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