© 2008 Clarence Byrd Inc. 2 Not-for-profit organizations normally do not have a transferable ownership interest

© 2008 Clarence Byrd Inc. 1

Chapter 11Chapter 11Not-For-Profit Accounting


NPO Organizations Defined

Not-for-profit organizations normally do not have a transferable ownership interest.



Not-for-profit organizations are operated exclusively for social, educational, professional, religious, health, charitable, or other not-for-profit purposes.



The resource providers, be they members or contributors, do not stand to benefit because of their status as resource providers.


NPO GAAP

General Approach› Some Handbook sections

are applicable (e.g., Section 1506 which deals with accounting changes)

› Some sections are not (e.g., Section 3465 on income taxes)


NPO Handbook Sections Section 4400 – Financial Statement

Presentation

Section 4410 – Revenue Recognition

Section 4420 – Contributions Receivable

Section 4430 – Capital Assets

Section 4440 – Collections Held

Section 4450 – Controlled and Related Entities

Section 4460 – Related Party Transactions


Fund Accounting Defined

Paragraph 4400.02(c) Fund accounting comprises the collective accounting procedures resulting in a self-balancing set of accounts for each fund established by legal, contractual or voluntary actions of an organization.

Elements of a fund can include assets, liabilities, net assets, revenues and expenses (and gains and losses, where appropriate). Fund accounting involves an accounting segregation, although not necessarily a physical segregation, of resources.


Problems With Fund Accounting

Fund Definition Individual organizations can define the funds that they will use in a totally arbitrary fashion. This means that similar organizations can be made to appear very different through the use of a different group of funds. Further, the use of arbitrarily defined funds can be used to obscure the overall performance of the organization.


Problems With Fund Accounting

Interfund Transfers Until Section 4400 was added to the CICA Handbook, there were no rules governing the reporting of interfund transfers. Such transfers could be made at the discretion of the organization and could be reported in a manner that suggested more activity than the organization was actually experiencing.


CICA Handbook SolutionsFund Definitions

Paragraph 4400.06 An organization that uses fund accounting in its financial statements should provide a brief description of the purpose of each fund reported. (April, 1997)


CICA Handbook SolutionsFund Definitions

Paragraph 4400.12 Interfund transfers should be presented in the statement of changes in net assets. (April, 1997)

Paragraph 4400.13 The amount and purpose of interfund transfers during the reporting period should be disclosed. (April, 1997)

Paragraph 4400.14 The amounts, terms and conditions of interfund loans outstanding at the reporting date should be disclosed. (April, 1997)


Recognition Alternatives

Paragraph 4410.10 An organization should recognize contributions in accordance with either:

› (a) the deferral method; or

› (b) the restricted fund method. (April, 1997)


The Deferral Method

Under the deferral method of accounting for contributions, restricted contributions related to expenses of future periods are deferred and recognized as revenue in the period in which the related expenses are incurred. Endowment contributions are reported as direct increases in net assets.

All other contributions are reported as revenue of the current period. Organizations that use fund accounting in their financial statements without following the restricted fund method would account for contributions under the deferral method.


The Restricted Fund Method

The restricted fund method of accounting for contributions is a specialized type of fund accounting which involves the reporting of details of financial statement elements by fund in such a way that the organization reports total general funds, one or more restricted funds, and an endowment fund, if applicable.

Reporting of financial statement elements segregated on a basis other than that of use restrictions (e.g., by program or geographic location) does not constitute the restricted fund method.


Contributions

A contribution is a non-reciprocal transfer to a not-for-profit organization of cash or other assets or a non-reciprocal settlement or cancellation of its liabilities.

Government funding provided to a not-for-profit organization is considered to be a contribution.


Types Of Contributions

A restricted contribution is a contribution subject to externally imposed stipulations that specify the purpose for which the contributed asset is to be used.

A contribution restricted for the purchase of a capital asset or a contribution of the capital asset itself is a type of restricted contribution.



An endowment contribution is a type of restricted contribution subject to externally imposed stipulations specifying that the resources contributed be maintained permanently, although the constituent assets may change from time to time.



An unrestricted contribution is a contribution that is neither a restricted contribution nor an endowment contribution.


Application Of The Deferral Method

Unrestricted Contributions These contributions can be recognized in the period in which they are received or become receivable.


Application Of The Deferral Method

Restricted Contributions The basic idea here is that the recognition of restricted contributions must be deferred until the restriction is fulfilled. The actual implementation of this will depend on the type of restriction that is involved:


Application of the Deferral Method – Restricted Contributions

Expenses Of Current Period If the restriction is for current period expenses, the contributions should be recognized in the current period.

Expenses Of Future Periods In this case, the contributions should be recognized in the same period or periods in which the related expenses are made.


Purchase Of Capital Assets If the restriction is based on acquiring capital assets that will be amortized, the contributions should be recognized on the same basis that the amortization expense is recorded.

Alternatively, if the contributions are restricted to the acquisition of non-amortizable assets, they should be recorded as direct increases in net assets, without being disclosed as a revenue in the Statement Of Operations.




Repayment Of Debt The recognition pattern here will depend on the purpose for which the debt was incurred:› If the debt was for expenses of one or more

periods, the repayment contributions should be recognized when the related expenses are recognized.

› If the debt was for the acquisition of non-amortizable capital assets, the repayment contributions should be added directly to net assets without being recorded as revenues in the Statement Of Operations.

› If the debt was for any other purpose, the repayment contributions should be recognized as revenue in the current period.


Application of the Deferral Method

Endowment Contributions These contributions should be recorded as direct increases in net assets during the current period. They should not be included in the revenues disclosed in the Statement Of Operations.



Investment Income As was the case with contributions restricted to the repayment of debt, the treatment of investment income amounts is dependent on their nature:› If the investment income is not subject to external

restrictions, it should be recognized as a revenue during the current period.

› …...› …...



Investment Income As was the case with contributions restricted to the repayment of debt, the treatment of investment income amounts is dependent on their nature:› …...

› If the investment income must be added to the principal amount of resources held for endowment, the net investment income should be recorded as a direct increase or decrease in net assets, not as a revenue in the Statement Of Operations.

› …...



Investment Income As was the case with contributions restricted to the repayment of debt, the treatment of investment income amounts is dependent on their nature:› …...› …...› If the investment income is subject to other types

of restrictions, it should be allocated to income on the same basis as was used for restricted contributions (e.g., if it is restricted to purchases of amortizable capital assets, it should be recognized as a revenue on the same basis as the amortization expense is recorded).


Application of the Restricted Fund Method

Unrestricted Contributions These contributions can be recognized in the period in which they are received or become receivable. They should be disclosed in the general fund.



Restricted Contributions The treatment here will depend on whether a restricted fund is being used for the particular type of restriction that is involved. For example, if an organization receives contributions that are restricted to providing food for the homeless, the treatment of these contributions will depend on whether a separate restricted fund has been established for this type of activity.


Application of the Restricted Fund Method – Restricted Contributions

Contributions With A Corresponding Restricted Fund In this case, the restricted contributions should be recognized as a revenue of the related fund in the period in which they are received or become receivable.


Application of the Restricted Fund Method – Restricted Contributions

Contributions With No Corresponding Restricted Fund These contributions should be recognized on the same basis as they would be under the deferral method (e.g., if they are restricted to purchases of amortizable capital assets, they should be recognized as a revenue on the same basis as the amortization expense is recorded).



Endowment Contributions These contributions should be recognized as a revenue of the endowment fund in the period in which they are received or become receivable. Note the difference here from the treatment of these amounts under the deferral method. Under the deferral method, endowment contributions are not recorded as revenues, but as direct increases in the endowment fund assets.



Investment Income As was the case under the deferral method, the treatment of investment income amounts is dependent on their nature:› If the investment income is not subject to external

restrictions, it should be recognized as a revenue during the current period. It would be included in the general fund.

› …..› …..



Investment Income As was the case under the deferral method, the treatment of investment income amounts is dependent on their nature:› …..› If the investment income must be added to the

principal amount of resources held for endowment, the net investment income should be recorded as a revenue in the Statement Of Operations of the endowment fund in the period in which it becomes received or receivable.

› …..



Investment Income As was the case under the deferral method, the treatment of investment income amounts is dependent on their nature:› …..› …..› If the investment income is subject to a restriction

for which there is a corresponding restricted fund, it should be included as a revenue in the Statement Of Operations of that fund in the period in which it becomes received or receivable. If no corresponding restricted fund exists, it should be recognized on the same basis as under the deferral method.


Section 4420 – Contributions Receivable

Paragraph 4420.03 A contribution receivable should be recognized as an asset when it meets the following criteria:› the amount to be received can

be reasonably estimated; and› ultimate collection is reasonably

assured.


Section 4420 – Contributions Receivable - Disclosure

Paragraph 4420.08 When a not-for-profit organization has recognized outstanding pledges and bequests in its financial statements, the following should be disclosed:› (a) the amount recognized as assets

at the reporting date; and

› (b) the amount recognized as revenue in the period.


Non-Monetary Contributions

Criteria For Recognition› Their value must be subject to

reasonable estimation. While this is not explicitly stated, it is likely that many items would not be recognized because the cost of estimation would likely exceed any benefits to be achieved through this process.


Non-Monetary Contributions

Criteria For Recognition› Contributed goods and services

would only be recognized if they would have otherwise been purchased. This is likely to eliminate the recognition of a significant portion of the voluntary services received.


Disclosure - Contributions

Paragraph 4410.21 An organization should disclose:› (a) the policy followed in accounting for endowment

contributions; and› (b) the policies followed in accounting for restricted

contributions.

Paragraph 4410.22 An organization should disclose its contributions by major source.


Disclosure - Contributions

Paragraph 4410.23 An organization should disclose the policy followed in accounting for contributed materials and services.

Paragraph 4410.24 An organization should disclose the nature and amount of contributed materials and services recognized in the financial statements.


Revenue Disclosure – Deferral Method

Paragraph 4410.52 Deferred contributions balances should be presented in the statement of financial position outside net assets.

Paragraph 4410.53 An organization should disclose the nature and amount of changes in deferred contributions balances for the period.


Revenue Disclosure – Deferral Method

Paragraph 4410.55 An organization should disclose the following related to net investment income earned on resources held for endowment:› (a) the amounts recognized in the statement of

operations in the period;› (b) the amounts deferred in the period;› (c) the amounts recognized as direct increases or

decreases in net assets in the period; and› (d) the total earned in the period.


Revenue Disclosure – Restricted Fund Method

Paragraph 4410.73 When restricted contributions are recognized in the general fund in accordance with paragraph 4410.65, any deferred contributions balances should be presented in the statement of financial position outside net assets.

Paragraph 4410.74 When restricted contributions are recognized in the general fund in accordance with paragraph 4410.65, the nature and amount of changes in deferred contributions balances for the period should be disclosed.


Revenue Disclosure – Restricted Fund Method

Paragraph 4410.76 An organization should disclose the following related to net investment income earned on resources held for endowment:› (a) the amounts recognized in the general fund in

the period;› (b) the amounts recognized in each restricted

fund in the period;› (c) the amounts recognized in the endowment

fund in the period;› (d) any amounts deferred in the period; and› (e) the total earned in the period.


Section 4400 – Financial Statement Presentation

Required Statements› Financial Position› Operations› Changes In Net Assets› Cash flows


Financial Position – General Recommendations

Paragraph 4400.18 For each financial statement item, the statement of financial position should present a total that includes all funds reported.


Financial Position – General Recommendations

Paragraph 4400.19 The statement of financial position should present the following:› (a) net assets invested in capital assets;

› (b) net assets subject to restrictions requiring that they be maintained permanently as endowments;

› (c) other restricted net assets;

› (d) unrestricted net assets; and

› (e) total net assets.


Financial Position – External Restrictions

Paragraph 4400.26 The following should be disclosed:

› (a) the amounts of deferred contributions attributable to each major category of external restrictions with a description of the restrictions; and

› (b) the amount of net assets subject to external restrictions requiring that they be maintained permanently as endowments.


Financial Position – External Restrictions

Paragraph 4400.28 The following should be disclosed:› (a) the amount of net assets (fund balances) subject to

external restrictions requiring that they be maintained permanently as endowments;

› (b) the amounts of net assets (fund balances) attributable to each major category of other external restrictions with a description of the restrictions; and

› (c) the amounts of deferred contributions attributable to each major category of external restrictions with a

description of the restrictions.


Statement Of OperationsGeneral Recommendations

Paragraph 4400.37 Revenues and expenses should be disclosed at their gross amounts.


Statement Of OperationsDeferral Method

Paragraph 4400.33 The statement of operations should present› a) for each financial statement item, a total that

includes all funds reported; and

› (b) total excess or deficiency of revenues and gains over expenses and losses for the period


Statement Of OperationsRestricted Fund Method

Paragraph 4400.35 The statement of operations should present the following for the period:› (a) the total for each financial statement item

recognized in the general fund;

› (b) the total for each financial statement item recognized in the restricted funds, other than the endowment fund;

› (c) the total for each financial statement item recognized in the endowment fund; and

› (d) excess or deficiency of revenues and gains over expenses and losses for each of the general fund, restricted funds other than the endowment fund and the endowment fund.


Statement Of Changes In Net Assets

Paragraph 4400.41 The statement of changes in net assets should present changes in the following for the period:› (a) net assets invested in capital assets;

› (b) net assets subject to restrictions requiring that they be maintained permanently as endowments;

› (c) other restricted net assets;

› (d) unrestricted net assets; and

› (e) total net assets.


Statement Of Cash Flows

Paragraph 4400.46 The statement of cash flows should report the total changes in cash and cash equivalents resulting from the activities of the organization during the period. The components of cash and cash equivalents should be disclosed.


Statement Of Cash Flows

Paragraph 4400.47 The statement of cash flows should distinguish at least the following:› (a) cash from operations: the components of

cash from operations should be disclosed or the excess of revenues over expenses should be reconciled to cash flows from operations; and

› (b) the components of cash flows resulting from financing and investing activities, not included in (a) above.


Section 4430 and 4440Capital Assets

Traditional practice excluded from financial statements

Section 4430 requires the usual capitalization and amortization rules

Two important exceptions


Exception 1 – Small Organizations

Paragraph 4430.03 Organizations may limit the application of this Section to the Recommendation in paragraph 4430.40 if the average of annual revenues recognized in the statement of operations for the current and preceding period of the organization and any entities it controls is less than $500,000. When an organization reports some of its revenues net of related expenses, gross revenues would be used for purposes of this calculation.


Exception 1 – Small Organizations - Disclosure

Paragraph 4430.40 Organizations meeting the criterion in paragraph 4430.03 and not following the other Recommendations of this Section should disclose the following:› (a) the policy followed in accounting for capital assets;

› (b) information about major categories of capital assets not recorded in the statement of financial position, including a description of the assets; and

› (c) if capital assets are expensed when acquired, the amount expensed in the current period.


Exception 2 - Collections

Collections› held for public exhibition, education or research;

› protected, cared for and preserved; and

› subject to an organizational policy that requires any proceeds from their sale to be used to acquire other items to be added to the collection or for the direct care of the existing collection.


Capital Assets – Recognition

Paragraph 4430.06 A capital asset should be recorded on the statement of financial position at cost. For a contributed capital asset, cost is considered to be fair value at the date of contribution. In unusual circumstances when fair value cannot be reasonably determined, the capital asset should be recorded at nominal value.


Capital Assets - Amortization

Paragraph 4430.16 The cost, less any residual value, of a capital asset with a limited life should be amortized over its useful life in a rational and systematic manner appropriate to its nature and use by the organization. Amortization should be recognized as an expense in the organization’s statement of operations.

Paragraph 4430.23 The amortization method and the estimate of the useful life of a capital asset should be reviewed on a regular basis.


Capital Assets – Asset Retirement Obligations

Paragraph 4430.25 Obligations associated with the retirement of property, plant and equipment are accounted for in accordance with “Asset Retirement Obligations”, Section 3110.


Capital Assets – Write Downs

Paragraph 4430.28 When a capital asset no longer has any long-term service potential to the organization, the excess of its net carrying amount over any residual value should be recognized as an expense in the statement of operations. A write down should not be reversed.


Capital Assets – Presentation And Disclosure

Paragraph 4430.31 For each major category of capital assets there should be disclosure of:› (a) cost;

› (b) accumulated amortization, including the amount of any write downs; and

› (c) the amortization method used, including the amortization period or rate.


Capital Assets – Presentation And Disclosure

Paragraph 4430.32 The net carrying amounts of major categories of capital assets not being amortized should be disclosed.

Paragraph 4430.33 The amount of amortization of capital assets recognized as an expense for the period should be disclosed.

Paragraph 4430.34 The amount of any write downs of capital assets should be disclosed in the financial statements for the period in which the write downs are made.


Contributed Capital Assets

Paragraph 4430.37 The nature and amount of contributed capital assets received in the period and recognized in the financial statements should be disclosed.

Paragraph 4430.38 Information should be disclosed about contributed capital assets recognized at nominal value



Definitions

› Control of an entity is the continuing power to determine its strategic operating, investing and financing policies without the co-operation of others.

› Joint control of an economic activity is the contractually agreed sharing of the continuing power to determine its strategic operating, investing and financing policies.

› A joint venture is an economic activity resulting from a contractual arrangement whereby two or more venturers jointly control the economic activity.



Definitions (Continued)› Significant influence over an entity is the ability to

affect the strategic operating, investing and financing policies of the entity.

› An economic interest in another not-for-profit organization exists if:

(i) the other organization holds resources that must be used to produce revenue or provide services for the reporting organization; or

(ii) the reporting organization is responsible for the liabilities of the other organization.


Controlled Not-For-Profit Organizations

Paragraph 4450.14 An organization should report each controlled not-for-profit organization in one of the following ways:› (a) by consolidating the controlled organization in its

financial statements;› (b) by providing the disclosure set out in paragraph

4450.22; or› (c) if the controlled organization is one of a large

number of individually immaterial organizations, by providing the disclosure set out in paragraph 4450.26.



Paragraph 4450.22 For each controlled not-for-profit organization or group of similar controlled organizations not consolidated in the reporting organization’s financial statements, the following should be disclosed, unless the group of controlled organizations is comprised of a large number of individually immaterial organizations (see paragraph 4450.26):› (a) total assets, liabilities and net assets at the

reporting date;› (b) revenues (including gains), expenses (including

losses) and cash flows from operating, financing and investing activities reported in the period;

› (c) details of any restrictions, by major category, on the resources of the controlled organizations; and

› (d) significant differences in accounting policies from those followed by the reporting organization.



Paragraph 4450.26 An organization may exclude a group of controlled organizations from both consolidation and the disclosure set out in paragraph 4450.22, provided that› (a) the group of organizations is comprised of a

large number of organizations that are individually immaterial; and

› (b) the reporting organization discloses the reasons why the controlled organizations have been neither consolidated nor included in the disclosure set out in paragraph 4450.22.


Controlled Profit Oriented Organizations

Alternatives

› Can consolidate

› Can use equity method



Paragraph 4450.31 For a controlled profit oriented enterprise, regardless of whether it is consolidated or accounted for using the equity method, the following should be disclosed:

› (a) the policy followed in reporting the controlled enterprise; and

› (b) a description of the relationship with the controlled enterprise.



Paragraph 4450.32 For each controlled profit oriented enterprise or group of similar controlled enterprises accounted for using the equity method, the following should be disclosed:› (a) total assets, liabilities and

shareholders’ equity at the reporting date; and

› (b) revenues (including gains), expenses (including losses), net income and cash flows from operating, financing and investing activities reported in the period.


Joint Ventures

Alternatives› Can use proportionate

consolidation› Can use the equity

method


Joint Ventures

Paragraph 4450.37 For an interest in a joint venture, regardless of whether it is reported using the proportionate consolidation or the equity method, the following should be disclosed:› (a) the policy followed in reporting

the interest; and

› (b) a description of the relationship with the joint venture.


Joint Ventures Paragraph 4450.38 For each interest in a

joint venture, or group of similar interests, accounted for using the equity method, the following should be disclosed:

(a) the reporting organization’s share of the joint venture’s total assets, liabilities and net assets, or shareholders’ equity, at the reporting date;

(b) the reporting organization’s share of the joint venture’s revenues (including gains), expenses (including losses), and cash flows from operating, financing and investing activities reported in the period; and

(c) significant differences in accounting policies from those followed by the reporting organization.


Significantly Influenced NPOs Paragraph 4450.40 When the reporting

organization has significant influence in another not-for-profit organization, the following should be disclosed:› (a) a description of the relationship with the

significantly influenced organization;

› (b) a clear and concise description of the significantly influenced organization’s purpose, its intended community of service, its status under income tax legislation and its legal form; and

› (c) the nature and extent of any economic interest that the reporting organization has in the significantly influenced organization.


Significantly Influenced Profit Oriented Enterprises

Paragraph 4450.43 When the reporting organization has significant influence over a profit oriented enterprise, the investment should be accounted for using the equity method in accordance with “Investments”, Section 3051.


Section 4460 – Related Party Transactions - Definitions

Related parties exist when one party has the ability to exercise, directly or indirectly, control, joint control or significant influence over the other. Two or more parties are related when they are subject to common control, joint control or common significant influence.

Two not-for-profit organizations are related parties if one has an economic interest in the other. Related parties also include management and immediate family members.


Section 4460 – Related Party Transactions - Definitions

A related party transaction is a transfer of economic resources or obligations between related parties, or the provision of services by one party to a related party, regardless of whether any consideration is exchanged.

The parties to the transaction are related prior to the transaction. When the relationship arises as a result of the transaction, the transaction is not one between related parties.


Examples Of Related Parties An entity that directly, or indirectly through one or more

intermediaries, controls, or is controlled by, or is under common control with, the reporting organization.

Management: any person(s) having authority and responsibility for planning, directing and controlling the activities of the reporting organization. (Management would include the directors, officers and other persons fulfilling a senior management function.)

An individual that has either significant influence or joint control over the reporting organization.

An individual who directly, or indirectly through one or more intermediaries, controls the reporting organization.


Related Party Disclosure

Paragraph 4460.07 An organization should disclose the following information about its transactions with related parties:› (a) a description of the relationship between the

transacting parties;› (b) a description of the transaction(s), including those

for which no amount has been recorded;› (c) the recorded amount of the transactions classified

by financial statement category;› (d) the measurement basis used for recognizing the

transaction in the financial statements;› …………


Related Party Disclosure

Paragraph 4460.07 An organization should disclose the following information about its transactions with related parties:› ……..› (e) amounts due to or from related parties and the

terms and conditions relating thereto;› (f) contractual obligations with related parties,

separate from other contractual obligations;› (g) contingencies involving related parties, separate

from other contingencies.


International Convergence

The IASB does not deal with NPOs

The CICA has not indicated what will happen to Section 4400 through 4460 at the changeover date.


Documents

© 2008 Clarence Byrd Inc. 2 Not-for-profit organizations normally do not have a transferable ownership interest