Question

Answer all of the following Questions in depth. (Please write In PDF format)

1. Describe the four types of Not-for-Profit entities.

2. Discuss the role of funds in accounting for NFP’s.

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

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

5. Discuss the oversight bodies for NFP’s

6. Discuss the accounting for contributed services.

7. Describe the presentation of cash on the financial statements of NFP’s. Include in your answer a discussion of the required footnote disclosure.

Answer 1

1. Describe the four types of Not-for-Profit entities

According to BoardSource, the United States is home to more than 1.6 million nonprofit organizations. Nonprofits provide a variety of services to the public, including feeding the homeless, tutoring children and providing scholarships. Public charities, foundations, social advocacy groups and trade organizations are common types of nonprofit organizations.

Public Charities

BoardSource reports that most nonprofits in the United States are public charities. These organizations provide free and low-cost services, such as computer training for children and career workshops for the unemployed. They receive funding from the public through the government, individuals, corporations and foundations. Churches, libraries, museums, hospitals and private schools can qualify as public charity nonprofits. Many public charities host fundraisers to obtain additional funding to support their missions.

Foundations

Foundations sponsor numerous programs and events in the community and they often fund other nonprofits. Foundations can be established through a family, a community group or through a business. BoardSource reports that more than 100,000 foundations operate in the United States. Private foundations form to distribute funding to public charities. Corporate foundations give grants to other nonprofits on behalf of a corporation. Community foundations fund nonprofits in a specific region or city.

Social Advocacy Organizations

Many nonprofits are established as social advocacy organizations. These are mostly membership organizations that form to advance a specific set of beliefs or to reach specific goals. The National Organization for Women and Greenpeace are examples of social advocacy nonprofits. Social advocacy nonprofits like these use donations and membership dues to disseminate information and advocate social change according to their mission statements.

Professional and Trade Organizations

According to the Society for Nonprofit Organizations, professional and trade organizations form to provide programs and services for a group of people in the same profession. The National Writers Union and the International Association of Meeting Planners would fall into this category. Although members pay dues to join these nonprofits, they also receive free and discounted classes and career training in their chosen fields.

2. Discuss the role of funds in accounting for NFP’s.

The concept of fund accounting is one of the main differences between for-profit and nonprofit accounting. Its name comes from the fact that revenues and expenses are segregated in the accounting system into “funds” for the purpose of tracking each fund separately – primarily for reporting purposes.

As opposed to for-profit organizations which focus on profitability, nonprofits use fund accounting to focus on accountability, and the use of separate “funds” with their own ledger allows nonprofit organizations to more easily assess each fund individually. Depending on the nonprofit, a separate fund is typically established for each of the organization’s various programs as well as its overhead, general administrative, and fundraising activities. To track such revenues and expenses separately, the organization will set-up in the fund accounting system and assign to these transactions a unique fund code. In most cases, the fund code will contain a string of unique identifiers – such as a code for the donor, grant, project, location, and so on. Depending on the organization, this code string may go by different names – a budget code, project code, cost center, or similar. But despite the nomenclature used by the organization, these identifiers essentially serve the same purpose — allowing the accounting staff to easily run queries and generate reports in the accounting system by any value in the code string.

An added benefit of fund accounting is that, by tracking revenues and expenses separately for each fund, organizations can easily see how donors’ funds are being spent. This is essential not only for the purpose of easily developing financial reports for those donors who require them as part of their grant agreement, but also for the purpose of tracking fund restrictions and generating accurate financial statements. For example, if an individual donates money to a nonprofit organization and limits how the organization can use the funds, that money is considered restricted solely for that purpose. When these funds are recorded in the fund accounting system, the accountant must designate whether the donated monies are restricted and assign the monies to a given fund code. As the organization spends the donated monies on the purpose for which they are intended, the revenues associated with these expenses are no longer restricted, and the corresponding revenues are reclassified from the restricted net asset account to the unrestricted net asset account. Thus, at any time, the accounting staff can easily determine, based on the expenses assigned to each fund, how much of a donor’s money is remaining and how much of the organization’s net assets is categorized as restricted versus unrestricted.

Of course, fund accounting does not only benefit the accounting staff, but also program managers who rely on such financial information in order to appropriately monitor their program’s resources. By segregating revenues and expenses into separate funds, the accounting staff can more easily provide programmatic staff with updated spending information, budget variances, forecasts, burn-rates, and pipelines, as well as monitoring program spending against donor-imposed restrictions (such as restrictions on budget line-item flexibility) – all of which is essential to program managers and to ensure overall programmatic success.

Given the unique role of nonprofits in our society, there is understandably a focus on an organization’s programs and its programmatic outcomes. But there is also a strong need for nonprofits to monitor the availability of funds that are designated for each individual program. Doing so helps the organization see where funds are being spent and where the organization should focus its fundraising activities. It allows nonprofits to individually assess programs for effectiveness and efficiency. And the use of fund accounting is essential to nonprofits in achieving these objectives.

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

It’s a given that nonprofit organizations like to receive contributions. But how and when they receive these contributions is often left up in the air.

This is partially because donors sometimes have difficulty letting go. They like to stay in control, so to speak. This is where conditions and restrictions come into play.

Donor-imposed conditions and restrictions often show up in two types of donations: promises to give (sometimes referred to as pledges) and, of course, restricted contributions. It’s important to pay attention to conditions and restrictions because they affect the way in which your organization’s revenue is recognized (revenue recognition).

By familiarizing yourself with the following six rules, you can take a step towards ensuring your pledges and contributions are properly recorded.

Promises to give (pledges)
Promises to give are defined as oral or written agreements — made by a donor — to contribute cash or other items to an organization. These agreements fall into two categories: unconditional or conditional.

Rule #1 – Unconditional promises to give are just that—unconditional.
In most cases, unconditional promises to give are dependent on either the passage of time or the perpetuation of the organization — both of which are fairly certain. An organization should recognize unconditional promises as revenue in the period the donor makes the unconditional promise. The promise to give can be oral, but we recommend obtaining verifiable documentation such as a written agreement, pledge card or a tape recording.

Rule #2 – Conditional promises to give are dependent on the occurrence of a specific future and uncertain event.
For instance, a donor may say “I will give the organization $100,000 if the organization also raises $100,000 from other contributors.”

Since the donor is not bound to the agreement until this specific event occurs, an organization cannot record conditional promises as revenue until the conditions of the promise are substantially met or are explicitly waived by the donor.

Rule #3 – Promises to give should not be confused with a donor’s intention to give.
An example of an intention to give is when a donor says that the organization has been included in his or her will (the will could change before the donor passes away).

Temporarily restricted contributions vs. permanently restricted contributions
Contributions to the organization can also be restricted by donor-imposed stipulations.

Rule #4 – Temporarily restricted contributions are contributions with donor-imposed stipulations that can be met by the passage of time or purpose.
For example, a donor contributes $100,000 in 2015, but says the money must be used for the organization’s 2016 activities (time restriction). Or, a donor contributes $50,000, but says the money must be used by the organization for a specific activity (purpose restriction).

Rule #5 – Permanently restricted contributions are contributions that are limited by donor-imposed stipulations that cannot be met by the passage of time or fulfilled by other donor-specified requirements.
For example, a donor gives a university $1 million, but requires the university to invest it and use only its earnings — not the original $1 million.

Rule #6 – Once time or purpose restrictions are met, contributions can be reclassified to unrestricted assets.
Unrestricted assets are any assets that are not restricted by a donor (temporarily or permanently) and are unconditional. Typically, the purpose of these assets is to support the organization’s general activities. Note: If the organization’s board of directors decides to set aside or earmark a certain amount of unrestricted assets for a particular activity, they are still unrestricted, but are now considered “designated assets.”

By understanding these rules, you’ll be in control of the conversation when someone, especially your auditor, asks if your organization’s pledges and contributions are properly recorded. You may even be able to reduce the number of adjusting journal entries your auditors propose!

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

Nonprofit’s main focus is to carry out its mission to the best of its ability yet there’s one thing that cannot be lost in the desire to do good: A fiduciary responsibility to its funding sources and the community to use those resources prudently.

In their book “The Best of Boards,” Marci Thomas and Kim Strom-Gottfried explained that executives and board members must spend time, regardless of how little joy they get from it, to obtain the necessary expertise to implement systems to ensure regulatory compliance and accurate financial reporting, among other things.

All nonprofits have at least three or four – depending on the type of organization – financial statements that they must submit to ensure compliance. These statements, which must be read together to have a complete picture of the organization, were described by Thomas and Strom-Gottfried:

• Statement of Financial Position: Also known as a balance sheet, this statement reports the organization’s assets, liabilities, and net assets at a specific point in time (usually at the end of the organization’s fiscal year).
• Statement of Activities: This statement reports the results of operations (revenues and expenses) and change in net assets for the year.
• Statement of Cash Flows: This statement provides information about the cash receipts and disbursements of the organization that result from operating activities, financing activities, and investing activities.
• Statement of Functional Expenses: This statement provides information about the organization’s expenses by function and by natural classification.

5. Discuss the oversight bodies for NFP’s

A common assumption of non-profits is that they are run completely by volunteers. This is not the case. Most non-profits have staff that work for the company, with many then bringing in volunteers to do the work led by the staff. The money to pay staff comes from the state law that allows nonprofits to pay reasonable salaries to their employees. NPO’s must be careful that their staff are not making too much money. If that is the case, the IRS has the right to penalize the non-profit. ^[6]

The extent to which a nonprofit organization is considered business-like, for example in how they manage their resources and accomplish their missions, is something nonprofits have to balance. Although the goal of non-profits isn’t to make a profit, they still have to operate as a business. Nonprofits have the responsibility of focusing on being professional, financially responsible, replace self-interest and profit motive with mission motive, and have the ability to speak both languages of the nonprofit, which is the business language and the nonprofit language^[7]. The business language provides the ability to work with money, such as applying for grants, which is crucial for non profits, while the nonprofit language provides the ability to speak to the community. Nonprofits need to balance these both out to have a successful organization.

6. Discuss the accounting for contributed services.

Contributed services are professional services that have been donated by someone outside of your organization with specialized skills — such as those provided by doctors, nurses, lawyers or accountants. A rule of thumb I like to apply is that if the person has letters after their name (CPA, JD, etc.) or requires some kind of licensing to do their job (architect, etc.) they can probably provide you contributed services that you (and they) can recognize.

The service:

• Must create or enhance a non-financial asset. For example, the organization acquires a graphic designer to create collateral materials to describe fund-raising and development programs. Although the services are provided on a pro bono basis, certain technical expertise is necessary to produce the materials, which would otherwise have been purchased.

Or the service:

• Must require specialized skills. General volunteer services, such as working a booth at a fundraising event, are typically not recognized as contributed services
• Must be provided by persons possessing those specialized skills, and
• Is of the type that typically would be purchased by the nonprofit organization if the service or skills were not donated.

An example of a recognized service would be a lawyer providing necessary legal advice. What would not be recognized is:

• A non-lawyer providing legal advice.
• A lawyer providing un-asked for legal advice.
• That same lawyer stuffing envelopes for a fundraiser.

Assuming the criteria above have been met, the nonprofit would record contribution revenue for the fair market value (based and invoice from the service provider) of the donated services and also as an expense in the appropriate category.

Accounting for Contributed Services

Services may be recognized as a contribution and as an expense if they.

1) create or enhance nonfinancial assets or

2) require specialized skills, are provided by individuals possessing those skills, and would typically need to be purchased if not received
by donation.

Professionals and craftsmen such as carpenters, plumbers, lawyers and doctors may provide these services. The fair value of the contributed services should be recorded, along with a description of the services, within the period in which the services were received.

The journal entry to record the receipt of contributed services is:

                                                                                       DR             CR

Asset (and/or)                                                                xx
Expense                                                                         xx
           Contributions Revenue - contributed services                         xx

7. Describe the presentation of cash on the financial statements of NFP’s. Include in your answer a discussion of the required footnote disclosure.

The following points highlight the top two methods of presentation of cash flow statement.

Method # 1. Direct Method:

The direct method shows each major class of gross cash receipts and gross cash payments.

The operating cash flows section of the cash flow statement under the direct method would appear as:

Method # 2. Indirect Method:

Indirect method adjusts accrual basis of net profit or loss for the effects of noncash transactions.

The operating cash flows section of the cash flow statement under Indirect Method is:

Cash flows relating to extra ordinary items should be classified as operating, investing or financing as appropriate and should be separately disclosed.

Cash flows of foreign subsidiaries should be translated at the exchange rates prevailing when the cash flows took place. As regards the cash flows of associates and joint ventures where the equity method is used, the cash flow statement should report only cash flows between investor and the investee, where proportionate consolidation is used, the cash flow statement should include the venture’s share of the cash flows of the investee.

Aggregate cash flows relating to acquisitions and disposals of subsidiaries and other business units should be presented separately and classified as investing activities with specific additional disclosures.

The aggregate cash paid or received as consideration should be reported as net cash and cash equivalent acquired or disposal of cash flows from investing and financing activities should be reported gross by major class of cash payment except for the following cash which may be reported on net basis:

Cash receipts and payments on behalf of customers:

Cash receipts and payment for items in which the turnover is quick, the amount are large and the maturities are short, generally less than three months.

Cash receipts and payments relating to fixed maturity deposits.

Cash advances as loans made to customers and repayment theory. Investing and financing transactions which do not require the use of cash should be excluded from the cash flow statement but they should be separately disclosed elsewhere in the financial statement.

The components of cash and cash equivalents should be disclosed and a reconciliation presented to amounts reported in the Balance Sheet.

The amount of cash and cash equivalent held by enterprise that is not available for use by the group should be disclosed, together with a commentary by management.

Footnotes to the financial statements refer to additional information provided in a company's financial statements. Footnotes to the financial statements report the details and additional information that are left out of the main reporting documents, such as the balance sheet and income statement. This is done mainly for the sake of clarity because these notes can be quite long, and if they were included, they would cloud the data reported in the financial statements

'Footnotes To The Financial Statements'

It is very important for investors to read the footnotes to the financial statements included in a company's periodic reports. These notes contain important information on such things as the accounting methodologies used for recording and reporting transactions, pension plan details and stock option compensation information — all of which can have material effects on the bottom-line return that a shareholder can expect from an investment in a company.

Footnotes on financial statements serve as a way for a company to provide additional explanation of various portions of the statement. It functions as a supplement, providing clarity to those who require it without having the information placed in the body of the statement.

Information Contained Within Footnotes

Footnotes may provide additional information used to clarify a point. This can include further details about items used as reference, a clarification of any applicable policies, a variety of required disclosures, or adjustments made to certain values. While much of the information may be considered required in nature, providing all of the information within the body of the statement may overwhelm the document, making it more difficult to read and interpret by those who receive them.

The Use of Footnotes

Using footnotes allows the general flow of a document to remain appropriate by providing a way for the reader to access additional information if they feel it is necessary. It allows an easily accessible place for complex definitions or calculations to be explained should a reader desire the additional information.

Often, the footnotes will be used to explain how a particular value was assessed on a specific line item. This can include issues such as depreciation or any incident where an estimate of future financial outcomes had to be determined.

Footnotes may also include information regarding future activities that are anticipated to have a notable impact on the business or its activities. Often, these will refer to large-scale events, both positive and negative. For example, descriptions of upcoming new product releases may be included, as well as issues about a potential product recall.