A Brief Note On Accounting For Not-For-Profit Organizations

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Chapter

13
Accounting for
Not-for-Profit Organizations

McGraw-Hill/Irwin

Copyright © 2013 by The McGraw-Hill Companies, Inc. All rights reserved.

Learning Objectives

After studying Chapter 13, you should be able to:


Distinguish not-for-profit organizations (NFPs) from entities in the governmental and commercial sectors of the U.S. economy



Identify the authoritative standards-setting body for establishing GAAP for nongovernmental NFPs

13-2

Learning Objectives (Cont’d)



Explain financial reporting and accounting for NFPs:


Required financial statements



Classification of net assets



Accounting for revenues, gains, and support



Accounting for expenses



Accounting for assets
13-3

Learning Objectives (Cont’d)



Describe the accounting for NFP combinations and consolidations 

Prepare financial statements in accordance with the generally accepted accounting principles governing
NFP organizations



Describe optional fund accounting

13-4

Not-for-Profit Sector
The not-for-profit sector of the U.S. economy is very diverse, consisting of many different kinds of organizations 

The majority of NFPs are philanthropic and quite often rely on contributions and the services of volunteers 

Some NFPs are designed to serve the interest of the organizations’ members



Most are not governments or governmental in nature



A minority of NFPs are owned or operated by governments 13-5

How Does a Nongovernmental NFP
Differ from a Business Entity?


Contributions of resources from providers who do not expect a proportionate return (i.e., nonexchange transactions) 

Operating purposes other than to earn a profit for owners (i.e., no one expects a return on their investment)



Lack of defined ownership (i.e., lack of owner oversight)
13-6

How Does a Nongovernmental NFP
Differ from a Governmental Entity?


It was not created by a government, but rather by individuals who are not placed in power through popular election or appointment by government officials



It does not have the power to levy taxes



It may not have the power to issue taxexempt debt

13-7

GAAP for Nongovernmental NFPs


The FASB, not the GASB, sets accounting and financial reporting standards for nongovernmental not-for-profit organizations



Unless otherwise indicated, all FASB standards apply to NFP organizations, but the FASB
Accounting Standards Codification (ASC) in
Section 958 apply specifically to NFPs

13-8

Financial Statements for NFPs



Statement of financial position (Ill. 13-2)



Statement of activities (Ill. 13-3)



Statement of cash flows (Ill. 13-4)



Statement of functional expenses for VHWOs (Ill.
13-5)



Notes to the financial statements

13-9

Statement of Financial Position



Can also be called a balance sheet



Net assets (the difference between assets and liabilities) must be classified into three classes:
 Unrestricted
 Temporarily

restricted

 Permanently



restricted

Flexibility in displaying information, including fundbased data, is allowed as long as net assets are classified 13-10

Statement of Activities



Reports on changes in all classes of net assets for a period of time



Changes take the form of revenues, gains, expenses, and losses



Net assets released from restrictions decrease temporarily restricted net assets and increase unrestricted net assets, as restrictions are met



All expenses decrease unrestricted net assets

13-11

Statement of Activities (Cont’d)


FASB allows flexibility in presenting information; it can be presented as a single column or three separate columns, one for each class of net assets 

Within net asset classes additional classifications can be used, such as operating and nonoperating, expendable and nonexpendable, earned and unearned, and recurring and nonrecurring



Expenses are reported on the face or in the notes by functional categories (i.e., program expenses vs. support expenses)
13-12

Statement of Cash Flows
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