FAR CPA Exam Unit 6

financial statements for a non-profit

1. statement of financial position (amount and nature of assets, liabilities, and net assets)

2. statement of activities (amount and kinds of inflows and outflows; effects of events and circumstances that change net assets)

3. statement of cash flows (how the org obtains and spends cash)

functional classification of expenses

categorize costs by major classes of program and support services

natural classification of expenses

include descriptions such as salaries, rent, utilities, interest expense, etc. (similar to general edger titles)

elements of the statement of activities

• revenues and expenses, net amount

• gains and losses, net amount

• reclassification of restricted assets

required reporting of expenses for all non-profits

functional classification in the statement of activities and natural classification analyzed by function in the notes to the financial statements

statement of cash flow reporting method for non-profits

may choose the direct or indirect method

attributes of a contribution

• unconditional

• must be a transfer of cash or other assets

• title must pass

• must be voluntary

• must be nonreciprocal

recognizing unconditional contributions

reported as either an increase to net assets without donor restrictions or donor-restricted support in the period received

• can be recognized as an asset, reduction of a liability, or an expense

recognizing conditional contributions

not recognized until condition is met - donor holds the right to demand return of the contribution if condition is not met

unconditional promises

• may be written or verbal

• verbal pledges should be documented by organization internally

• contribution is recorded at fair value when promise is made

conditional promises

• recognition does not occur until conditions are substantially met and promise becomes unconditional

• good faith deposits that accompany a conditional promise are accounted for as a refundable advance in the liability section

multi-year pledges

• recorded at net present value at date pledge is made

• future collections are consider donor-restricted revenues and net assets

• difference between previously-recorded present value and current amount collected is recognized as contribution revenue, not interest revenue

placed-in-service approach

used to report the expiration of restrictions on contributions associated with long-lived assets in the absence of specific donor restrictions

allowance for uncollectible pledges

recorded like a for-profit business but no bad debt expense recognized at any point

split-interest agreements

• donor contributions of trusts or other arrangements under which the not-for-profit organization receives benefits that are shared with other beneficiaries

• changes in value should be recognized for amortization of discounts and revaluations, and disclosed as separate line items in statement of activities

• assets and liabilities recognized should be disclosed separately in statement of financial position

donating services requirements

• specialized skills required and possessed by donor

• otherwise needed by the organization

• measurable

• easily (at fair value)

donated collection items

not required to be recorded by organization if all requirements are met:

• item is part of a collection and held for public viewing, exhibition, education, research

• collection is cared for, preserved, and protected by the organization

• organization has a policy that requires any proceeds from sale of donated items to be reinvested in other collection items, or used to support the direct care of existing collections

donated materials

if it has significant value, materials should be recorded at fair value as an asset

• if materials will pass through the organization to an ultimate beneficiary (ex. lumber to build a house for a beneficiary), should not be recorded unless amounts are substantial

recognizing unconditional promises to contribute in the future

reported as donor-restricted support (implied time restriction) at present value of estimated future cash flows using a discount rate

• if expected to be collected or paid in less than one year, can be measured at NRV

pledges without donor restriction (with implied time restriction) journal entry

Dr. Pledge receivable - with donor restriction

Cr. Allowance for doubtful accounts

Cr. Contributions - with donor restriction

pledges without donor restriction (implied time restriction) at collection journal entry

Dr. Cash - with donor restriction

Cr. Pledge receivable - with donor restriction

Dr. Satisfaction of time restriction - with donor restriction

Cr. Cash - with donor restriction

Dr. Cash - without donor restriction

Cr. Satisfaction of time restriction - without donor restriction

financially interrelated organizations

• organization has the ability to influence the operating and financial decisions of the other and

• organization has an ongoing economic interest in the net assets of the other

variance power

recipient can vary from the original wishes of the resource provider

conditions for a non-profit to be a recipient entity

accepts assets from a resource provider and:

• agrees to use the assets on behalf of a specified beneficiary or

• transfer the assets to a specified beneficiary

recipient is not financially interrelated and does not have variance power

Dr. Asset (at fair value)

Cr. Refundable advance liability

• treated as a liability, not contribution revenue, when resource provider can change the beneficiary; provider’s asset transfer is conditional, revocable, or repayable; provider controls the recipient organization and specifies an unaffiliated beneficiary; provider specifies itself or its affiliate as the beneficiary and does not qualify for equity accounting

recipient is not financially interrelated and has variance power

assets are recognized as a contribution when received and expensed when distributed to beneficiary

Dr. Asset

Cr. Contribution

recipient is financially interrelated and has/does not have variance power

same as not financially interrelated and have power; assets are recognized as a contribution when received and expensed when distributed to beneficiary

Dr. Asset

Cr. Contribution

beneficiary is not financially interrelated: no variance power for recipient

• beneficiary recognizes receivable pending payment of the amount

• beneficiary treats amount as a contribution like unconditional promise

Dr. Receivable

Cr. Contribution

beneficiary is not financially interrelated: beneficial interest

beneficiaries recognize beneficial interest in:

• unconditional right to receive specified cash flows from a pool of assets

• donations held by the recipient are nonfinancial

Dr. Beneficial interest

Cr. Contribution

beneficiary is financially interrelated: interest in the net assets of the recipient

beneficiaries recognize a change in their interest in the net assets of the recipient when organizations are financially interrelated

Dr. Interest in recipient net assets

Cr. Change in interest in recipient net assets

non-profit receives financial instruments

• recorded at fair value in statement of financial position

• gains and losses are reported as increases or decreases in net assets without donor restrictions unless use of investment is donor restricted

non-profit receives derivates

recognize change in fair value of all derivates in period of the change

non-profit receives dividends, interest, and other investment income

reported in period earned as increases in unrestricted net assets unless use of the investment is donor restricted, net of any related investment expense

endowment funds

• used to account for assets established to provide income for the maintenance of a non-profit

• classified as either net assets without donor restrictions or with donor restrictions

quasi-endowments

board-designated endowment funds; designated as net assets without donor restrictions

endowment fund inception

• original gifted amount and (generally) related returns initially classified as net assets with donor restrictions

• unless donor restricted, investment income is deemed available for spending and is classified as net assets without donor restrictions

endowment fund returns subject to donor restriction

• reported within net assets with donor restriction until appropriated for expenditure

• upon approval for expenditure, funds are deemed to have been appropriated for expenditure

underwater endowment

donor-restricted fund where fair value of fund at reporting date is less than either the original gifted amount or the amount required to be maintained by the donor

• report accumulated losses together with the endowment fund in net assets with donor restrictions

• must disclose reason for being underwater

required disclosures for all endowment funds

• governing board’s interpretation of the requirements that underlie the net asset classification of the endowment and ability to spend from underwater funds

• policies for appropriation of endowment assets

• investment policies

• composition of non-profit endowment by net asset class

• reconciliation of beginning vs ending balance of non-profit’s endowment by net asset class

objectives of governmental reporting

• designed to demonstrate the accountability of each organization for the stewardship of the resources in its care

• focused on providing efficient and effective delivery of services with public resources in compliance with applicable laws

• identifying and displaying the accountability objectives of governmental organizations is integral to related accounting

objectives of fund accounting

• enables service and mission-driven organizations to easily monitor and report compliance with spending purposes, spending limits, and other fiscal accountability objectives

• governments use fund accounting to demonstrate fiscal accountability in their external reporting and use funds for internal accounting

industries that use governmental accounting and principles

• governmental units

• colleges and universities

• health care organizations

fund definition

sum of money or other resource segregated for the purpose of carrying on a specific activity or attaining certain objectives in accordance with specific regulations, restrictions, or limitations, constituting an independent fiscal and accounting entity

fund structure

• defined by GASB 34

• eleven fund types are classified in three generic categories: governmental, proprietary, and fiduciary funds

• fund financial statements are separately presented for each category

• no specific number of funds but there will be a minimum to comply with legal requirements

fund accounting

fund classifications within the fund structure defined by the GASB affect the basis of accounting and the measurement focus principles associated with each fund category

external reporting for governmental accounting

• reporting requirements include both fund-based and government-wide financial statement presentations supported by notes and supplementary info

• presentation of a reconciliation of fund vs government-wide financials are required

primary users of governmental financial reports

• citizens

• legislative and oversight bodies

• investors and creditors

characteristics of information in governmental financial reports

• understandable

• reliable

• relevant

• timely

• consistent

• comparable

governmental funds

• accounted for using the modified accrual basis of accounting and current financial resources measurement focus

• source, use, and balance of the govt’s current financial resources and the related current liabilities are accounted for through the use of governmental funds

• focus of financial reporting is on statement of revenues, expenditures, and changes in fund balance

governmental fund types: general

• set up to account for the ordinary operations of a governmental unit that is financed from taxes and other general revenues

• all transactions not accounted for in other funds are accounted for here

governmental fund types: special revenue

• set up to account for revenues from specific taxes or other earmarked sources

• restricted or committed to finance particular activities of govt

governmental funds types: debt service funds

• set up to account for

  • accumulation of resources

  • payment of interest and principal on all “general obligation debt”, other than that serviced by enterprise funds or special assessments in another fund

governmental funds types: capital projects

• set up to account for restricted, committed, or assigned resources

• specifically used for acquisition or construction of major capital assets by a governmental unit, except those projects funded by an enterprise fund

governmental funds types: permanent

used to report resources that are legally restricted to the extent of that income, and not principal, may be used for purposes supporting the reporting govt’s programs

governmental funds balance sheet

• current assets + deferred outflows

• current liabilities + deferred inflows of resources + fund balance (like equity)

proprietary funds

• account for business-type activities

• similar to commercial accounting

• should be accounted for using the full accrual basis of accounting and economic resources measurement focus

proprietary funds types: internal service

• set up to account for goods and services provided by designated departments

• customers of this fund are primarily internal

• other depts and agencies within a single governmental unit or to other governmental units are provided funds on a cost-reimbursement fee basis

proprietary funds types: enterprise

• set up to account for the acquisition and operation of governmental facilities and services that intended to be primarily self-supported by user charges

• customers of this fund are primarily external

enterprise fund criteria

• activity of the fund is financed by debt secured by a pledge of fee revenue,

• laws require collection fees adequate to recover costs, or

• pricing policies are established to produce fees to recover costs

fiduciary funds

• account for assets controlled by a govt in the capacity of a trust on behalf of beneficiaries with whom a beneficiary relationship exists

• accounted for using the full accrual basis of accounting and economic resources measurement focus

fiduciary funds types: custodial

• account for resources in:

  • temporary custody of the governmental unit

  • any fiduciary activities that are not required to be reported in other fiduciary fund classifications

fiduciary funds types: investment trust

account for external investment pools

fiduciary funds types: private purpose trust

used for activities not properly accounted for either as pension or investment trust funds, in which assets are dedicated to providing benefits to recipients in accordance with benefit terms and assets are legally protected from creditors of the govt

fiduciary funds types: pension trust

account for resources of defined benefit plans, defined contribution plans, post-employment benefit plans, and other long-term employee benefit plans

current financial measurement focus

• fund balance is a measure of available, spendable, or appropriable resources

• only current assets and liabilities are included on the balance sheet

• when reconciling between govt funds and govt-wide financials, adding back FA and subtracting non-current liabilities are most significant differences

economic resources measurement focus

• financial reporting centers on the costs of services and the effectiveness and efficiency with which invested capital has been used

• all assets and liabilities are included on balance sheet, including certain transactions classified as deferred outflows/inflows of resources

• net position reported in three components: net investment in capital assets, restricted, unrestricted

modified accrual basis of accounting

• revenue is recognized when it is measurable and available to finance the expenditures of the current period

• available: collectible within the current period or soon enough thereafter to be used to pay current period liabilities

• expenditures are generally recorded when the related fund liability is incurred, with some exceptions:

  • principal and interest expenditures on debt are not recognized until due or paid

  • incurred but unpaid debt expenditures are not accrued

• when reconciling, add back accrual basis revenues and subtract accrued interest expenses

funds using modified accrual basis of accounting

GR(a)SPP

• general funds

• special revenue

• debt service

• capital projects

• permanent

funds using the accrual basis of accounting

SE-CIPPOE

• internal service

• enterprise

• custodial

• investment trust

• pension trust

• private purpose trust