endowment that is to be invested for four years will be recognized
as restricted support (revenue or gain) in the period it is received. In Year 4, when that term
endowment becomes unrestricted, a reclassification will be reported to reflect the decrease in
temporarily restricted net assets and the increase in unrestricted net assets. Accordingly, the
related effects of that time-restricted gift shall be reported in the period of receipt as well as the
period in which the nature of the restriction changes.
If an expense is incurred for a purpose for which both unrestricted and temporarily restricted net
assets are available, a donor-imposed restriction is fulfilled to the extent of the expense incurred
unless the expense is for a purpose that is directly attributable to another specific external source
of revenue. Temporarily restricted net assets with time restrictions are not available to support
expenses until the time restrictions have expired.
When a donor does not specify a time period over which a donated long-lived asset must be used,
FASB ASC 958-605-45-6 states that an NFP can elect a policy to imply a time restriction that
expires over the useful life of the donated long-lived assets. If an NFP adopts a policy of implying
time restrictions, it will also imply a time restriction on long-lived assets acquired with gifts of cash
or other assets restricted for those acquisitions. If time restrictions are implied on gifts of long-
lived assets, those implied time restrictions expire as the economic benefits of the acquired assets
are used up (i.e., over their estimated useful lives). In the absence of donor stipulations specifying
how long donated assets must be used or an NFP’s policy of implying time restrictions, restrictions
on long-lived assets, if any, or cash to acquire long-lived assets expire when the assets are placed
in service.
1. Exercise 7-9
Please review and complete the below.
In the below, try to list three auditing procedures that may be employed to test the presentation and disclosure of net assets in the financial statements:
1
2
3
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F. Gross versus net reporting in the statement of activities
As we discussed in Chapter 5, to assist in explaining the relationships of an NFP’s ongoing major or
central operations and activities, a statement of activities reports the gross amounts of revenues and
expenses. However, investment revenues may be reported net of related expenses, such as custodial
fees and internal and external investment advisory costs, provided that the amount of the expenses is
disclosed either on the face of the statement of activities or in notes to the financial statements.
Net reporting
The statement of activities may report gains and losses as net amounts
if they result from peripheral or incidental transactions or from other
events and circumstances that may be largely beyond the control of the
NFP and its management.
The frequency of the events and the significance of the gross
revenues and expenses distinguish major or central events from
peripheral or incidental events.
As discussed above, the frequency of the events and the significance of the gross revenues and
expenses distinguish major or central events from peripheral or incidental events. Events are ongoing
major or central activities if they are normally part of an NFP’s strategy and it normally carries on such
activities or if the event’s gross revenues or expenses are significant in relation to the NFP’s annual
budget. Events are peripheral or incidental if they are not an integral part of an NFP’s usual activities or if
their gross revenues or expenses are not significant in relation to the NFP’s annual budget. Thus, similar
events may be reported differently by different NFPs based on the NFP’s overall activities.
Special events
Remember as we discussed in Chapter 5, an NFP may report net
amounts for its special events if they result from peripheral or incidental
transactions. However, special events often are ongoing major
activities; if so, an NFP will report the gross revenues and expenses of
those activities. Costs netted against receipts from peripheral or
incidental special events will be limited to direct costs.
1. Exercise 7-10
Earlier in this chapter, we discussed that expenses should be reported as decreases in unrestricted net
assets. In this section, we discussed that a statement of activities may report gains and losses as net
amounts if they result from peripheral or incidental transactions or from other events and circumstances
that may be largely beyond the control of the NFP and its management. Based on this information,
answer the question on the following page.
I believe this is largely beyond your control.
Special event
Well, this is kind of special...
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Reporting bad debt losses
FASB ASC 958-310-35-7 discusses that if the fair value of a contribution receivable decreases because
of changes in the quantity or nature of assets expected to be received, the decrease is required to be
recognized in the period(s) in which the expectation changes. That decrease is required to be reported
as an expense or loss (bad debt) in accordance with paragraph 958-310-45-3. May bad debt losses
be netted against contribution revenue?
G. Key disclosures related to the statement of activities
The following chart discusses several key disclosure requirements related to the statement of activities.
NFPs have several disclosure requirements related to the statement of activities including:
As discussed earlier, if an NFP’s use of the term operations is not apparent from the details
provided on the face of the statement, a note to the financial statements is required to describe the
nature of the reported measure of operations or the items excluded from operations.
As discussed earlier, an NFP is required to disclose the amount of investment-related expenses,
such as custodial fees and investment advisory fees, netted against investment revenues if that
amount is not disclosed on the face of the statement of activities.
H. Statement of activities examples
This section includes a couple of example statements of activities (excluding footnotes).
1. The single-column format
The following is an illustrative statement of activities which reports information in a single column. The
single-column format is also called the pancake approach (as the presentation stacks the levels of net
assets). In the author’s experience, the single-column format is used less frequently than the multi-
column format that we will look at in a moment.
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NFP Y Statement of Activities
Year Ended September 30, 2016
Changes in unrestricted net assets:
Revenues and gains:
Contributions $145,368
Fees 4,546
Income on long-term investments 15,102
Other investment income 7,055
Net unrealized and realized gains on long-term investments 41,024
Other 2,026
Total unrestricted revenues and gains $215,121
Net assets released from restrictions:
Satisfaction of program restrictions 31,058
Expiration of time restrictions 15,012
Total net assets released from restrictions 46,070
Total unrestricted revenues, gains, and other support 261,191
Expenses:
Program Alpha 97,068
Program Beta 83,012
Management and general 35,013
Fundraising 27,884
Total expenses 242,977
Increase in unrestricted net assets 18,214
Changes in temporarily restricted net assets:
Contributions 38,775
Income on long-term investments 17,522
Net unrealized and realized gains on long-term investments 21,073
Net assets released from restrictions (46,070)
Increase in temporarily restricted net assets 31,300
Changes in permanently restricted net assets:
Contributions 18,001
Income on long-term investments 10,012
Net unrealized and realized gains on long-term investments 15,063
Increase in permanently restricted net assets 43,076
Increase in net assets 92,590
Net assets at beginning of year 501,190
Net assets at end of year $593,780
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2. The multi-column format
The following is an illustrative statement of activities which reports information in a columnar format with a
column for each class of net assets and an optional total column. This format is normally seen more
frequently than the single-column format. Sometimes, NFPs will also add a total only column with prior
year information or perhaps present a full prior year statement on a separate page.
NFP Y Statement of Activities
Year Ended September 30, 2016
Unrestricted
Temporarily Restricted
Permanently Restricted Total
Revenues, gains, and other support:
Contributions $145,368 $38,775 $18,001 $202,144
Fees 4,546 4,546
Income on long-term investments 15,102 17,522 10,012 42,636
Other investment income 7,055 7,055
Net unrealized and realized gains on long-term investments
41,024
21,073
15,063
77,160
Other 2,026 2,026
Net assets released from restrictions:
Satisfaction of program restrictions 31,058 (31,058)
Expiration of time restrictions 15,012 (15,012)
Total revenues, gains, and other support 261,191 31,300 43,076 335,567
Expenses:
Program Alpha 97,068 97,068
Program Beta 83,012 83,012
Management and general 35,013 35,013
Fundraising 27,884 27,884
Total expenses 242,977 242,977
Change in net assets 18,214 31,300 43,076 92,590
Net assets at beginning of year 200,417 100,297 200,476 501,190
Net assets at end of year $218,631 $131,597 $243,552 $593,780
3. Exercise 7-11
In this section of the course, we have seen illustrations of both the single-column and multi-column
formats for the statement of activities. In the below, list some advantages to each format.
Advantages to using the single-column format include:
Advantages to using the multi-column format include:
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IV. The statement of cash flows
A statement of cash flows reports the cash effects during a period of an NFP’s operations, its investing
transactions, and its financing transactions. It also provides for a reconciliation of the change in net
assets and net cash flow from operating activities. To achieve this, the statement of cash flows is
required to report certain items as illustrated in the following chart.
The statement of cash flows is required to report all of the following amounts for the period:
The change in net assets
Net increase (decrease) in cash and cash equivalents
Net cash provided (used) by operating activities
Cash and cash equivalents at the beginning of the year
Net cash provided (used) by investing activities
Cash and cash equivalents at the end of the year
Net cash provided (used) by financing activities
In the following sections, we will look at key aspects of an NFP’s statement of cash flows and how items
are portrayed on the statement.
A. Cash and cash equivalents
A statement of cash flows explains the change during the period in cash and cash equivalents. The
statement uses descriptive terms such as cash or cash and cash equivalents rather than ambiguous
terms such as funds. The total amounts of cash and cash equivalents at the beginning and end of the
period shown in the statement of cash flows are required to be the same amounts as similarly titled line
items or subtotals shown in the statements of financial position as of those dates.
What is a cash equivalent?
FASB ASC 230-10-20 provides that cash equivalents are short-term, highly liquid investments that have
both of the following characteristics: (1) readily convertible to known amounts of cash; and (2) so near
their maturity that they present insignificant risk of changes in value because of changes in interest
rates.
Generally, only investments with original maturities of three months or less qualify under the above
definition. Original maturity means original maturity to the entity holding the investment. For example,
both a three-month U.S. Treasury bill and a three-year U.S. Treasury note purchased three months from
maturity qualify as cash equivalents. However, a Treasury note purchased three years ago does not
become a cash equivalent when its remaining maturity is three months. Examples of items commonly
considered to be cash equivalents are Treasury bills, commercial paper, and money market funds.
Not all assets of NFPs that meet the definition of cash equivalents are cash equivalents for purposes of
preparing statements of financial position and cash flows. Restrictions can prevent them from being
included as cash equivalents even if they otherwise qualify. For instance, short-term highly liquid
investments are not cash equivalents if they are purchased with resources that have donor-imposed
restrictions that limit their use to long-term investment.
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$
$
$
$
$
$
$
$
$
$
$
$
$
Cash received with a donor-imposed restriction that limits its use to long-term purposes
FASB ASC 958-210-45-6 discusses that cash received with a donor-imposed restriction that limits
its use to long-term purposes should not be classified with cash that is unrestricted and available for
current use on a statement of financial position. Thus, when an NFP reports cash received (or cash
receipts from the sale of donated financial assets that upon receipt were directed without any NFP-
imposed limitations for sale and were converted nearly immediately into cash) with a donor-imposed
restriction that limits its use to long-term purposes an adjustment is necessary for the statement of
cash flows to reconcile beginning and ending cash and cash equivalents. For example, in
accordance with FASB ASC 230, such a cash receipt that is restricted for the purchase of
equipment is required to be reported as a cash flow from financing activities (using a caption such
as contributions restricted for purchasing equipment), and it is required to be simultaneously
reported as a cash outflow from investing activities (using a caption such as purchase of assets
restricted to investment in property and equipment or, if the equipment was purchased in the same
period, purchase of equipment). An adjustment to reconcile the change in net assets to net cash
used or provided by operating activities would also be needed if the contributed asset is not
classified as cash or cash equivalents on the statement of financial position. When the equipment is
purchased in a subsequent period, both the proceeds from the sale of assets restricted to
investment in the equipment and the purchase of the equipment is reported as cash flows from
investing activities.
Note. As seen in the above, when an NFP reports cash received (or cash receipts from the sale of
donated financial assets that upon receipt were directed without any NFP-imposed limitations for
sale and were converted nearly immediately into cash) with a donor-imposed restriction that limits its
use to long-term purposes an adjustment is necessary for the statement of cash flows to reconcile
beginning and ending cash and cash equivalents. The bolded text in the prior sentence represents
somewhat recent guidance that the FASB issued related to NFPs in the form of ASU No. 2012-05. In
October 2012, the FASB issued ASU No. 2012-05, Not-for-Profit Entities: Classification of the Sale
Proceeds of Donated Financial Assets in the Statement of Cash Flows. ASU No. 2012-05 requires an
NFP to classify cash receipts from the sale of donated financial assets consistently with cash donations
received in the statement of cash flows if those cash receipts were from the sale of donated financial
assets that upon receipt were directed without any NFP-imposed limitations for sale2 and were converted
nearly immediately3 into cash. Thus, the cash receipts from the sale of those financial assets should be
classified as cash inflows from operating activities, unless the donor restricted the use of the contributed
resources to long-term purposes, in which case those cash receipts should be classified as cash flows
from financing activities. Otherwise, cash receipts from the sale of donated financial assets should be
classified as cash flows from investing activities by the NFP. ASU No. 2012-05 became effective for
years beginning after June 15, 2013.
2 A limit order is the example of an NFP-imposed limitation provided in the Basis for Conclusions to ASU No. 2012-05. For
example, a limit order on the sale of donated securities would be indicative of an investing decision. Such a limitation should result in an investing cash flows classification for the related proceeds.
3 The Basis for Conclusions to ASU No. 2012-05 discusses that nearly immediately should generally be considered to be within days rather than months, and should be interpreted to be the same regardless of the type of financial asset being sold.
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B. Cash flows from operating, investing, and financing activities
A statement of cash flows classifies and reports cash receipts and cash payments as resulting from
operating, investing, or financing activities.
What are operating, investing, and financing activities?
Operating activities
Operating activities include all
transactions and other events
that are not defined as investing
or financing activities. Operating
activities generally involve
producing and delivering goods
and providing services. Cash
flows from operating activities
are generally the cash effects of
transactions and other events
that enter into the determination
of change in net assets.
Investing activities
Investing activities include making and
collecting loans and acquiring and
disposing of debt or equity instruments
and property, plant, and equipment and
other productive assets, that is, assets
held for or used in the production of
goods or services by the entity (other
than materials that are part of the entity’s
inventory). Investing activities exclude
acquiring and disposing of certain loans
or other debt or equity instruments that
are acquired specifically for resale.
Financing activities
Financing activities include
receiving restricted resources
that by donor stipulation must
be used for long-term
purposes; borrowing money
and repaying amounts
borrowed, or otherwise
settling the obligation; and
obtaining and paying for
other resources obtained
from creditors on long-term
credit.
When classifying and reporting cash receipts and cash payments for an NFP, FASB ASC 958-230
provides additional guidance related to agency transactions and collections.
Agency transactions
Cash received and paid in agency transactions should be
reported as cash flows from operating activities in a
statement of cash flows. If the statement of cash flows is
presented using the indirect method, cash received and
paid in such transactions is permitted to be reported either
gross or net.
Collections
Cash flows from purchases, sales, and
insurance recoveries of unrecognized,
noncapitalized collection items should be
reported as investing activities in a
statement of cash flows.
$
$
$ $
$
$ $ $ $ $
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1. Exercise 7-12
Please review and complete the below.
Cash collected on contributions receivable.
Cash received from service recipients.
Cash paid to lenders and other creditors for interest.
Cash received from contributions and investment income
that by donor stipulation are restricted for the purposes of
acquiring, constructing, or improving property, plant,
equipment, or other long-lived assets or establishing or
increasing a permanent endowment or term endowment.
Cash received from the sale of investments.
Cash paid to acquire investments.
Financing Activities
Operating
Activities
Investing Activities
Cash paid on long-term debt and notes payable.
In the left column below are examples of cash inflows and outflows. Draw a line to connect the
cash inflows and outflows to the statement of cash flows classification they generally belong to
in the right column.
Cash paid for annuity obligations.
Cash received from contributors.
Cash paid to employees and suppliers.
Cash paid to grantees.
Cash paid to purchase equipment.
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C. Reconciling the change in net assets to cash flow from operating activities
The statement of cash flows provides a reconciliation of the change in total net assets and net cash flow
from operating activities. NFPs may use either the direct or indirect method of reporting cash flows from
operating activities in a statement of cash flows.
D. Key disclosures related to the statement of cash flows
The following chart discusses several key disclosure requirements related to the statement of cash flows.
NFPs have several disclosure requirements related to the statement of cash flows including:
An NFP should disclose its noncash investing and financing activities.
If the indirect method is used, amounts of interest paid (net of amounts capitalized) and income
taxes paid during the period are required to be disclosed.
An NFP should disclose its policy for determining which items are treated as cash equivalents.
1. Exercise 7-13
Please review and complete the below.
Noncash investing and financing activities
An NFP is required to disclose its noncash investing and financing activities. What are three
examples of noncash investing and financing activities that an NFP may have?
E. Statement of cash flows examples
The following pages include two example statements of cash flows (excluding footnotes).
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1. The direct method
The following is an illustrative statement of cash flows which utilizes the rarely used direct method.
NFP E Statement of Cash Flows for the Year Ended June 30, 2016
Cash flows from operating activities:
Cash received from contributors $117,298
Cash received from service recipients 41,995
Cash collected on contributions receivable 27,026
Interest and dividends received 9,254
Interest paid (4,123)
Cash paid to employees and suppliers (171,289)
Grants paid (5,999)
Net cash provided by operating activities 14,162
Cash flows from investing activities:
Purchase of equipment (7,025)
Proceeds from sale of investments 22,074
Purchase of investments (27,568)
Net cash used by investing activities (12,519)
Cash flows from financing activities:
Proceeds from contributions restricted for:
Investment in endowment 4,321
Investment in land 8,784
Other financing activities:
Interest and dividends restricted for reinvestment 6,156
Payments on notes payable (4,995)
Net cash provided by financing activities 14,266
Net increase in cash and cash equivalents 15,909
Cash and cash equivalents at beginning of year 7,548
Cash and cash equivalents at end of year $23,457
Reconciliation of change in net assets to net cash provided by operating activities:
Change in net assets $37,033
Adjustments to reconcile change in net assets to net cash provided by operating activities:
Depreciation 7,699
Increase in accounts and interest receivable (1,444)
Increase in inventories and prepaid expenses (2,002)
Increase in contributions receivable (4,777)
Decrease in accounts payable (548)
Decrease in grants payable (887)
Contributions restricted for long-term investment (14,002)
Interest and dividends restricted for long-term investment (6,156)
Net unrealized and realized gains on long-term investments (754)
Net cash provided by operating activities $14,162
Supplemental data for noncash investing and financing activities:
Gift of land $10,000
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2. The indirect method
The following is an illustrative statement of cash flows which utilizes the frequently used indirect method.
NFP E Statement of Cash Flows for the Year Ended June 30, 2016
Cash flows from operating activities:
Change in net assets $37,033
Adjustments to reconcile change in net assets to net cash provided by operating activities:
Depreciation 7,699
Increase in accounts and interest receivable (1,444)
Increase in inventories and prepaid expenses (2,002)
Increase in contributions receivable (4,777)
Decrease in accounts payable (548)
Decrease in grants payable (887)
Contributions restricted for long-term investment (14,002)
Interest and dividends restricted for long-term investment (6,156)
Net unrealized and realized gains on long-term investments (754)
Net cash provided by operating activities 14,162
Cash flows from investing activities:
Purchase of equipment (7,025)
Proceeds from sale of investments 22,074
Purchase of investments (27,568)
Net cash used by investing activities (12,519)
Cash flows from financing activities:
Proceeds from contributions restricted for:
Investment in endowment 4,321
Investment in land 8,784
Other financing activities:
Interest and dividends restricted for reinvestment 6,156
Payments on notes payable (4,995)
Net cash provided by financing activities 14,266
Net increase in cash and cash equivalents 15,909
Cash and cash equivalents at beginning of year 7,548
Cash and cash equivalents at end of year $23,457
Supplemental data:
Noncash investing and financing activities:
Gift of land $10,000
Interest paid 4,123
3. Exercise 7-14
Please review and complete the below.
A common error in the statement of cash flows
A common error seen in statements of cash flows is getting the wording and brackets wrong when
saying “increase in” or “decrease in” particularly when using a statement of cash flows template from
the prior year. Do you have any suggestions to prevent this problem?
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V. The statement of functional expenses
The statement of functional expenses is an additional financial statement that voluntary health and
welfare entities are required to present. The statement of functional expenses provides information about
the functional and natural classification of expenses. It should be noted that other NFPs are encouraged,
but not required, to provide information about expenses by their natural classification. The rationale for
why all NFPs are not required to prepare a statement of functional expenses is found in the Basis for
Conclusions to FASB No. 117 which stated that “The Board agrees that information about expenses by
natural classification often is useful and encourages NFPs to provide that information. However, it also
believes that information about expenses by natural classification may not be essential in understanding
the service efforts of all NFPs or in assessing the ability of all organizations to continue to provide
services.”
A. A financial statement with an unusual history
The genesis of the statement of functional expenses dates back prior to the issuance of FASB No. 117.
Prior to FASB No. 117, NFPs frequently looked at four different AICPA publications4 to find financial
reporting guidance. NFPs would select the AICPA publication that most appropriately matched their
organization and follow that guidance. The AICPA publication for voluntary health and welfare entities
required those NFPs to provide a statement that reported expenses by their functional and natural
classifications in a matrix format (i.e., the statement of functional expenses). When the FASB developed
FASB No. 117 it retained this requirement for voluntary health and welfare entities but decided against
extending this requirement to other types of NFPs. In the Basis for Conclusions to FASB No. 117, the
FASB stated that they would study whether the requirement should be extended to other NFPs.
However, the issue remained dormant in the intervening years until resurfacing in the FASB’s Financial
Statements of Not-for-Profit Entities project which we will discuss in Chapter 8.
B. What is a voluntary health and welfare entity?
Per FASB ASC 958-205-45-4 voluntary health and welfare entities are required to provide a statement of
functional expenses. So, it is important to understand which types of NFPs are voluntary health and
welfare entities as described in the following chart.
What is a voluntary health and welfare entity?
A voluntary health and welfare entity is defined as an NFP that is formed for the purpose of performing
voluntary services for various segments of society and that is tax exempt (organized for the benefit of
the public), supported by the public, and operated on a not-for-profit basis. Most voluntary health and
welfare entities concentrate their efforts and expend their resources in an attempt to solve health and
welfare problems of our society and, in many cases, those of specific individuals. As a group,
voluntary health and welfare entities include those NFPs that derive their revenue primarily from
voluntary contributions from the general public to be used for general or specific purposes
connected with health, welfare, or community services. For purposes of this definition, the general
public excludes governmental entities when determining whether an NFP is a voluntary health and
welfare entity.
4 The four AICPA publications being: (1) Audits of Colleges and Universities; (2) Audits of Voluntary Health and Welfare
Organizations; (3) SOP 78-10, Accounting Principles and Reporting Practices for Certain Nonprofit Organizations; and (4) Audits of Providers of Health Care Services.
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1. Exercise 7-15
Please answer the following question related to voluntary health and welfare entities.
Voluntary health and welfare entities
Can you name a few examples of voluntary health and welfare entities?
C. The matrix format for the statement of functional expenses
The statement of functional expenses uses a matrix format to report information about expenses by their
functional classes (e.g., major classes of program services and supporting activities) as well as
information about expenses by their natural classification (e.g., salaries, rent, electricity, interest expense,
depreciation, awards and grants to others, and professional fees). The following illustrates the key
elements that make up the matrix format.
Key elements of the matrix format
Supporting activities are all activities of an NFP other than program services. Generally, they include: (1) management and general activities; (2) fundraising activities; and (3) membership development activities.
Management and general activities are activities that are not identifiable with a single program, fundraising activity, or membership development activity but that are indispensable to the conduct of those activities and to an entity’s existence.
Program services are the activities that result in goods and services being distributed to beneficiaries, customers, or members that fulfill the purposes or mission for which the NFP exists. Those services are the major purpose for and the major output of the NFP and often relate to several major programs.
Program Services Supporting Services
Program
Alpha Program
Beta
Management and General Fundraising
Membership Development
Total Program and Supporting
Services
Salaries $X $X $X $X $X $X
Rent X X X X X X
Electricity X X X X X X
Interest expense X X X X X X
Depreciation X X X X X X
Awards and grants to others X X X X X X
Professional fees X X X X X X
Total Expenses $X $X $X $X $X $X
Fundraising activities are activities undertaken to induce potential donors to contribute money, securities, services, materials, facilities, other assets, or time.
Membership development activities include soliciting for prospective members and membership dues, membership relations, and similar activities. However, if there are no significant benefits or duties connected with membership, the substance of membership development activities may, in fact, be fundraising.
Expenses by their natural classification
Expenses by their functional classification
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The FASB ASC discusses that to the extent that expenses are reported by other than their natural
classification (e.g., salaries included in cost of goods sold or facility rental costs of special events reported
as direct benefits to donors) they are required to be reported by their natural classification if a statement
of functional expenses is presented. As an example, salaries, wages, and fringe benefits that are
included as part of the cost of goods sold on the statement of activities are required to be included with
other salaries, wages, and fringe benefits in the statement of functional expenses. Furthermore,
expenses that are netted against investment revenues are required to be reported by their functional
classification on the statement of functional expenses (if the NFP presents that statement).
1. Exercise 7-16
Please review the below question and provide an answer in the space provided.
Types of functional classifications
In this section we discussed the functional classifications of program services, management and
general activities, fundraising activities, and membership development activities. Are these the only
possible functional classifications in the statement of functional expenses?
D. Statement of functional expenses example
This section includes an example statement of functional expenses (excluding footnotes).
NFP J Statement of Functional Expenses
Year Ended October 31, 2016
Program Services Supporting Services
Elderly
Services Youth
Services Community
Services Management and General Fundraising
Total Program and Supporting
Services
Salaries $40,123 $31,658 $27,858 $12,089 $17,997 $129,725
Employee benefits 4,851 3,658 3,555 2,568 3,425 18,057
Awards and grants 15,012 4,056 7,058 - - 26,126
Professional fees 4,078 2,568 3,698 5,565 2,179 18,088
Supplies 4,514 3,656 2,999 4,121 3,668 18,958
Depreciation 3,500 2,100 2,050 1,021 997 9,668
Utilities 2,568 1,875 1,989 798 678 7,908
Travel 1,798 1,568 958 1,023 2,023 7,370
Interest expense 1,523 758 459 878 754 4,372
Total Expenses $77,967 $51,897 $50,624 $28,063 $31,721 $240,272
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VI. Suggested solutions to exercises
This section contains the suggested solutions to the exercises presented in the chapter.
A. Suggested solution to Exercise 7-1
Providing information about an NFP’s liquidity
In the prior chart we saw that NFPs currently have three methods of providing information about their
liquidity. The second method involves classifying assets and liabilities as current and noncurrent (i.e.,
presenting a classified statement of financial position). In the author’s experience, most NFPs do not
elect this method today. Why do many NFPs not use this method today?
There really are two drawbacks to presenting a classified statement of financial position. The first is
that to some degree you are doubling the lines on the statement for items like current and noncurrent
contributions receivable which to some degree can clutter the presentation of the statement. The
second drawback is that for some items, the classification of current or noncurrent is either difficult or
not meaningful. For example, certain investments may be classified as noncurrent. However, those
same investments could potentially be liquidated rather quickly to satisfy a current liability. For those
reasons, many NFPs elect to not present a classified statement. Those that do classify tend to be
those NFPs required by either the FASB (i.e., an NFP business-oriented health care entity) or perhaps
a funding source to present classification.
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B. Suggested solution to Exercise 7-2
Issues and answers related to liquidity
Issue: Answer:
1
NFP A sequences assets and liabilities in the statement
of financial position based on their relative liquidity. At
year end, NFP A has cash and cash equivalents related
to permanent endowment funds which are being held
temporarily until suitable long-term investment
opportunities are identified. Where should these cash
and cash equivalents be reported in the statement of
financial position?
The cash and cash equivalents of
permanent endowment funds held
temporarily until suitable long-term
investment opportunities are identified
should be included in the classification
long-term investments.
2
NFP B sequences assets and liabilities in the statement
of financial position based on their relative liquidity. At
year end, NFP B has cash and contribution receivables
restricted by donors to investment in land, buildings,
and equipment that are not included with the line items
cash and cash equivalents or contributions receivable.
Where should these cash and contribution receivables
be reported in the statement of financial position?
The cash and contribution receivables
should be reported as assets restricted
to investment in land, buildings, and
equipment. They should be sequenced
closer to land, buildings, and equipment
in the statement of financial position.
3
NFP C classifies assets and liabilities as current and
noncurrent in the statement of financial position. At
year end NFP C has cash that is designated for
expenditure in the acquisition or construction of
noncurrent assets. Should the cash be classified as a
current asset in the statement of financial position?
FASB ASC 210-10-45-4 states that the
concept of the nature of current assets
contemplates the exclusion from that
classification of such resources as cash
that is designated for expenditure in the
acquisition or construction of
noncurrent assets.
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C. Suggested solution to Exercise 7-3
True or False
1
In today’s environment, the vast
majority of NFPs present some level
of additional disaggregation within the
three classifications of net assets in
the statement of financial position.
False. While a good number of NFPs certainly do present
some level of disaggregation, the author’s experience is
that the majority just present three lines (i.e., permanently
restricted, temporarily restricted, and unrestricted net
assets). If some level of disaggregation is presented, it is
normally presented in the unrestricted class as the board
wants to convey how they intend to use unrestricted
amounts.
2
The FASB has historically believed
that information about a minimum of
three classes of net assets, based on
the presence or absence of donor-
imposed restrictions and their nature,
generally is necessary to gain an
adequate understanding of the
financial position of an NFP.
True. In the Basis for Conclusions to FASB No. 117 the
FASB concluded that “information about a minimum of
three classes of net assets, based on the presence or
absence of donor-imposed restrictions and their nature,
generally is necessary to gain an adequate understanding
of the financial position of an NFP, including its financial
flexibility and ability to continue to render services.”
D. Suggested solution to Exercise 7-4
FASB ASC 958 encourages the use of the terms unrestricted, temporarily restricted, and permanently
restricted net assets; however, other labels exist. For example, equity may be used for net assets, and
other or not donor-restricted may be used with care to distinguish unrestricted net assets from the
temporarily and permanently restricted classes of net assets. The net asset section format shown in
Exercise 7-4 is actually an example from the Implementation Guidance and Illustrations section of FASB
ASC 958 (see FASB ASC 958-210-55-3).
At a minimum, FASB ASC 958-210-45-1 requires that the amounts for each of the three classes of net
assets (i.e., unrestricted net assets, temporarily restricted net assets, and permanently restricted net
assets) and the total of net assets be reported in a statement of financial position. The captions used to
describe those amounts must correspond with their meanings.
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E. Suggested solution to Exercise 7-5
Are entitywide totals required for individual line items of revenues, expenses, gains, or losses?
No, entitywide totals are not necessary for
individual line items of revenues, expenses, gains,
or losses. Information about reasonably
homogeneous components of revenues (e.g.,
unrestricted contributions available to support
current expenses and restricted contributions to be
used to acquire land and buildings) is typically more
useful than the aggregated total of those
components.
In what level of detail should revenues and expenses be presented?
Disaggregated information that permits users of
financial information to relate components of
revenues to components of expenses is often
preferable to information provided by their
aggregated amounts. Financial statement
preparers are generally the best able to make
judgments about the extent to which financial
statements or notes to financial statements
should provide disaggregated information about
various items of revenues or expenses.
F. Suggested solution to Exercise 7-6
Providing information about contributions
In the prior chart, we saw that donor-restricted contributions whose restrictions are met in the same
reporting period may be reported as unrestricted support provided that an NFP has a similar policy for
reporting investment gains and income, reports consistently from period to period, and discloses its
accounting policy. This option is sometimes referred to as the simultaneous release option. What
types of NFPs are most likely to use this option today?
In today’s environment, the use of the simultaneous release option is most commonly seen in the
college and university sector and in larger NFPs. In the author’s experience, most NFPs do not elect
the simultaneous release option. Some donors do not prefer this option as they cannot see all of the
temporarily restricted amounts that were met during the period. It really comes down to the NFP
selecting the approach that works best for its user base.
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G. Suggested solution to Exercise 7-7
Question: Answer:
NFP Z is considering including a
measure of operations within its
statement of activities. The controller
of NFP Z asks you for some
examples of activities that NFPs
commonly include in nonoperating
activities. What are a couple of
examples that you have seen?
Because of the flexibility permitted in the standards, there can
be many answers to this question. However, two of the more
frequently seen nonoperating activities are: (1) investment
gains or income in excess of the NFP’s spending policy [i.e.,
either you have a spending rate or some budgeted amount of
investment return and the difference between that number
and the actual return is presented as nonoperating]; and
(2) certain items related to capital assets [e.g., contributions
restricted for the acquisition of long-lived assets].
Can you name a sector of the
NFP community where the
operating/nonoperating format is
frequently seen in the statement
of activities?
One example of a sector within the NFP community where the
operating/nonoperating format is frequently seen is the
college and university sector.
H. Suggested solution to Exercise 7-8
Why wouldn’t you?
Currently, either the statement of activities or the notes to the financial statements will provide
information about expenses reported by their functional classification such as major classes of program
services and supporting activities. Most NFPs choose to do this on the face of the statement of
activities. However, some NFPs simply disclose functional expense information in the notes. Why
would an NFP choose to not provide functional expense information on the face of the statement
of activities?
Some NFPs, which operate more on fees for services they provide than contributions (e.g., an NFP
business-oriented health care entity), may feel that the statement of activities should emphasize
expenses by nature rather than function and thus present functional expense information in the notes.
For example, Baylor Health Care System (a large health care system in the southwestern United States)
operates primarily off of fees for medical services even to the extent that contributions are reported as
gains instead of revenues. Thus, the statement of activities for Baylor Health Care System (i.e., the
statement of operations and changes in net assets) emphasizes expenses by nature and functional
expense information is provided deep in the notes to the financial statements. Contrast this treatment to
St. Jude Children’s Research Hospital, Inc. which relies heavily on contribution revenue and thus
presents functional expense information on the face of the statement of activities.
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I. Suggested solution to Exercise 7-9
In the below, try to list three auditing procedures that may be employed to test the presentation and disclosure of net assets in the financial statements:
1 Reviewing the minutes of the governing board and governing board committee meetings for
evidence of donor restrictions.
2 Determining compliance with donor restrictions and testing expenditures to determine that
restricted net assets are used for their restricted purposes.
3 Determining that appropriate reclassifications are reported in the statement of activities when
donor-imposed restrictions have been fulfilled.
J. Suggested solution to Exercise 7-10
Reporting bad debt losses
FASB ASC 958-310-35-7 discusses that if the fair value of a contribution receivable decreases
because of changes in the quantity or nature of assets expected to be received, the decrease is
required to be recognized in the period(s) in which the expectation changes. That decrease is
required to be reported as an expense or loss (bad debt) in accordance with paragraph 958-310-45-3.
May bad debt losses be netted against contribution revenue?
No. Since losses are permitted to be netted only against gains, and not against revenues, bad debt
losses cannot be netted against contribution revenue. Per FASB ASC 958-310-45-3 decreases
recognized under paragraph 958-310-35-7 are required to be reported as expenses or losses (bad
debt) in the net asset class in which the net assets are represented. Because all expenses are
reported in the unrestricted net asset class, those decreases are reported as losses if they are
decreases in temporarily restricted net assets or permanently restricted net assets.
K. Suggested solution to Exercise 7-11
Advantages to using the single-column format include:
The single-column format provides for a more
straightforward presentation of multi-year
comparative information than the multi-column
format does.
Advantages to using the multi-column format include:
The multi-column format makes it clear that the
effects of expirations on donor restrictions result in
reclassifications between classes of net assets
and do not change total net assets. The multi-
column format also assists in the presentation of
aggregated information about contributions and
investment income for the entity as a whole.
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L. Suggested solution to Exercise 7-12
Cash collected on contributions receivable.
Cash received from service recipients.
Cash paid to lenders and other creditors for interest.
Cash received from contributions and investment income
that by donor stipulation are restricted for the purposes of
acquiring, constructing, or improving property, plant,
equipment, or other long-lived assets or establishing or
increasing a permanent endowment or term endowment.
Cash received from the sale of investments.
Cash paid to acquire investments.
Financing Activities
Operating
Activities
Investing Activities
Cash paid on long-term debt and notes payable.
Cash paid for annuity obligations.
Cash received from contributors.
Cash paid to employees and suppliers.
Cash paid to grantees.
Cash paid to purchase equipment.
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M. Suggested solution to Exercise 7-13
Noncash investing and financing activities
An NFP is required to disclose its noncash investing and financing activities. What are three
examples of noncash investing and financing activities that an NFP may have?
Three examples of noncash investing and financing activities are: (1) receiving contributions of
buildings and equipment; (2) receiving contributions of securities; and (3) receiving contributions of
recognized collection items.
N. Suggested solution to Exercise 7-14
A common error in the statement of cash flows
A common error seen in statements of cash flows is getting the wording and brackets wrong when
saying “increase in” or “decrease in” particularly when using a statement of cash flows template from
the prior year. Do you have any suggestions to prevent this problem?
One suggestion to prevent this type of error is using the wording “changes in” instead of “increase in” or
“decrease in.”
O. Suggested solution to Exercise 7-15
Voluntary health and welfare entities
Can you name a few examples of voluntary health and welfare entities?
Examples of NFPs that may qualify as being voluntary health and welfare entities could include entites
such as: (1) The Salvation Army; (2) soup kitchens; (3) crisis centers; (4) United Way; (5) Boy Scouts &
Girl Scouts; (6) Boys & Girls Clubs; (7) The American Cancer Society; (8) The ALS Association; and
(9) The Leukemia & Lymphoma Society.
Note. NFPs that are not voluntary health and welfare entities are NFPs where: (1) the primary revenue
source comes from non-contribution revenues; or (2) the NFP’s activities are not focused on health,
welfare, or community services. In some cases, the determination of whether an NFP is or is not a
voluntary health and welfare entity may be difficult and in that scenario most would recommend
deciding that the NFP is a voluntary health and welfare entity.
P. Suggested solution to Exercise 7-16
Types of functional classifications
In this section we discussed the functional classifications of program services, management and
general activities, fundraising activities, and membership development activities. Are these the only
possible functional classifications in the statement of functional expenses?
Chapter 13 of the AICPA Not-for-Profit Entities Audit and Accounting Guide discusses that different
NFPs may have various kinds of functions. While the classifications of program, management and
general, and fundraising are the functions most commonly seen in practice other functional
classifications are possible. Consequently, the classifications used in the matrix may include program,
management and general, and fundraising or other classifications, such as cost of sales or investing.
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Financial Reporting Tomorrow
Learning objectives 1 I. Changes coming to NFP financial reporting 1
A. The who, what, and when of the changes coming to NFP financial reporting 2 B. Targeted changes in five key areas 2 C. Changes in the reporting of net assets 2
1. Reducing and renaming the classifications of net assets 3 2. Exercise 8-1 4 3. Emphasizing the amounts and purposes of board-designated net assets 4 4. Exercise 8-2 4 5. Reporting expirations of restrictions on gifts related to long-lived assets 5 6. Exercise 8-3 5 7. Exercise 8-4 6 8. Reporting amounts related to underwater endowment funds 6
D. Changes in the liquidity information provided 6 1. Exercise 8-5 8
E. A change related to the statement of cash flows 8 1. Look for more changes to be coming related to the statement of cash flows 9
F. A change related to presenting an operating measure 10 1. Exercise 8-6 11 2. Look for more changes to be coming related to presenting an operating measure(s) 11
G. Changes in the reporting of expenses 12 1. Changing how investment expenses are reported 12 2. Exercise 8-7 12 3. Providing additional information related to allocated costs 13 4. Refining/updating the definition of management and general activities 13 5. Adjusting how NFPs report functional and natural expense information 14 6. Exercise 8-8 16
H. Transitional provisions related to the new requirements 16 II. Suggested solutions to exercises 17
A. Suggested solution to Exercise 8-1 17 B. Suggested solution to Exercise 8-2 17 C. Suggested solution to Exercise 8-3 17 D. Suggested solution to Exercise 8-4 18 E. Suggested solution to Exercise 8-5 18 F. Suggested solution to Exercise 8-6 18 G. Suggested solution to Exercise 8-7 19 H. Suggested solution to Exercise 8-8 19
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Financial Reporting Tomorrow
Learning objectives
Upon completing this chapter, you will be able to:
Understand the background and status of the FASB’s Financial Statements
of Not-for-Profit Entities project; and
See how NFP financial reporting will be different in the future under the new
reporting requirements.
I. Changes coming to NFP financial reporting
When you look at a set of NFP financial statements today, they generally look the same as they did 20+
years ago (except for the note disclosures which are longer). This is true because for the most part, the
current NFP reporting requirements found in FASB ASC 958 come primarily from FASB No. 117,
Financial Statements of Not-for-Profit Organizations which was issued in 1993. However, back in 2011,
the FASB’s Not-for-Profit Advisory Committee (NAC) began a project to reexamine the existing standards
for financial statement presentation and determine whether they could be improved. In 2012, the NAC
provided several recommendations to the FASB for their consideration. The FASB subsequently began
deliberating on the Financial Statements of Not-for-Profit Entities project and issued an exposure draft in
April 2015. The comment period for the exposure draft ended in August 2015. As the FASB began
reviewing the comment letters on the exposure draft, they ran into difficulties with regard to two proposed
areas as discussed in the following.
Running into a few delays
When the FASB began reviewing the comment letters on the exposure draft related to
the Financial Statements of Not-for-Profit Entities project, it became apparent that a
couple of proposed changes were perhaps more controversial/complex than the FASB
originally thought. These two issues related to proposals that would have: (1) required
all NFPs to present two defined operating measures in their statement of activities; and
(2) changed the way certain items are classified within the statement of cash flows.
We will discuss both of these issues later in the chapter. However, the key point
is that the FASB plans to address these two issues in a separate (i.e., Phase 2)
project/standard which they may begin working on as early as the 2nd half of 2016.
The following chart discusses the status of the Financial Statements of Not-for-Profit Entities project.
The present status of the Financial Statements of Not-for-Profit Entities project
After the FASB decided to temporarily defer addressing the proposals related to requiring operating
measures and reclassifying items on the statement of cash flows, the FASB began its final deliberations
on the remaining issues in late 2015. During its deliberation process, the FASB periodically announced
its decisions on the remaining issues in the exposure draft. In this chapter, we will discuss those
decisions. As this course was written in April 2016, a final standard had not been issued. However, the
issuance of a final ASU was imminent. Please review the wording in the final ASU at the FASB website
(www.fasb.org) as sometimes minor changes can occur in the final wording of a standard.
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A. The who, what, and when of the changes coming to NFP financial reporting
The following chart discusses the who, what, and when of the changes coming from the Financial
Statements of Not-for-Profit Entities project.
The who, what, and when of the changes coming to NFP financial reporting
Who will be affected by the
changes?
The changes will affect substantially all NFPs (e.g., charities, foundations,
private colleges and universities, nongovernmental health care providers,
cultural institutions, religious organizations, trade associations, and others).
What standards will be affected
by the changes?
The changes will affect FASB ASC 958, Not-for-Profit Entities and FASB ASC
954, Health Care Entities.
When will the changes become
effective?
The new reporting requirements will be effective for annual financial
statements for years beginning after December 15, 2017. Early adoption is
allowed if the NFP adopts all the new requirements at the same time. Later in
this chapter, we will discuss certain transitional provisions related to the new
requirements.
B. Targeted changes in five key areas
As discussed below, NFP financial reporting in the future will change in five key areas.
The Financial Statements of Not-for-Profit Entities project targeted changes in five key areas
The reporting of net assets by NFPs;
The liquidity information provided by NFPs;
The statement of cash flows that some NFPs prepare (i.e., those that use the direct method);
The operating measure information provided by some NFPs; and
The reporting of expenses by NFPs.
C. Changes in the reporting of net assets
Net assets are essentially the equity portion of an NFP’s statement of financial position. In this section of
the course, we are going to review how the reporting of net assets in the future will be different from what
NFPs are doing today. There are four key areas of change coming in the reporting of net assets.
The four key areas of change coming in the reporting of net assets relate to…
1 Reducing and renaming the classifications of net assets;
2 Emphasizing the amounts and purposes of board-designated net assets;
3 Reporting expirations of restrictions on gifts related to long-lived assets; and
4 Reporting amounts related to underwater endowment funds.
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1. Reducing and renaming the classifications of net assets
The following chart discusses how the current classifications of net assets will be reduced and renamed
in the future.
Reducing and renaming the classifications of net assets
What the FASB requires NFPs to do today:
What the FASB will require NFPs to do tomorrow:
Currently, NFPs are required to present three classes
of net assets on the face of a statement of financial
position (i.e., unrestricted net assets, temporarily
restricted net assets, and permanently restricted net
assets).
In the future, NFPs will be required to
present two classes of net assets on the
face of a statement of financial position
(i.e., net assets without donor restrictions
and net assets with donor restrictions).
In looking at the above, it should be noted that NFPs will continue to report total net assets on the
statement of financial position. The FASB believes that users of NFP financial statements will find the
use of two net asset classes less confusing than three. The FASB also believes that the term net assets
without donor restrictions will be clearer to users than unrestricted net assets has been. The following
chart further illustrates the reducing and renaming of the classifications of net assets that will occur.
A further illustration of the reducing and renaming of the classifications of net assets
Today NFPs have three classifications of net assets:
Unrestricted net assets
Temporarily restricted net assets
Permanently restricted net assets
Tomorrow NFPs will have two classifications of net assets:
Net assets without donor restrictions (i.e., we are just renaming
unrestricted net assets)
Net assets with donor restrictions (i.e., we are just combining temporarily restricted net assets and permanently
restricted net assets)
While NFPs will only have two classifications of net assets in the future, they will still be providing relevant
information about the nature and amounts of donor restrictions on net assets as discussed in the below.
NFPs will continue to have disclosures related to restrictions on net assets
In the future, NFPs will continue to provide information about the nature and amounts of different types
of donor-imposed restrictions either by: (1) reporting their amounts on the face of the statement of
financial position; or (2) including relevant details in the notes to the financial statements. Separate line
items may be reported within net assets with donor restrictions or in notes to the financial statements to
distinguish between various types of donor-imposed restrictions, which include, for example, restrictions
related to: (1) support of particular operating activities; (2) use in a specified future period; (3) the
acquisition of long-lived assets; (4) investment for a specified term; (5) the creation of a donor-
restricted endowment that is perpetual in nature; and (6) assets, like land or works of art, that are
donated with stipulations that they be used for a specified purpose, be preserved, and not be sold.
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2. Exercise 8-1
Please answer the following true or false question.
True or False
1 In the future, the statement of activities will report: (1) the change in net
assets with donor restrictions; (2) the change in net assets without donor
restrictions; and (3) the change in total net assets.
3. Emphasizing the amounts and purposes of board-designated net assets
Board-designated net assets are net assets without donor restrictions that are subject to self-imposed
limits by action of the governing board. Board-designated net assets may be earmarked for future
programs, investment, contingencies, purchase or construction of fixed assets, or other uses. In the
Financial Statements of Not-for-Profit Entities project the FASB determined that the amounts and
purposes of board-designated net assets should to be emphasized in either the financial statements or in
the notes as described in the following chart.
Emphasizing the amounts and purposes of board-designated net assets
What the FASB requires NFPs to do today:
What the FASB will require NFPs to do tomorrow:
Currently, NFPs are allowed but not required to
present information about board-designated net
assets on the face of the statement of financial
position or in the notes.
In the future, NFPs will be required to disclose
the amounts and purposes of board-designated
net assets either on the face of the statement of
financial position or in the notes.
The above change represents a fairly significant reversal in the FASB’s thought process regarding board-
designated net assets. For example, in the Basis for Conclusions to FASB No. 117, the FASB concluded
that information about board-designated net assets was not essential and that NFPs should be permitted
but not required to provide information about such designations. Note. NFPs have had and will continue
to have disclosures related to board-designated endowments.
4. Exercise 8-2
Please answer the following question related to board-designated net assets.
But I don’t want to change
NFP Z has always felt that the fewer lines on the financial statements and the fewer disclosures
the better. Historically, the board of directors of NFP Z has internally designated some amounts of
unrestricted net assets for certain programs and purchases of assets. However, NFP Z has not
disclosed those amounts on its financial statements or in the notes as it did not believe that the
information was useful to its financial statement users. In the future, NFP Z would prefer to just
show the net assets without donor restrictions classification and not break out board-designated
amounts on the face of the statement of financial position or in the notes. Do you have any ideas
for how NFP Z could do this?
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5. Reporting expirations of restrictions on gifts related to long-lived assets
Historically, NFPs have chosen either of two approaches (i.e., either the implied over time approach or
the placed in service approach) for the expiration of restrictions on capital assets where the donor has not
specified a time period over which the asset must be used. As discussed below, in the future the FASB is
eliminating the implied over time approach.
Reporting expirations of restrictions on gifts related to long-lived assets
What the FASB requires NFPs to do today:
What the FASB will require NFPs to do tomorrow:
Currently, when a donor does not specify a time period
over which a donated long-lived asset must be used,
FASB ASC 958-605-45-6 states that an NFP can elect a
policy to imply a time restriction that expires over the
useful life of the donated long-lived assets. If an NFP
adopts a policy of implying time restrictions, it will also
imply a time restriction on long-lived assets acquired with
gifts of cash or other assets restricted for those
acquisitions. If time restrictions are implied on gifts of
long-lived assets, those implied time restrictions expire as
the economic benefits of the acquired assets are used up
(i.e., over their estimated useful lives). In the absence of
donor stipulations specifying how long donated assets
must be used or an NFP’s policy of implying time
restrictions, restrictions on long-lived assets, if any, or
cash to acquire long-lived assets expire when the assets
are placed in service.
In the future, gifts of long-lived assets
received without stipulations about how
long or for what purpose the donated
asset must be used will be reported as
revenue without donor restrictions.
Long-lived assets acquired with gifts of
cash or other assets restricted for those
acquisitions will initially be reported as
donor-restricted support and released
from restrictions by reclassifying net
assets with donor restrictions to net
assets without donor restrictions when
the asset is placed in service unless the
donor also has placed a time or purpose
restriction on the use of the long-lived
asset.
6. Exercise 8-3
Please answer the following question related to reporting expirations of restrictions on gifts to be used for
long-lived assets.
But I don’t want to change (Part 2)
Historically, University A has elected to imply a time restriction on buildings acquired with gifts of cash
restricted to acquire those buildings when the donor did not specify a time period over which the
building must be used. University A has preferred this approach as it aligns the reclassification of net
assets with the depreciation expense on the buildings. Do you have an idea for how University A
could continue to align the reclassification of net assets with depreciation expense on future
gifts to construct buildings under the new requirements?
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7. Exercise 8-4
Please answer the following true or false question.
True or False
1
Currently, NFP business-oriented health care entities are already required
to use the placed in service approach related to long-lived assets. Thus,
in doing away with the option of implying time restrictions, the FASB is
putting all NFPs on the same page.
8. Reporting amounts related to underwater endowment funds
Underwater endowment funds are donor-restricted endowment funds for which the fair value of the fund
is less than either the original gift amount or the amount required to be maintained by the donor or law.
The FASB is making some changes related to underwater endowment funds as illustrated in the below.
Reporting amounts related to underwater endowment funds
What the FASB requires NFPs to do today:
What the FASB will require NFPs to do tomorrow:
Currently, NFPs present
the aggregate amount by
which endowments are
underwater in unrestricted
net assets. NFPs are also
required to disclose the
aggregate amount for
donor endowments that
are underwater.
In the future, the aggregate amount by which endowment funds are
underwater will be classified within net assets with donor restrictions
rather than net assets without donor restrictions. For endowment
funds that are underwater, NFPs will disclose: (1) the NFP’s policy to
either reduce expenditure or not spend from underwater endowment
funds; (2) the aggregate fair value; (3) the aggregate original
endowment gift amount or level required by donor stipulations or by
law to be maintained; and (4) the aggregate of the amount of the
deficiencies.
The following chart provides a simple illustration of how the new underwater endowment fund guidance
might play out for an entity.
An illustration of how the reporting for underwater endowment funds may change
NFP Z has a $1,000,000 endowment fund with a value of $980,000. Under current GAAP,
NFP Z would show $20,000 as a negative amount in unrestricted net assets and $1,000,000
in permanently restricted net assets related to the endowment fund. In the future, NFP Z
would show $980,000 in net assets with donor restrictions related to the endowment fund.
NFP Z would then have more extensive disclosures regarding the underwater amount.
D. Changes in the liquidity information provided
In this section we are going to review how in the future NFPs will provide more information regarding
liquidity than they do today. In the area of liquidity, the FASB wanted to have NFP financial reporting
provide additional information that would be useful in assessing: (1) how an NFP manages its liquid
resources available to meet cash needs for general expenditures; and (2) the availability of an NFP’s
financial assets at the balance sheet date to meet cash needs for general expenditures.
$
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In deliberating the Financial Statements of Not-for-Profit Entities project, it appeared early on that the
FASB was leaning towards requiring all NFPs to prepare a classified balance sheet as NFP business-
oriented health care entities do. Then, in the exposure document the FASB proposed a disclosure
requirement that was very specific and somewhat boilerplate which received mixed reviews. Ultimately,
the FASB decided to add a disclosure requirement that is a little more flexible than the disclosure
originally proposed as discussed below.
Providing additional liquidity information
What the FASB requires NFPs to do today:
What the FASB will require NFPs to do tomorrow:
Currently, NFPs are required to provide
information about liquidity by any of the
following: [1] sequencing assets according
to their nearness of conversion to cash
and sequencing liabilities according to the
nearness of their maturity and resulting
use of cash; [2] classifying assets and
liabilities as current and noncurrent (Note.
NFP business-oriented health care entities
are required to use this option); or
[3] disclosing in the notes to the financial
statements relevant information about the
liquidity or maturity of assets and liabilities,
including restrictions on the use of
particular assets.
In the future, NFPs will continue to provide the
information on the left. NFPs will also be required to
provide: [1] qualitative information in the notes that
communicates how an NFP manages its liquid
resources available to meet cash needs for general
expenditures within one year of the balance sheet date;
and [2] quantitative information either on the face of the
balance sheet or in the notes, and additional qualitative
information in the notes as necessary, that
communicates the availability of an NFP’s financial
assets at the balance sheet date to meet cash needs
for general expenditures within one year of the balance
sheet date. (Note. The availability of a financial asset
may be affected by its nature; external limits imposed
by donors, laws, and contracts with others; and internal
limits imposed by governing board decisions.)
The FASB believes that the new information that NFPs will provide is particularly desired by the lending
community which has found difficulties in assessing an NFP’s liquidity as assets may appear to be liquid
on the basis of their nature, however limitations imposed by contracts, laws, and donor stipulations may
make an otherwise liquid asset unavailable for purposes of meeting near-term cash demands. For
example, donor-imposed restrictions may influence the liquidity or cash flow patterns of certain assets
(e.g., a donor stipulation that donated cash be used to acquire land and buildings limits an entity’s ability
to take effective actions to respond to unexpected opportunities or needs, such as emergency disaster
relief). However, some donor-imposed restrictions have little or no influence on cash flow patterns or an
entity’s financial flexibility (e.g., a gift of cash with a donor stipulation that it be used for emergency-relief
efforts has a negligible impact on an entity if emergency relief is one of its major ongoing programs). The
following chart discusses how the new liquidity information may assist financial statement users.
How the new liquidity information may assist financial statement users
In looking at the new liquidity information, the qualitative information on how an NFP manages its liquid
resources is trying to provide an ongoing look at how the NFP manages its liquid resources. The
quantitative and qualitative information regarding the availability of an NFP’s financial assets will more
or less provide a snapshot at the balance sheet date of where the NFP stands liquidity wise and
whether there are any restrictions on financial assets that affect the NFP’s liquidity.
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1. Exercise 8-5
Please answer the following true or false question.
True or False
1
The requirement to provide quantitative information regarding financial assets
to be available within one year of the balance sheet date may encourage
more NFPs to adopt a classified statement as the information provided on the
statement in addition to the disclosure of other information regarding other
items that may limit availability (e.g. potentially donor restrictions, board
designations) will likely cover the availability disclosure requirement.
E. A change related to the statement of cash flows
A statement of cash flows reports the cash effects during a period of an NFP’s operations, its investing
transactions, and its financing transactions. It also currently provides for a reconciliation of the change in
net assets and net cash flow from operating activities.
Changing the statement of cash flows
Since FASB No. 95, Statement of Cash Flows, was issued in 1987, NFPs have
been encouraged to prepare the statement of cash flows using the direct method
but allowed to use the indirect method. Today, the vast majority of NFPs utilize the
indirect method to prepare the statement of cash flows. The FASB believes that
the statement of cash flows has been underutilized and that a different direction
is needed for the statement of cash flows. In the exposure draft related to the
Financial Statements of Not-for-Profit Entities project the FASB proposed requiring
all NFPs to prepare the statement of cash flows using the direct method. However,
in a close 4-3 vote the FASB ultimately decided to make a less significant change.
The following chart discusses the change that the FASB decided to make to the statement of cash flows.
A change related to the statement of cash flows
What the FASB requires NFPs to do today:
What the FASB will require NFPs to do tomorrow:
Currently, NFPs are allowed to use either
the direct method or the indirect method to
prepare the statement of cash flows. If the
direct method is used, NFPs are required
to disclose the indirect reconciliation of the
change in total net assets to net cash flow
from operating activities.
In the future, NFPs will continue to be allowed to use
either the direct method or the indirect method to
prepare the statement of cash flows. However, if the
direct method is used, NFPs will not be required to
disclose the indirect reconciliation of the change in total
net assets to net cash flow from operating activities.
(Note. By making the direct method a little easier the
FASB is hoping that more NFPs will voluntarily migrate
to this approach.)
The Statement of Cash Flows
New & possibly
improved!
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The following is an illustration of a statement of cash flows using the direct method which excludes the
indirect reconciliation of the change in total net assets to net cash flow from operating activities.
How a statement of cash flows under the direct method might appear tomorrow…
Cash flows from operating activities:
Cash received from contributors $117,298
Cash received from service recipients 41,995
Cash collected on contributions receivable 27,026
Interest and dividends received 9,254
Interest paid (4,123)
Cash paid to employees and suppliers (171,289)
Grants paid (5,999)
Net cash provided by operating activities 14,162
Cash flows from investing activities:
Purchase of equipment (7,025)
Proceeds from sale of investments 22,074
Purchase of investments (27,568)
Net cash used by investing activities (12,519)
Cash flows from financing activities:
Proceeds from contributions restricted for:
Investment in endowment 4,321
Investment in land 8,784
Other financing activities:
Interest and dividends restricted for reinvestment 6,156
Payments on notes payable (4,995)
Net cash provided by financing activities 14,266
Net increase in cash and cash equivalents 15,909
Cash and cash equivalents at beginning of year 7,548
Cash and cash equivalents at end of year $23,457
Supplemental data for noncash investing and financing activities:
Gift of land $10,000
1. Look for more changes to be coming related to the statement of cash flows
In the exposure draft related to the Financial Statements of Not-for-Profit Entities project the FASB also
proposed changes in how certain items are classified within the statement of cash flows. A couple of
examples of the proposed changes included: (1) reporting cash payments of interest expense as
financing cash flows instead of operating cash flows; and (2) reporting cash proceeds from the sale of
long-lived assets used for operating purposes as operating cash flows instead of investing cash flows.
The FASB proposed these changes to make the statement of cash flows more compatible with the
mission dimension of the proposed intermediate measures of operations in the statement of activities that
was in the exposure draft. Since the FASB deferred the proposed required operating measures in the
statement of activities into Phase 2 of the Financial Statements of Not-for-Profit Entities project, the FASB
also deferred action on the realignment of items within the statement of cash flows into Phase 2 as well.
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F. A change related to presenting an operating measure
In this section we are going to review a change related to presenting an operating measure in the
statement of activities.
A change related to presenting an operating measure
What the FASB requires NFPs to do today:
What the FASB will require NFPs to do tomorrow:
Currently, NFPs are allowed but not required to
have a self-defined operating measure on the
statement of activities. For example, an NFP may
break its statement of activities down into operating
and nonoperating components. If an NFP chooses
to do this, it is required to: (1) report the change in
unrestricted net assets for the period on the
statement of activities; and (2) if the use of the term
operations is not apparent from the details provided
on the face of the statement of activities, include a
note to the financial statements describing the
nature of the reported measure of operations or the
items excluded from operations.
In the future, NFPs will continue to follow the
guidance on the left. However, NFPs that
choose to present an operating measure that
also present internal board designations,
appropriations, and similar actions on the
face of the financial statements affecting
that measure will have additional reporting
requirements. Specifically, such NFPs will
be required to report those types of internal
transfers appropriately disaggregated and
described by type, either on the face of the
financial statements or in the notes.
The following chart discusses the reason that the FASB is adding the above requirement regarding
transfers for NFPs that elect to present an operating measure.
Why is the FASB doing this?
The term operating activities is currently not defined in NFP GAAP. An
NFP is typically not required to provide any disclosure about its reported
intermediate measure of operations other than describing the reported
measure if that information is not apparent from the face of the statement of
activities. The FASB has noted that some NFPs report an operating measure
on the statement of activities which is impacted by governing board
designations, appropriations, and similar transfers. Some NFPs currently
present these transfers as a single line item on the statement of activities
and it is difficult to determine if one or multiple transfers are occurring (and
possibly being netted) as such transfers are often not described in the notes.
The FASB believes that such transfers can involve significant amounts that
warrant separate line items or disclosure for the user to be able to understand
the impact on the operating measure.
It should be noted that NFP business-oriented health care entities are currently required by FASB ASC
954, Health Care Entities, to present a performance indicator. However, that measure is not considered
to be a measure of operations. So, if an NFP business-oriented health care entity elected to also include
a self-defined operating measure it would need to provide the additional information regarding transfers
described above.
Operating activities
Nonoperating activities
Net assets
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1. Exercise 8-6
Please answer the following true or false questions.
True or False
1 NFP Z does not elect to provide an operating measure in its statement of
activities. Thus, the change we just discussed regarding providing
information on transfers will not impact NFP Z.
2 Today, very few NFPs provide an operating measure in their statement of
activities.
2. Look for more changes to be coming related to presenting an operating measure(s)
Historically, NFPs have had a good deal of latitude in terms of the classifications used in the statement of
activities. However, the FASB would like to see more uniformity in financial reporting across the NFP
sector. One area where the FASB feels more uniformity is needed is in the area of presenting an
operating measure(s). In the exposure draft for the Financial Statements of Not-for-Profit Entities project,
the FASB proposed that all NFPs: (1) present two operating measures within the statement of activities;
and (2) present those two operating measures consistently across the NFP sector as opposed to being
self-defined. The following summarizes the FASB’s proposal that was contained in the exposure draft.
The proposed intermediate measures of operations format that was contained in the Financial Statements of Not-for-Profit Entities project exposure draft
Under the FASB proposal a typical NFP would report the following sections in the net assets without donor restrictions column of a statement of activities:
Operating activities
The operating excess (deficit) before transfers
Board designations, appropriations, and similar transfers to operations and from operations
The operating excess (deficit) after transfers
Nonoperating activities
Board designations, appropriations, and similar transfers to nonoperations and from nonoperations
Increase (decrease) in net assets
Net assets at beginning of year
Net assets at end of year
Note. The bold italicized subtotals above represent the two additional subtotals the FASB proposed to
provide uniform intermediate measures of operations.
The above proposal was somewhat controversial as it would have required all NFPs to present operating
measures and as some did not like the format. Ultimately, the FASB deferred the proposed required
operating measures into Phase 2 of the Financial Statements of Not-for-Profit Entities project. So,
practitioners should watch for future FASB deliberations on this topic.
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G. Changes in the reporting of expenses
In this section we are going to review how the reporting of expenses in the future will be different from
what NFPs are doing today. There are four key areas of change coming in the reporting of expenses.
The four key areas of change coming in the reporting of expenses relate to…
1 Changing how investment expenses are reported;
2 Providing additional information related to allocated costs;
3 Refining/updating the definition of management and general activities; and
4 Adjusting how NFPs report functional and natural expense information.
So, let us begin by looking at how investment expenses will be reported differently in the future.
1. Changing how investment expenses are reported
An area where the FASB believed that financial reporting complexity could be reduced and the
comparability of information across the NFP sector could be increased was in the reporting of investment
expenses. The following chart discusses how the reporting of investment expenses will be different in the
future from what NFPs do currently.
Changing how investment expenses are reported
What the FASB requires NFPs to do today:
What the FASB will require NFPs to do tomorrow:
Currently, NFPs have the option to either
report investment return net of related
expenses or on a gross basis. However,
if it is reported net, there is a requirement
to disclose the details that comprise the
net result.
In the future, NFPs will be required to report investment
return net of external and direct internal investment
expenses. NFPs will not be required to disclose any
investment expenses that are netted against investment
return (including internal salaries and benefits that are
netted against investment return).
Related to the above, it should also be noted that in the future NFPs will no longer be required to display
the investment return components in the endowment net assets roll forward. NFPs would also not be
required to include external and direct internal investment expenses that have been netted against
investment return in the functional expense analysis.
2. Exercise 8-7
Please answer the following true or false question.
True or False
1
In the exposure draft for the Financial Statements of Not-for-Profit Entities
project, the FASB had proposed that NFPs would be required to continue
to disclose the amount of internal salaries and benefits, if any, that have
been netted against investment return.
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3. Providing additional information related to allocated costs
As discussed in the following chart, in the future NFPs will provide additional information related to
allocated costs.
Providing additional information related to allocated costs
What the FASB requires NFPs to do today:
What the FASB will require NFPs to do tomorrow:
Currently, an NFP is required to disclose certain
information related to joint costs (i.e., costs which are
part fundraising and part other functional category)
that were allocated. However, current GAAP generally
does not require a description of the method(s) used to
allocate other types of costs among program and
support functions (although many NFPs provide this
information).
In the future, NFPs will also be required to
provide a description of the methods used
to allocate costs among program and
support functions.
The following chart illustrates what the new disclosure describing the methods used to allocate costs
among program and support functions might look like.
The new disclosure describing the methods used to allocate costs among program and support functions might look like…
The financial statements of NFP Z report certain categories of expenses that are attributable to more
than one program or supporting function. Therefore, these expenses require allocation on a reasonable
basis that is consistently applied. The expenses that are allocated include depreciation of office and
occupancy, which are both allocated on a square footage basis, as well as salaries and benefits, which
are allocated on the basis of time and effort studies.
4. Refining/updating the definition of management and general activities
The FASB wanted to refine/update the definition of management and general activities as discussed in
the following chart.
Refining/updating the definition of management and general activities
What the FASB requires NFPs to do today:
What the FASB will require NFPs to do tomorrow:
Currently, management and general activities of NFPs
are defined as activities that are not identifiable with a
single program, fundraising activity, or membership
development activity but that are indispensable to the
conduct of those activities and to an entity’s existence.
In the future, management and general
activities of NFPs will be defined as
supporting activities that are not identifiable
with one or more program, fundraising, or
membership development activities.
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5. Adjusting how NFPs report functional and natural expense information
One of the final areas deliberated by the FASB in the Financial Statements of Not-for-Profit Entities
project was the area of reporting functional and natural expense information. In FASB No. 117, the FASB
generally took the position that reporting functional expense information [i.e., breaking expenses down
into program services and supporting activities (e.g., management and general activities, fundraising
activities, and membership development activities)] was critical to understanding an NFP. In FASB No.
117, the FASB also took the position that natural expense information (i.e., breaking expenses down into
natural categories like salaries, travel, and depreciation) could be important to understanding some NFPs
but was not as critical as functional expense information. Thus, FASB No. 117 said that voluntary health
and welfare entities should provide a statement of functional expenses (which provides functional and
natural expense information) and other NFPs were encouraged but not required to provide this
information.
Over the years, various interest groups have expressed various opinions on the importance of functional
and natural expense information as discussed in the following chart.
Over the years various opinions have been expressed on the importance of functional and natural expense information
Creditors
Creditors have generally said that natural expense information is more
important than functional expense information as it provides information
regarding which costs are possibly variable (e.g., travel) as opposed to fixed
(e.g., depreciation).
Donors, NFP rating agencies, and regulators
Donors, NFP rating agencies, and regulators tend to prefer functional expense
information as it provides information about the allocation of resources for
missional fulfillment.
NFP business-oriented health
care entities
NFP business-oriented health care entities (and some other NFPs that are
more fee based than contribution based) have expressed the opinion that
natural expense information is useful but that functional expense information
has very little value. For example, some NFP business-oriented health care
entities just have a small disclosure breaking expenses down into two
functions (e.g., patient or health care services and general and administrative
expenses).
NFPs in general
From just a recording standpoint, expenses generally originate in natural form
(e.g., utilities expense on an invoice) and then require coding and allocation to
get to functional form (which has been the form required to be presented on
the statement of activities or disclosed in the notes by GAAP for many years).
Many NFPs prefer to not present both natural and functional expense
information in the financial statements (as voluntary health and welfare entities
are required to do) as it tends to focus the reader’s attention on things like
salaries and travel expenses by the management and general function and the
fundraising function.
Ultimately, the FASB decided to make both functional and natural expense proponents happy and those
who do not like having both functional and natural information being presented together unhappy.
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The following chart discusses how the reporting of functional and natural expense information will be
different in the future from what NFPs do currently.
Changing how NFPs report functional and natural expense information
What the FASB requires NFPs to do today:
What the FASB will require NFPs to do tomorrow:
Currently, all NFPs are required to
provide information about expenses
by their functional classification either
on the statement of activities or in the
notes to the financial statements.
Voluntary health and welfare entities
are required to provide a statement
of functional expenses which means
that they are also required to provide
information about expenses by
nature.
In the future, all NFPs will continue to have the requirement
to the left regarding providing functional information. All
NFPs will also be required to provide information about
expenses by their nature. NFPs will have the flexibility to
present expenses by function, by nature, or by both on the
statement of activities.
NFPs will also be required to provide an analysis of all
expenses (other than netted investment expenses) by
function and nature in one location either: [1] on the
statement of activities; [2] in a separate statement (e.g., think
statement of functional expenses); or [3] in a schedule in the
notes. Note. This also applies to voluntary health and
welfare entities so they will have the option of presenting this
information on the statement of activities or in the notes if
they do not want to prepare a separate statement of
functional expenses.
As discussed in the above, in the future all NFPs will be required to provide an analysis of all expenses
(other than netted investment expenses) by function and nature in one location either: [1] on the
statement of activities; [2] in a separate statement; or [3] in a schedule in the notes. For NFPs choosing
the schedule in the notes option, the disclosure will likely look very similar to how a statement of
functional expenses appears today for voluntary health and welfare entities. The following chart
illustrates what a disclosure providing an analysis of all expenses by function and nature might look like.
A disclosure providing an analysis of all expenses by function and nature might look like...
The table below presents NFP Z’s expenses by both their function and nature for fiscal year 20X1.
Program Activities Supporting Activities
Alpha Beta Gamma Programs Management and General Fundraising Supporting
Total Expenses
Salaries and benefits $7,400 $3,900 $1,725 $13,025 $1,130 $960 $2,090 $15,115
Grants to other organizations 2,075 750 1,925 4,750 4,750
Supplies and travel 865 1,000 490 2,355 240 560 800 3,155
Services and professional fees 160 1,490 600 2,250 200 390 590 2,840
Office and occupancy 1,160 600 450 2,210 218 100 318 2,528
Depreciation 1,440 800 570 2,810 250 140 390 3,200
Interest 133 66 40 239 78 65 143 382
Total expenses $13,233 $8,606 $5,800 $27,639 $2,116 $2,215 $4,331 $31,970
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6. Exercise 8-8
Please answer the following question related to reporting functional and natural expense information in
the future.
What will they do?
As we have discussed, in the future all NFPs will be providing an analysis of all expenses by function
and nature. This analysis will be provided either: (1) on the statement of activities; (2) in a separate
statement; or (3) in a schedule in the notes. Which option do you believe that NFPs will migrate
to?
H. Transitional provisions related to the new requirements
When an NFP implements the new requirements (i.e., years beginning after December 15, 2017) the
requirements will be applied on a retrospective basis for all periods presented except for the changes
related to the new liquidity information and the analysis of expenses by function and nature which only
need to be presented for the year of adoption and not for any prior years presented. If an NFP early
adopts the new financial reporting requirements they will apply all of the new requirements.
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II. Suggested solutions to exercises
This section contains the suggested solutions to the exercises presented in the chapter.
A. Suggested solution to Exercise 8-1
True or False
1 In the future, the statement of activities will report: (1) the change in net
assets with donor restrictions; (2) the change in net assets without donor
restrictions; and (3) the change in total net assets.
True.
B. Suggested solution to Exercise 8-2
But I don’t want to change
NFP Z has always felt that the fewer lines on the financial statements and the fewer disclosures
the better. Historically, the board of directors of NFP Z has internally designated some amounts of
unrestricted net assets for certain programs and purchases of assets. However, NFP Z has not
disclosed those amounts on its financial statements or in the notes as it did not believe that the
information was useful to its financial statement users. In the future, NFP Z would prefer to just show
the net assets without donor restrictions classification and not break out board-designated amounts on
the face of the statement of financial position or in the notes. Do you have any ideas for how NFP Z
could do this?
It really comes down to how the board of directors of NFP Z chooses to operate. NFP Z could
determine that it really does not need to designate amounts of net assets. For example, if the board
of directors feels that it could more or less have its say in the operations of NFP Z through budgetary
oversight instead of board designations that could be an option to avoid this disclosure in the future.
C. Suggested solution to Exercise 8-3
But I don’t want to change (Part 2)
Historically, University A has elected to imply a time restriction on buildings acquired with gifts of cash
restricted to acquire those buildings when the donor did not specify a time period over which the
building must be used. University A has preferred this approach as it aligns the reclassification of net
assets with the depreciation expense on the buildings. Do you have an idea for how University A
could continue to align the reclassification of net assets with depreciation expense on future
gifts to construct buildings under the new requirements?
University A could simply ask donors to place a time restriction on the use of the long-lived asset
which aligns to the depreciation period. The elimination of the implied over time approach and the
requirement to use the placed in service approach only comes into play when the donor has not placed
a time or purpose restriction on the use of the long-lived asset.
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D. Suggested solution to Exercise 8-4
True or False
1
Currently, NFP business-oriented health care entities are already required
to use the placed in service approach related to long-lived assets. Thus, in
doing away with the option of implying time restrictions, the FASB is putting
all NFPs on the same page.
True. This is an
area where the
FASB wanted more
standardization.
E. Suggested solution to Exercise 8-5
True or False
1
The requirement to provide quantitative information regarding financial
assets to be available within one year of the balance sheet date may
encourage more NFPs to adopt a classified statement as the information
provided on the statement in addition to the disclosure of other information
regarding other items that may limit availability (e.g. potentially donor
restrictions, board designations) will likely cover the availability disclosure
requirement.
True.
F. Suggested solution to Exercise 8-6
True or False
1
NFP Z does not elect to
provide an operating measure
in its statement of activities.
Thus, the change we just
discussed regarding providing
information on transfers will
not impact NFP Z.
True.
2 Today, very few NFPs provide
an operating measure in their
statement of activities.
False. Currently, the majority of colleges and universities
classify items as operating or nonoperating within the statement
of activities (i.e., they include an intermediate measure of
operations). Perhaps half of other types of NFPs also include
an intermediate measure of operations. NFPs that present an
intermediate measure of operations often believe that including
such a measure allows them to communicate how they view their
results internally to others (i.e., which activities relate to the core
operations or mission of the NFP).
cpenow.com / [email protected] Copyright © 2016 Surgent McCoy CPE, LLC – FMIS/16/01 8-19
G. Suggested solution to Exercise 8-7
True or False
1
In the exposure draft for the Financial Statements of
Not-for-Profit Entities project, the FASB had proposed
that NFPs would be required to continue to disclose the
amount of internal salaries and benefits, if any, that
have been netted against investment return.
True. In a close 4-3 vote the FASB
ultimately decided against this position
that was in the exposure draft. Thus,
NFPs will not be required to disclose
this information in the future.
H. Suggested solution to Exercise 8-8
What will they do?
As we have discussed, in the future all NFPs will be providing an analysis of all expenses by function
and nature. This analysis will be provided either: (1) on the statement of activities; (2) in a separate
statement; or (3) in a schedule in the notes. Which option do you believe that NFPs will migrate
to?
This is obviously a question that we do not know the answer to today. However, in making their
decision, NFPs will likely consider how useful the information may or may not be to their key financial
statement user groups. For example, NFP business-oriented health care entities will likely migrate to
the schedule in the notes option as they may feel that the functional information provided in the
analysis is not particularly helpful to their users. Voluntary health and welfare entities may well decide
to continue preparing a separate financial statement as that is what their users are accustomed to
seeing.
cpenow.com / [email protected] Copyright © 2016 Surgent McCoy CPE, LLC – FMIS/16/01 9-1
Latest Developments
This chapter is reserved for additional materials to be added throughout the year as appropriate. As this
course went to press there were no latest developments to include.