Kế toán, kiểm toán - Chapter 13: Accounting for not - For - profit organizations

Chapter13Accounting for Not-for-Profit OrganizationsLearning ObjectivesAfter studying Chapter 13, you should be able to:Distinguish not-for-profit organizations (NFPs) from entities in the governmental and commercial sectors of the U.S. economyIdentify the authoritative standards-setting body for establishing GAAP for nongovernmental NFPsLearning Objectives (Cont’d) Explain financial reporting and accounting for NFPs: Required financial statementsClassification of net assetsAccounting for revenues, gains, and supportAccounting for expensesAccounting for assetsLearning Objectives (Cont’d)Describe the accounting for NFP combinations and consolidationsPrepare financial statements in accordance with the generally accepted accounting principles governing NFP organizationsDescribe optional fund accountingNot-for-Profit Sector The not-for-profit sector of the U.S. economy is very diverse, consisting of many different kinds of organizations The majority of NFPs are philanthropic and quite often rely on contributions and the services of volunteersSome NFPs are designed to serve the interest of the organizations’ members Most are not governments or governmental in natureA minority of NFPs are owned or operated by governmentsContributions of resources from providers who do not expect a proportionate return (i.e., nonexchange transactions)Operating purposes other than to earn a profit for owners (i.e., no one expects a return on their investment)Lack of defined ownership (i.e., lack of owner oversight)How Does a Nongovernmental NFP Differ from a Business Entity?It was not created by a government, but rather by individuals who are not placed in power through popular election or appointment by government officialsIt does not have the power to levy taxesIt may not have the power to issue tax-exempt debtHow Does a Nongovernmental NFP Differ from a Governmental Entity?The FASB, not the GASB, sets accounting and financial reporting standards for nongovernmental not-for-profit organizations Unless otherwise indicated, all FASB standards apply to NFP organizations, but the FASB Accounting Standards Codification (ASC) in Section 958 apply specifically to NFPsGAAP for Nongovernmental NFPsStatement of financial position (Ill. 13-2)Statement of activities (Ill. 13-3)Statement of cash flows (Ill. 13-4)Statement of functional expenses for VHWOs (Ill. 13-5)Notes to the financial statementsFinancial Statements for NFPsCan also be called a balance sheetNet assets (the difference between assets and liabilities) must be classified into three classes: UnrestrictedTemporarily restrictedPermanently restricted Flexibility in displaying information, including fund-based data, is allowed as long as net assets are classifiedStatement of Financial PositionReports on changes in all classes of net assets for a period of timeChanges take the form of revenues, gains, expenses, and lossesNet assets released from restrictions decrease temporarily restricted net assets and increase unrestricted net assets, as restrictions are metAll expenses decrease unrestricted net assetsStatement of ActivitiesFASB allows flexibility in presenting information; it can be presented as a single column or three separate columns, one for each class of net assets Within net asset classes additional classifications can be used, such as operating and nonoperating, expendable and nonexpendable, earned and unearned, and recurring and nonrecurringExpenses are reported on the face or in the notes by functional categories (i.e., program expenses vs. support expenses)Statement of Activities (Cont’d)NFP organizations follow the same standard as for-profit entities when preparing the statement of cash flowsCash flows are reported as changes in operating, investing, and financing activitiesThe indirect method or direct method (with reconciliation) may be used for reporting cash flows from operating activities Statement of Cash FlowsUnrestricted contributions and gifts are reported as part of operating activitiesRestricted contributions given for long-term purposes are included with financing activities along with the related incomeNoncash gifts or in-kind contributions are disclosed as noncash investing and financing activities in a separate sectionStatement of Cash Flows (Cont’d) VHWOs must present this statement showing both functional expenses and natural (object or line item) expenses (Ill. 13-5) Salaries Adoption Mgt and General Supplies Counseling Fund-raising Depreciation Education Functional ExpensesNatural ExpensesProgramSupportStatement of Functional ExpensesTraditionally, revenues have been defined as increases in unrestricted net assets that arise from exchange transactions in which the other party receives direct tangible benefits commensurate with the resources providedExamples include:Membership duesProgram service feesSales of supplies and servicesInvestment incomeSome grantsRevenuesSupportSupport is a category of revenue that arises fromreceipt of resources in nonexchange transactions inwhich the donor derives no tangible benefit from therecipient agencyContributions – support in the form of cash, other assets or services (or cancellation of liabilities)Pledges – the promise of a contributionSupport Increases:Unrestricted net assets when no donor restrictions exist or the restrictions have expiredTemporarily restricted net assets when the donor imposes restrictions as to purpose (how the asset is used) or time (when the asset is used) Permanently restricted net assets when the donor stipulates that the assets must be held in perpetuity, but the organization can spend the income from the assetsPledges or Promises to GiveUnconditional pledges depend only on the passage of time or demand by the promisee for performance. Record these as support in the period madeConditional pledges depend on the occurrence of a specified future and uncertain event to bind the promissor, such as obtaining matching gifts by the recipient. Do not record these as support until the conditions are substantially metRecording PledgesUnconditional pledges received in less than a year can be reported at net realizable value (at year end adjust for any estimated uncollectible amount)Long-term unconditional pledges are generally recorded at fair valueApply fair value criteria to determine the present fair value of future receiptsThe difference between the pledge amount and the fair value amount is recorded as a discount that is amortized as the pledges are receivedRecording Pledges (Cont’d)Example: A charity receives pledges of $1,000 to be paid within the next year. It also receives pledges of $5,000 to be collected 2 and 3 years from now. It is estimated the fair value of the long-term pledges is $4,760. Debit CreditContributions Receivable 6,000 Contributions—Temporarily Restricted 5,760 Discount on Contributions Receivable 240 Donated materials (gifts-in-kind) should be recorded as contributions and as expenses (supplies expense or cost of goods sold) at fair value on the date of the gift if an objective, clearly measurable basis for fair value can be establishedDonated MaterialsContributed Services Contributed services should be recorded as contributions and asset/expense (salaries expense) at fair value if the services:Create or enhance nonfinancial assets (such as a carpenter constructing a building), orAre provided by individuals possessing specialized skills that typically would need to be purchased if not provided by donation (e.g., accountants or nurses)Recording Contributed ServicesA certified electrician contributes $10,000 in services to wiring a new building for a charity (enhances nonfinancial asset) Debit CreditBuilding 10,000 Contributions—Unrestricted 10,000A nurse contributes $3,000 in services to provide professional services at the free clinic (these services are part of the clinic’s mission)Salary expense 3,000 Contributions—Unrestricted 3,000Special EventsSpecial events are fund-raising activities in which something of tangible value is offered to donor participants for a payment that includes a contributionExamples include: DinnersDancesGolf outingsBazaarsCookie salesSpecial Events (Cont’d)If special events give rise to incidental revenue, such as advertising, this revenue is reported in the special events category of supportSpecial event revenue and direct costs of the event should be reported at gross amounts, unless the expenses are peripheral or incidental in nature, in which case they can be netted against the gross revenueContributions Involving an Intermediary An intermediary is a fiduciary, assisting with the transfer of assets between a donor and a beneficiaryAs a general rule, the intermediary recognizes an asset (debit) and a liability to the beneficiary (credit) when it receives a contribution from the donor for the beneficiaryIn this instance, the beneficiary recognizes the contribution as support revenueContributions Involving an Intermediary (Cont’d)An exception occurs if one of the following situations exists:The intermediary has “variance power,” which allows it to redirect the assets to another beneficiaryThe intermediary is financially interrelated with the beneficiary organization (e.g., a captive fund-raising foundation)If one of the exceptions occurs the intermediary recognizes the contribution as support revenue rather than as a liabilityExpensesRecognized on the accrual basis of accountingAll expenses are reported as decreases in unrestricted net assetsReport depreciation expense for all capital assets, except collections Joint Costs with a Fund-Raising AppealReport these as fund-raising support expenses, rather than allocating them to functional programs, such as education or advocacy Criteria to be applied includes considering Purpose Audience ContentQ: Can you define each criterion?InvestmentsEquity securities that have readily determinable values and debt securities are reported at fair value Report realized and unrealized gains and losses and investment income in the statement of activitiesReport income and gains and losses as changes in unrestricted net assets, unless their use is restricted by the donor or legally restricted by state lawInvestments (Cont’d)NFPs are not required to classify investments into trading, available-for-sale, and held to maturityUnless restricted by donor or law, realized and unrealized gains/losses are adjustments to unrestricted net assetsFASB requires extensive disclosures regarding investments and related incomeCollection ItemsCollections include works of art, historical treasures, or other types of similar assetsNFPs can opt to recognize or not recognize collectionsIf recognizedRecord at cost if acquired and at fair value if contributedDepreciation is not recorded if the economic benefit of the collection is used so slowly the estimated useful life is extraordinarily longCollection Items (Cont’d)To not recognize assets related to a collection the assets must meet the definition of a collectionHeld for public exhibition, education, or research in furtherance of the public interestProtected, kept unencumbered, cared for, and preservedProceeds from sale of collection items are to be used to acquire other items for the collectionNFPs have varied relationships with other NFPs, for-profit businesses, and governments that could result in: Consolidations – generally occur if the NFP has a controlling financial interest in another organization Combinations – occur through merger or acquisitionConsolidations and CombinationsNFPs may use fund accounting for internal purposes to facilitate reporting back to grantors or funding agenciesFASB permits NFPs to present disaggregated data classified by fund groups, as long as the aggregated net asset statements are also presentedOptional Fund AccountingThere are many types of NFP organizationsGAAP for nongovernmental NFPs is set by FASBUnique to NFPs is a dependence on contributionsAlthough there are many accounting similarities between for-profit and NFP organizations there are also several accounting issues unique to NFP organizationsENDConcluding Comments