Chapter 13: Private Not-for-Profit Organizations

Characteristics of Private Not-for-Profit (NFP) Organizations

• Mission-driven purposes

• No ownership or equity (no one has a residual claim to net assets)

• Use of resources (surplus revenues are reinvested into the mission rather than distributed as dividends)

• Accountability (stewardship of donor and grant funds through financial reports and compliance with state and federal regulations)

• Voluntary support (they rely heavily on voluntary donations, grants, and membership contributions)

Governance and Oversight of Private NFP | Fiduciary Duty

Board members have legal obligations of care, loyalty, and obedience to the organization’s mission

Governance and Oversight of Private NFP | Transparency

Financial and operational reporting is crucial for maintaining public trust and donor confidence

Governance and Oversight of Private NFP | Regulation

In the U.S., the Internal Revenue Service (IRS) monitors compliance with tax-exempt status requirements, while state attorneys general oversee charitable organizations at the state level

Categories of Private NFPs

• Voluntary health and welfare organizations (WHWOs)

• Private colleges and universities

• Hospitals and other health care organizations

• Other private NFP organizations

Characteristics of Voluntary Health and Welfare Organizations (VHWOs)

• Majority of support from voluntary contributions/grants

• Offer services to the general public

• Services include social welfare, health, community activiities

• Examples: American Heart Association, Salvation Army, YMCA, and Habitat for Humanity

Characteristics of Colleges and Universities

• Private not-for-profit schools (two year and four-year colleges and universities)

• Support/resources mainly derived from student tuition and fees, alumni contributions, grants, private endowments, and state/federal funding

• Examples: SMU and Rice

Characteristics of Hospitals and Other Health Care Organizations

• Includes private not-for-profit hospitals, nursing homes, health maintenance organizations, medical groups, ambulatory care facilities, and clinics

• Major support comes from patient charges, third party payments (like insurance), contributions, endowments, and grants

• Examples: Covenant Health and St. Jude Children’s Research Hospital

Other Private NFP Organizations

• Elementary and Secondary Schools

• Social and Political Groups

• Churches

• Museums

• Civic, Fraternal, and Professional Organizations

• Examples: Humane Society of the United States, Beta Alpha Psi, and Metropolitan Museum of Art

NFP Reporting Environment | The primary determinant of GAAP for NFPs is the….

Financial Accounting Standards Board (FASB)

NFP Reporting Environment | ASC Topic 958

• Addresses External financial statements for private NFPs

  • Report on the organization as a whole

  • Use full accrual accounting

NFP Reporting Environment | FASB ASC Topic 954

Addresses reporting issues specific to business-oriented health care NFPs

NFP Reporting Environment | Form 990 Return of Organization Exempt from Income Tax

• Filed annually with the IRS

• IRS requires substantial information, including:

  • Governance structure, compensation, and description of programs

  • Balance sheet and operating statement information similar to GAAP requirements

• Easily available and standardized informatino

  • Used by charity ratings organizations and watchdog groups to evaluate NFPs

NFPs are expected to…

• Use contributions for their intended purpose

• Choose activities that effectively further the organization’s goals

• Operate efficiently

Overall Reporting Concepts | Basic Objectives per FASB Concepts Statement No. 4

• Financial information should be useful to contributors, lenders, suppliers, the organization’s members, oversight bodies, and managers in making resource allocation decisions

• Financial information should be useful in evaluating the services provided by the organization and in determining its ability to continue to provide these services

• Financial information should be useful in assessing the performance of management

• Financial reporting should provide information on resources and obligations

  • Nature of inflows and outflows

  • Costs of programs and services

  • Liquidity

What are the three financial statements of NFPs?

• Statement of Financial Position

• Statement of Activities

• Statement of Cash Flows

The financial statements of NFPs utilize the __________ basis and cover __________ activities of the organization (including entities the organization controls — consolidated statements)

Full accrual; all

Statement of Financial Position

• Basic concepts of business accounting are followed in valuing assets and liabilities, expect investments in debt and equity securities (fair value)

• Net assets are divided into with and without donor restrictions

Foundational Equation of the Statement of Financial Position

Assets = Liabilities + Net Assets

Net Assets with Donor Restrictions are subject to donor-imposed or legal restrictions. What are some examples?

• Assets donated with stipulations that they be preserved or used for a specified purpose

• Endowments to be held in perpetuity

Net Assets without Donor Restrictions are not subject to donor-imposed or legal restrictions (there could be constraints on use imposed internally). What are some examples?

• Board-designated endowment assets

• Assets collected for a specified future activity

• Emergency fund

On the Statement of Financial Position, assets are listed in order of…

Liquidity

Can net assets without donor restrictions still have restrictions?

Yes, an organization may internally restrict how these net assets are used

Statement of Activities

• Shows changes in each net asset category (restricted and non-restricted) during the year through:

  • Revenue and other support

  • Expenses

  • Gain

  • Losses

Statement of Activities | Revenues and Other Support

• Inflows from contributions, sales, etc. are revenues

  • Reported as increases in the appropriate net asset category

• Net assets released from restrictions

  • As donor-imposed restrictions are met, net assets with donor restrictions are reclassified to net assets without

Statement of Activities | Gains and Losses

• May be reported as either category of net assets, depending on donor agreements

Statement of Activities | Donor-restricted resources must be _____________ before it can be used

Released first from net assets with donor restrictions

Statement of Activities | Expenses

• Classified functionally and naturally

  • Functionally: based on programs or activities, then further divided into program and support expenses

  • Either or both classifications may be used in the statement of activities. Both methods must also be displayed in one place, such as a note.

• Only reported as reductions in net assets without donor restrictions

Statement of Activities | Program Expenses are expenses that are…

Related to the stated goal of the NFP

Statement of Activities | Examples of Program Expenses

• Financial and accounting costs

• Management

• Fund raising

• Membership development

Statement of Activities | Natural Expense Categories

• Salaries and wages

• Employee benefits

• Professional services

• Supplies

• Interest expense

• Rent

• Utilities

• Depreciation

In most cases, expenses presented in functional categories (programs/support) on the ____________. Natural expenses are usually presented in the ____________.

Statement of Activities; notes

The bottom line in the Statement of Activities is what?

The change in net assets

True or False: Organizations are discouraged from displaying intermediate performance measures, such as subtotals for operating and nonoperating performance

False

Statement of Cash Flows

• Operating, Investing, and Financing

• Direct or indirect method is allowed for Operating Activities

  • Use “Change in Net Assets” instead of “Net Income” for Operating Activities

  • If the direct method is used, a reconciliation of change in net assets is not required

Statement of Cash Flows | Which types of contributions are located in the operating section?

• Unrestricted

• Short-Term Temporary

Statement of Cash Flows | Which types of contributions are located in the financing section?

• Long-Term Temporary

• Permanent

Statement of Cash Flows | Which type of contribution is first located in the financing section before being moved to the operating section as it is released?

Long-Term Temporary

Contributions

• May be cash, other assets, forgiveness of liabilities, or qualified volunteer services

• Appear on the Statement of Activities

• Contributions are all measured at __________

• NFPs are required to make __________ of the value of non-cash contributions

• Contributions may require __________

Fair value; good faith estimates; independent appraisal

True or False: Contributions can be conditional or unconditional, depending on whether circumstances exist under which the contribution would be returned

True

Donor restricted/unrestricted contributions increase net assets with/without donor restrictions on the __________

Statement of Activities

Journal Entry Skeleton: Suppose an NFP receives a cash contribution for general use

DR Cash $________

CR Contribution Revenue—Unrestricted $________

Journal Entry Skeleton: Suppose a company donates office supplies having a fair value of $________ to an NFP, with no restrictions as to use

DR Office Supplies $________

CR Contribution Revenue—Unrestricted $_______

True or False: Only a subset of service contributions meet requirements to be reported in the financial statements

True

When can service contributions be recognized as revenue?

• They create or enhance nonfinancial assets

or

• Require specialized skills, are provided by individuals possessing those skills, and are typically purchased if not provided by donation (recognized as an expense)

  • Example: Accountants, architects, carpenters, doctors, electricians, lawyers, nurses, plumbers, and teachers

Service contributions are valued at…

The fair value of services rendered or assets created

Journal Entry Skeleton (Professional Consulting Services): A company contributes professional consulting services valued at $________, as support for an annual conference, and a contractor donates services to an NFP to build a new faciliity, The services add $________ to the fair value of the facility.

DR Annual Meeting Expenses $________

CR Revenue from Contributed Services—Unrestricted $_______

Journal Entry Skeleton (Donated Services to the NFP for the facility): A company contributes professional consulting services valued at $________, as support for an annual conference, and a contractor donates services to an NFP to build a new facility, The services add $________ to the fair value of the facility.

DR Building $________

CR Revenue from Contributed Services—Unrestricted $_______

True or False: Most donated services, including those such as college students volunteering or faculty advisors to an NFP, are reported as serve contributions.

False

What are the two types of temporary restrictions imposed by donors on their contributions?

• Purpose

• Time

Purpose Restrictions

Donor specifies that the contribution be used for a particular purpose, or the purpose is inferred by the method of solicitation

Time Restrictions

Donor specifies future time period over which contribution may be used

Time and purpose-restricted contributions initially _________ net assets with donor restrictions

Increase

Reporting Purpose Restrictions | Contribution Revenue ________ increases net assets with donor restrictions on the Statement of Activities

Increases

Reporting Purpose Restrictions | When restricted assets are used, what happens first and how is the expense recorded?

• Release the restriction, decreasing net assets with donor restrictions and increasing net assets without donor restrictions

• Record the expense as a reduction in net assets without donor restrictions

Journal Entry Skeleton (Cash Contribution): Suppose an NFP receives $________, donor-designated, to fund best practice awards and then makes awards

DR Cash $_________

CR Contribution Revenue—Restricted $_________

Journal Entry Skeleton (Reclassification of Net Assets): Suppose an NFP receives $________, donor-designated, to fund best practice awards and then makes awards

DR Net Assets Released from Restrictions—Restricted $_________

CR Net Assets Released from Restrictions—Unrestricted $_________

Journal Entry Skeleton (Distribution of Cash Awards): Suppose an NFP receives $________, donor-designated, to fund best practice awards and then makes awards

DR Awards (Expense) $_________

CR Cash $_________

Promises

• Pledges to give in the future

  • Must have verifiable documentation

  • Reported in the period the promise is given

Promises appear as _________, valued at __________, net of estimated uncollectible amounts

Receivables; realizable value

Promises are measured at __________ if expected to be collected over more than one year

Present Value

Promises are usually recorded as ___________, increased net assets with donor restrictions, because the donor specifies a specific purpose for the donation

Donor-restricted contributions

If a restriction on a promise is not donor-specified, it increases…

Unrestricted net assets

Journal Entry Skeleton (record the promise at NRV): Suppose an NFP receives documented promises to contribute $X within the next year, to be used for faculty awards. Estimated uncollectible are $Y.

DR Contributions Receivable $X

CR Allowance for Uncollectible Contributions $Y

CR Contribution Revenue—Restricted $(X-Y)

Because contribution revenue is restricted, and expenses cannot be deducted from restricted net assets, expected uncollectibles are reported as a deduction from…

Contribution Revenue

Journal Entry Skeleton (record present value of the agreement): A donor agrees to contribute $X per year to an NFP for the next 5 years to support student travel to conferences. The appropriation rate is 4%, and all payments are expected to be collected.

DR Contributions Receivable $X

CR Contribution Revenue—Restricted $(PV of $X)

CR Discount on Contributions Receivable $(X - PV of $X)

Journal Entry Skeleton (record interest earned on outstanding contributions at the end of each year): A donor agrees to contribute $X per year to an NFP for the next 5 years to support student travel to conferences. The appropriation rate is 4%, and all payments are expected to be collected.

DR Discount on Contributions Receivable $________

CR Contribution Revenue—Restricted $________

Promises | True or False: Interest accumulates in net assets with donor restrictions until the donation is used for it’s intended purpose

True

Journal Entry Skeleton (record the cash contribution at the end of the first year): A donor agrees to contribute $X per year to an NFP for the next 5 years to support student travel to conferences. The appropriation rate is 4%, and all payments are expected to be collected.

DR Cash $X

CR Contributions Receivable $X

Promises | True or False: When the donation is used for student travel, net assets are released and the expense is recorded as a reduction in unrestricted net assets.

True

Donor-Imposed Conditions

• Refers to an uncertain future event that could void the contribution

• Conditional and documented promises to give

  • Recognizes as receivables and contribution revenue in the period the condition is met

Donor-Imposed Conditions | If the donor makes the contribution before the condition is met, how does the accounting work?

• Recognize as a liability

• Convert to revenue once the condition is met

Journal Entry Skeleton (receipt of a conditional contribution): Suppose a donor promises in writing to contribute $________ to an NFP if contributions by others total $_________. The donor pays $________ to the organization before the condition is met.

DR Cash $________

CR Refundable Contributions $________

Journal Entry Skeleton (once the condition is met): Suppose a donor promises in writing to contribute $________ to an NFP if contributions by others total $_________. The donor pays $________ to the organization before the condition is met.

DR Refundable Contribution $________

CR Contribution Revenue—Unrestricted $________

Donor-Imposed Restrictions in Perpetuity | Permanent Endowments

• Occur when the donor stipulates that the principal of the donation be maintained

• Increases net assets with donor restrictions

Donor-Imposed Restrictions in Perpetuity | Income earned on investments bay be _________ or _________

Unrestricted or Restricted to a Time Period or Purpose

Donor-Imposed Restrictions | Unrestricted income on investment increases _________

Net Assets Without Donor Restrictions

Donor-Imposed Restrictions | Income on Investment that is Restricted to a Time Period or Purpose increases _________

Net Assets With Donor Restrictions

Journal Entry Skeleton (receipt of the permanent endowment in 2021): Suppose a large CPA firm gives $X to an NFP in 2021. The $X principal must be left intact, and income earned on the principal must be used to fund annual faculty advisor awards. The NFP invests the $X in securities.

DR Restricted Cash $X

CR Contribution Revenue—Restricted $X

Journal Entry Skeleton (record investment in securities in 2021): Suppose a large CPA firm gives $X to an NFP in 2021. The $X principal must be left intact, and income earned on the principal must be used to fund annual faculty advisor awards. The NFP invests the $X in securities.

DR Investment in Securities $X

CR Restricted Cash $X

Journal Entry Skeleton (record investment income): Suppose a large CPA firm gives $X to an NFP in 2021. The $X principal must be left intact, and income earned on the principal must be used to fund annual faculty advisor awards. The NFP invests the $X in securities.

The investments generated income of $Y in 2022. This $Y is paid out in faculty advisor awards in 2023.

DR Cash $Y

CR Investment Income—Restricted $Y

Journal Entry Skeleton (record reclassification of funds in 2023): Suppose a large CPA firm gives $X to an NFP in 2021. The $X principal must be left intact, and income earned on the principal must be used to fund annual faculty advisor awards. The NFP invests the $X in securities.

The investments generated income of $Y in 2022. This $Y is paid out in faculty advisor awards in 2023.

DR Net Assets Released From Restrictions—Restricted $Y

CR Net Assets Released from Restrictions—Unrestricted $Y

Journal Entry Skeleton (record the use of funds for the donor specified purpose in 2023): Suppose a large CPA firm gives $X to an NFP in 2021. The $X principal must be left intact, and income earned on the principal must be used to fund annual faculty advisor awards. The NFP invests the $X in securities.

The investments generated income of $Y in 2022. This $Y is paid out in faculty advisor awards in 2023.

DR Faculty Advisor Awards (Expense) $Y

CR Cash $Y

Contributions of Long-Lived Assets:

• Valued at _____________ at date of donation

• If the organization must use assets for a specific time period, reclassify the donation to _____________ over the specified time period

• If the donor requires specific use for assets, reclassify net assets to _____________ as the asset is used

Fair market value; unrestricted net assets; unrestricted

Journal Entry Skeleton (record the receipt of the building): Suppose an NFP received a donation of a building with a fair market value of $Z, a 25 year estimated life, and no restrictions on use.

DR Building $Z

CR Contribution Revenue—Unrestricted $Z

True or False: For NFPs, depreciation expense on an unrestricted long-lived asset, such as a building with no restrictions, reduced net assets without restrictions

True

Journal Entry Skeleton (record the receipt of the building): Suppose a donor requires an NFP to use a donated building (fair value of $B) for five years. The initial contribution increases restricted net assets. At the end of the first year, net assets are reclassified.

DR Building $B

CR Contribution Revenue—Restricted $B

Journal Entry Skeleton (record the release of time restriction at the end of year 1): Suppose a donor requires an NFP to use a donated building (fair value of $B) for five years. The initial contribution increases restricted net assets. At the end of the first year, net assets are reclassified.

DR Net Assets Released from Restrictions—Restricted $(B/5)

CR Net Assets Released from Restrictions—Unrestricted $(B/5)

True or False: Suppose a donor requires an NFP to use a donated building (fair value of $B) for five years. The initial contribution increases restricted net assets. At the end of the first year, net assets are reclassified.

After the restriction is released, annual depreciation expense reduces net assets without donor restrictions.

True

Land Contributions are reported at _________, increasing restricted or unrestricted net assets, depending on donor stipulations

Fair Value

Contributions of art or items of historical value are not required to be reported as revenue or assets if…

• It’s held for public exhibition, education, or research in furtherance of public service rather than financial gain

• It’s protected, not used as collateral for loans, cared for, preserved

• It’s subject to an organizational policy that requires the proceeds from sales of collection items to be used to acquire other items for collections

NFP — Accounting for Investments | Fill in the blanks:

• Applies to equity securities with ___________ and all __________ securities

• Reported at ____________

• Depending on the existence of donor restrictions or applicable laws, unrealized gains and losses are categorized as ____________

Determinable fair values; debt; fair market value; changes in net assets with donor restrictions or without donor restrictions

NFP — Accounting for Investments | True or False: No distinction is made between debt securities held for trading, available-for -sale, or held-to-maturity.

True

Voluntary Health and Welfare Organizations (VHWOs) | Resources

• Public support—contributions, bequests, and grants

• Revenues from providing goods and services (separate from contributions activities, use normal business accounting; reported as changes in unrestricted net assets)

  • Examples: YWCA provides childcare services, Goodwill Industries does

    contract work for businesses

• Contributions of nonfinancial assets, such as food and supplies (must be separately reported on the Statement of Activities)

Voluntary Health and Welfare Organizations (VHWOs) | Donors

• Take a strong interest in the distinction between program service expenses, administrative, and fund-raising expenses

  • BBB standard is 65% or more of expenses should be toward programs

  • Watchdog groups rank VHWOs on this basis

College and University Revenues | Fill in the blanks:

• Tuition revenue is shown at ________ amount

  • With adjustments such as scholarships and waivers shown as either __________ or __________

• Tuition adjustments made as an exchange for services provided (such as graduate teaching assistantships) are shown as __________

• Tuition adjustments not involving services (such as scholarships) are shown as __________

Gross; revenue deductions; expenses; expenses; revenue deductions

College and University expenses are functionally classified by education costs, support costs, and self-supporting services. What are some examples of education costs?

Faculty salaries, supplies, and classroom facility costs

College and University expenses are functionally classified by education costs, support costs, and self-supporting services. What are some examples of support costs?

Student services and maintenance

College and University expenses are functionally classified by education costs, support costs, and self-supporting services. What are some examples of self-supporting services?

Dormitories, food service, and health service