2013-03-05 Accounting Issues for NPOs

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Thrive. Grow. Achieve.

Accounting for Contributions and Net Assets

ASC 958

• Jean Gilbert, CPA • March 5, 2013

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OBJECTIVES

• Discuss key revenue sources unique to nonprofit organizations.

• Differentiate between contributions, exchange and agency transactions and how to apply appropriate accounting treatment.

• Review documentation to determine how contributions should be classified.

• Apply key accounting principles related to net assets including, differentiating among unrestricted, temporarily restricted, and permanently restricted net assets.

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IDENTIFYING NONPROFIT REVENUE TRANSACTIONS

• Does the income received represent a contribution, revenue in exchange?

• Does the income received represent a pass-through?

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DEFINITIONS

• Unconditional and voluntary transfer of cash or other assets or services to an entity, or a cancellation of liabilities in a voluntary nonreciprocal transfer by an entity acting other than an owner

Contribution Transaction

• Reciprocal transfer between two entities that are in substance purchases of goods or services in which each party receives and sacrifices commensurate value.

Exchange Transaction

• Transfer of assets to an organization who, in turn, must transfer the assets to a third-party donee according to the donor's instructions.

Agency

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IDENTIFYING NONPROFIT REVENUE TRANSACTIONS

• Are there restrictions or conditions to the contribution?

• Are there promises of future support? If so is it conditional or unconditional?

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CONTRIBUTION DEFINITIONS

• Funds donated for no specific purpose other than to support the organization

Unrestricted

• Promises to give to be paid over more than one accounting period

Temporarily restricted for

time

• Funds donated to be used for a specific purpose, usually over a period of time

Temporarily restricted

for purpose

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CONTRIBUTION DEFINITIONS

• Funds donated to be held in perpetuity, with the intent that the income derived from the funds would support the organization or a specific program

Permanently restricted

• Usually specifies a future and uncertain event and the occurrence or non-occurrence determines if the organization will receive funding

Conditional

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PROMISES TO GIVE

• Sufficient verifiable evidence should exist to document that a promise was made by the donor • Written agreement • Pledge card • Oral promises documented by

letters, tape recordings, emails, etc.

• Does not need to be legally enforceable in order to be recorded

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CONTRIBUTION REVENUE

Contributions Bequests Pledges Sponsorships (some

exceptions) Sponsored programs Change in PV Discount

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EXCHANGE REVENUE

Registrations Application Fees Tuition Sales Advertising

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REVENUES WITH CHARACTERISTICS OF BOTH CONTRIBUTION AND EXCHANGE TRANSACTIONS

Associations and membership dues

Federal grants Sponsorships Special events revenue

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IS IT A CONTRIBUTION: PART I

Unconditional? yes

Contribution

no

Either not recorded or recorded as a liability if

physical assets have been transferred to non-profit

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IS IT A CONTRIBUTION: PART II

Voluntary? yes

Nonreciprocal (value received in

exchange is nominal or nonexistent)?

Not a contribution “Other”

yes

Might be a contribution:

additional testing required

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CONTRIBUTION OR EXCHANGE TRANSACTION?

Attribute Contribution Exchange

Intent when requesting the asset The nonprofit requested a contribution

The nonprofit requested assets in exchange for specific goods or services

Intent about the asset's purpose

The grantor believes it is making a contribution to support the activities of the nonprofit

The grantor believes it is providing assets in exchange for specific goods or services

Delivery method

The organization determines how and when the resulting assets will be provided to the end recipients

The grantor determines how and when the resulting assets will be provided to the end recipients

Payment method The payment subsidizes the organization's budgeted costs

The payment is based on the organization's cost of goods or services provided

Penalties assessed for failure to make timely delivery of resulting assets

Penalties are limited to the delivery of assets already produced and return of unspent amount

Economic penalties for non performance are in excess of payment to the organization

Delivery of assets

The organization delivers the resulting assets to a person or entity other than the grantor

The organization delivers the resulting assets to the grantor

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CONTRIBUTION OR AGENCY TRANSACTION

Attribute Contribution Agency Transaction

Financially interelated

Recipient organization is financially interrelated to the specified beneficiary

Recipient organization is not financially interrelated

Use of assets

Resource provider allows the recipient organization to establish, define and carry out programs that disburse resources to ultimate beneficiaries

Resource provider can directly or indirectly specify the beneficiaries

Variance power

The resource provider expressly granted variance power

Recipient organization must disburse resources to beneficiaries named by resource provider

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REVENUE RECOGNITION

• Recognized in period received Contribution

• Recognized in period earned Exchange

• Not recognized Agency

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RECOGNITION PRINCIPLES FOR PROMISES TO GIVE

• Pledges or contributions receivable

• Written or oral What?

• At the time the promise is made When?

• At fair value • Temporarily restricted, unless:

• Donor stipulates it is permanently restricted

• Donor states the contribution is to be used for current or prior period

How?

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RECOGNITION PRINCIPLES FOR CONTRIBUTIONS

• Promises to give – In the example below, as of December 31,

2009, there are three pledges receivable, each one payable under different terms.

• Donor 1: is promising $5.9 million over 3 years

• Donor 2 is promising $5,000 in 2013 • Donor 3 is promising $20,000, in

equal installments in 2012 and 2013.

• Each donor has a history of giving with the organization, and pays as agreed

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PROMISES TO GIVE: FAIR VALUE

Journal entry 12/31/2009 DR CR

Promises to give $5,925,000

PV Discount $ 542,860

Contribution, Temporarily Restricted 5,382,140

Client Name Accounts Receivable Discount

12.31.2009

FY FY FY 2011 2012 2013 Total

Contribution 1 2,000,000 2,000,000 1,900,000 5,900,000 Contribution 2 5,000 5,000 Contribution 3 10,000 10,000 20,000 Total Long Term Contributions 2,000,000 2,010,000 1,915,000 5,925,000

Interest Rate 5% Number of Periods 1 2 3 PV @5% 1,904,762 1,823,129 1,654,249 5,382,140 Total Discount 542,860

Cumulative FV (Check) 1,904,762 3,727,891 5,382,140 -

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PROMISES TO GIVE: FAIR VALUE

Journal entry Adjust PV-12/31/2010

DR CR

PV Discount $269,107

Contribution, Temporarily Restricted $269,107

Client Name Accounts Receivable Discount

12/31/2010

FY FY FY 2011 2012 2013 Total

Contribution 1 2,000,000 2,000,000 1,900,000 5,900,000 Contribution 2 5,000 5,000 Contribution 3 10,000 10,000 20,000 Total Long Term Contributions 2,000,000 2,010,000 1,915,000 5,925,000

Interest Rate 5% Number of Periods 1 2 PV @5% 2,000,000 1,914,286 1,736,961 5,651,247 Total Discount 273,753

Cumulative PV (Check) 2,000,000 3,914,286 5,651,247 -

PV 2009 542,860

PV 2010 273,753

JE 269,107

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PROMISES TO GIVE: FAIR VALUE

Journal entries DR CR 3/31/2011 Cash 2,000,000 Promises to give 2,000,000 TRNA released from restriction 2,000,000 Releases from restriction 2,000,000

12/31/2011 PV Discount 182,563 Contribution, Temporarily Restricted 182,563

PV 2010 273,753

PV 2011 91,190

JE 182,563

Client Name Accounts Receivable Discount

12/31/2011

FY FY FY 2011 2012 2013 Total

Contribution 1 2,000,000 2,000,000 1,900,000 5,900,000 Contribution 2 5,000 5,000 Contribution 3 10,000 10,000 20,000 Received 3/31/2011 (2,000,000) (2,000,000) Total Long Term Contributions - 2,010,000 1,915,000 3,925,000

Interest Rate 5% Number of Periods 1 PV @5% 0 2,010,000 1,823,810 3,833,810 Total Discount 91,190

Cumulative PV (Check) 0 2,010,000 3,833,810 -

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RECOGNITION PRINCIPLES FOR CONTRIBUTIONS (CONTINUED)

• Donor-imposed conditions – Asset transfer dependent on a future and

uncertain event

Discussion 1

A donor promises to contribute $10,000 to a charity, if they are able to raise an additional $10,000 in 10 days.

1. The charity raises $8,000 in 10 days – What do they book? 2. The charity raises $12,000 in 10 days– What do they book?

Discussion 2 A donor promises to contribute $1,000 to a school for every football game the team wins.

1. When can they book the contribution?

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RECOGNITION PRINCIPLES FOR CONTRIBUTIONS (CONTINUED)

• Intentions to Give – Are conditional, therefore not

booked

Discussion •A donor says “I put you in my will for $1 million” •A donor says “I promise to give you $1 million when I die” •A donor says “If I win the lottery, I’ll give you $1 million”

Are any of the above statements a contribution, conditional, an intention?

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RECOGNITION PRINCIPLES FOR CONTRIBUTIONS (CONTINUED)

• Contributed Services and Gifts in Kind – Services that create or enhance a non-

financial asset – Would typically need to be purchased – Require specialized skills – Measured at fair market value (adequate

documentation)

Discussion

•CPA provides carpentry services to aid with set design for a local theater company (under supervision of carpenter)

•Doctor provides data entry services for a children’s soccer league

•Board members review audit engagement letter

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RECOGNITION PRINCIPLES FOR CONTRIBUTIONS (CONTINUED)

• Donor-imposed restrictions (purpose or time) – No restrictions – Unrestricted – If limitations are temporary; may

expire over time or incurrence of expenditures – Temporarily Restricted

– If limitations are permanent; corpus of the gift must be maintained permanently – Permanently Restricted

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NET ASSETS

• Unrestricted – Designated-Boards can

designate • Temporarily Restricted

– Only donors can restrict • Permanently Restricted

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UNRESTRICTED NET ASSETS

• Donor places no restrictions or is silent to use of funds.

• Donor imposed restrictions should not be considered restrictions unless they are more specific than the broad limits imposed by the organization’s purpose and nature.

• Donors can impose restrictions on an organization’s unrestricted net assets which would result in a reclassification of UR to TR.

• If organization meets donor-imposed restrictions in the same reporting period in which received than maybe reported as UR (need policy).

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UNRESTRICTED NET ASSETS

• Board Designations do not create restrictions on otherwise unrestricted net assets:

• Only Donors can restrict. • Boards can designate. • Amounts can be segregated and

displayed separately within the unrestricted net asset section of the Statement of Financial Position.

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TEMPORARILY RESTRICTED NET ASSETS

• If limitations are temporary; may be restricted for time or purpose.

• It is not possible to release more restricted amounts than available. Any “overspending” of restricted net assets should be charged to UR.

• No expenses should be shown in TR – only releases from restrictions.

• Expiration of donor-imposed restrictions should be shown separately as reclassifications.

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CONDITIONS FOR RELEASES

• Payment received - Donor stipulated time has elapsed

• Donor stipulated purpose has been fulfilled.

• The expiration of donor-imposed restriction is recognized in the period in which the stipulations have been met or expired.

• If expenses are incurred for purposes for which both UR and TR net assets are available, use TR before UR.

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PERMANENTLY RESTRICTED NET ASSETS

• Result from donor imposed restrictions that the inflow must be maintained permanently.

• Usually part or all of the income resulting from investing the restricted revenue may be used.

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CLASSIFICATION PRINCIPLES FOR INCREASES TO NET ASSETS

Discussion •Donor promises to give $1 million over three years for general operating expenses of an organization

•Investment revenue results in a an overall gain. Organization has endowments.

•Organization’s board agrees to spend 5% of the organization’s endowments.

•Donor gives $1 million for the charity to invest for 15 years, and proceeds are to be used to fund a scholarship program

•Donor gives $1 million for the charity to invest in perpetuity, and proceeds are to be used to fund a scholarship program

How would you classify each of these revenues?

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NET ASSETS INS AND OUTS

Category “In” “Out”

Unrestricted

•New donor contributions with no restrictions as to their use •Operating income from exchange transactions and other income •Assets released from restriction

•Operating activities expenses •Investment declines •Other losses •Endowment investments underwater

Temporarily Restricted

•New donor contributions with time or purpose restrictions. •Income on permanently restricted net assets and endowments

•Assets released from restriction due to fulfillment of time or purpose restriction. •Investment declines on endowments/limited to aggregated gains

Permanently Restricted

•New donor contributions with the stipulation they must be invested in perpetuity. •Possibly income on permanently restricted net assets

•Changes by the donor to release these funds from restriction. •Investment declines if designated by the donor (i.e.: split-interest agreements, trusts.)

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THANK YOU!

Jean Gilbert Direct: 202-955-6532 E-mail: jgilbert@raffa.com