Question

1. Discuss donor imposed restrictions on the use of contributions.

2. Describe the 3 types financial statements prepared by NFP’s.

Answer 1

Financial Accounting Standard Board (FASB 116) mainly focus on the concept of restricted revenue.

Under this standard, all the contribution revenue has to be classified as below:

• Unrestricted, temporarily restricted.
• Permanently restricted

The existence of restrictions are determined by the donor-imposed restrictions. Internal restrictions such as Board designated funds are considered unrestricted.

Permanently restricted support

Permanently restricted support includes all the contributions, which are not expendable by the (Not for Profit) NFP. Example: Endowment fund- In this, the organization is not able to use the principal amount but is able to use the investment earnings.

If the earnings on permanently restricted funds are further restricted for use for a given purpose, it results in temporarily restricted revenue.

Temporarily restricted

Temporarily restricted consists of contributions with donor-imposed restrictions that limits the use of funds as mentioned below:

1. Purpose-restricted- The funds are donor-restricted for use on a particular project.
2. Time-restricted- The funds that are donor-restricted for use within a certain time period. Example: Unconditional pledge that stipulates the funds will be donated to the NFP over a period of 6 years. The amount which is to be received in future years is considered time-restricted.

Unrestricted support

Unrestricted support consists of all other revenue.

2. 3 types financial statements prepared by NFP’s.

A Not-For-Profit (NFP) entity is an organization that seeks to carry out their mission without focus on returning profit to an ownership group and are is generally designed for the benefit of a third party. If these entities meet certain guidelines established by the IRS, then they are exempt from incomes taxes. Example: Colleges, Universities, Foundations and other Charitable Organizations are often designated as Not-For-Profit Entities.

All financial statements are reported in accordance with GAAP (Generally accepted accounting principles in USA.

Three types of financial statements prepared by NFPs are as below:

1. Statement of Financial Position

Statement of Financial Position is also known as Balance Sheet provides a snapshot of the NPF’s assets, liabilities at a point in time. It is designed to provide relevant information about the nature and interrelationship of an organization’s assets and liabilities.

Examples of item included in Statement of Financial Position are:

1. Contributions Receivable
2. Investments
3. Unrestricted net assets

1. Statement of Activities

The Statement of Activities is also known as the Income Statement. It provides a summary of the income and expenditures of the NPF including income received from donors, fundraising events organised, federal grants, and other sources, as well as the expenses incurred in performing the NPFs activities.  

Expenses are mainly classified by their functional classification as opposed to their natural classification. Functional classification segregates expenses into the below basic categories:

1. Program Services
2. General and Administration activities
3. Fundraising activities

1. Statement of Cash Flows

The main objective of the cash flow statement is to reconcile the change in net assets per the statement of activities to the actual cash received or spent by the organization during the year. This is required because there are many non-cash transactions that are included in the overall change in net assets figure as a result of applying accounting principles. Example: depreciation taken on buildings and equipment is not an actual cash expense and therefore must be added back to the change in net assets to arrive at the change in cash for the year. Next objective of the cash flow statement is to segregate the cash activities of the organization into three categories:

1. Operational Activities
2. Investing Activities
3. Financing Activities

Cash flows from operations measure the cash inflows and outflows caused by core operations of the organization (e.g. program services offered).

Cash flows from investing activities generally refer to the acquisition or disposal of equipment, investments or other assets throughout the year.

Cash flows from financing activities generally reflect the financing activity of the NFP and include receipts of assets that, by donor restriction, must be used for long-term purposes and debt activity.