Module 4

External (GAAP)Financial Reporting

Convery 2013 1

Describe alternative forms of financial reporting

Identify financial statements required by GAAP

Describe the differences between the cash and accrual bases of accounting

Define exchange and nonexchange transactions

Identify the sources of GAAP for NPOs◦ FASB◦ AICPA

Identify other resources to assist in staying current with GAAP

Convery 2013 2

• Audited financial statements that comply with GAAP

• IRS annual reporting Form 990• Periodic Treasurer’s Reports to the Board

– on a cash or accrual basis– comparisons of budget to actual

• Annual Reports that include outcomes measures as well as some financial data

Convery 2013 3

Statement of Financial Position

Statement of Activities

Statement of Cash Flows

Statement of Functional Expenses - for VHWOs With Notes to the Financial Statements

Convery 2013 4

Reports on an aggregate view of the entity as a whole, rather than on disaggregated funds, as of a point in time

Net assets (assets less liabilities) must be classified into classes:

unrestricted temporarily restricted permanently restricted

Flexibility is allowed in displaying information as long as net assets are classified; such as showing disaggregated fund-based data

Convery 2013 5

• Reports on changes in all classes of net assets for a period of time (revenues, gains, support, 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 and are reported by functional categories (i.e., program vs. support)

• SFAS No. 117 allows considerable flexibility in presenting information; either a single column or three columns for each class of net asset

Convery 2013 6

• Cash flows from Operationsincludes unrestricted gifts

• Cash flows from Investingincludes temporarily and permanently restricted

net assets given for long-term purposes (and related income)

• Cash flows from Financingincludes issuance and repayment of long-term

debt• Noncash Investing and Financing Activities

Includes gifts-in-kind contributions

Convery 2013 7

Voluntary health and welfare organizations (VHWOs) must present this statement showing both functional expenses and natural (object or line item) expenses

Salaries Adoption Mgt and General

Supplies Counseling Fund-raising

Depreciation Education

Convery 2013 8

Functional ExpensesNatural

Expenses

Program Support

• Argument for Cash: It (most often) matches the budgetBoard members understand itInadequate cash flows put organizations at high

risk

• Arguments for Accrual:Monthly reports should lead into the audited annual

financial statement so there are no surprises caused by auditor’s accrual adjustments, such as depreciation

All information is captured (i.e., what is earned and incurred)

Convery 2013 9

Revenues are increases in unrestricted net assets that arise from bilateral exchange transactions in which the other party receives direct tangible benefits commensurate with the resources provided.

Examples include: membership dues program service fees sales of supplies and services investment income some grants

Convery 2013 10

Unrestricted net assets when no donor restrictions exist or the restrictions have expired

Temporarily restricted net assets when the donor imposes restrictions as to purpose (how the asset is used) or time (when the asset is used)

Permanently restricted net assets when the donor stipulates that the assets must be held in perpetuity, but the organization can spend the income

Convery 2013 11

Unconditional promises depend only on the passage of time or demand by the promisee for performance. Record these as support in the period made

Conditional promises depend on the occurrence of a specified future and uncertain event to bind the promissor, such as obtaining matching gifts by the recipient. Do not record these as support until the conditions are substantially met

Convery 2013 12

Audit and Accounting Guide Not-for-Profit Organizations, updated each May

Not-for-Profit Organizations – Annual Audit Risk Alert

See: www.aicpa.org

Convery 2013 13

Convery 2013 14

Example: GAAP for a Health Care Organizations

For-Profit:Proprietary

Not-for-Profit:Voluntary

Governmental:Public

AICPA Audit and Accounting Guide Health Care Organizations

FASB Guidance

GASB Guidance

Convery 2013 15

•SFAS No. 93 — recognition of depreciation

•SFAS No. 116 — accounting for contributions

•SFAS No. 117 — financial statement display

•SFAS No. 124 —accounting for investments

•SFAS No. 136 —agent, trustee, intermediaries•SFAS No. 133 derivatives and hedging activities, June 2000, see related 137, 138.•SFAS No. 132 - pension disclosures•SFAS No. 121 —impairment of long-lived assets•SFAS No. 157 Fair Value Measurements•SFAS No. 158 Employers’ Disclosures about Pensions and Other Postretirement Benefits-an amendment of FASB Statements No. 87, 88, and 106•SFAS No. 159 The Fair Value Option for Financial Assets and Financial Liabilities•SFAS No. 164 Mergers and Acquisitions for Not-for-Profit Organizations

GAAP from FASB (note: see Codification)

Convery 2013 16

•AICPA Statement of Position 98-2

•GASB Statement No. 39 Determining Whether Certain Organizations are Component Units, June 2002.

GAAP from AICPA and GASB (see Codification)

Convery 2013 17

GAAP that Differs between GASB and FASB

• reporting entity

• contributions

• financial statement display

• cash flows

• deposits and investments (i.e., see GASB Statement No. 31, SFAS No. 115, and SFAS No. 124)

• operating leases

• compensated absences

• debt refunding; risks and uncertainties

• pensions; other post retirement benefits (OPEB)

Revises SOP 87-2 on joint costs making it more difficult to allocate “educating the public” or “advocacy” costs to program expenses.

Provides that costs of all materials and activities that include a fund-raising appeal should be reported as fund-raising costs unless a bona fide program or management & general function has been conducted in conjunction with the appeal for funds.

Costs that are clearly identifiable should be charged to program, management and general, or fund-raising. The joint costs of a bona fide program or management and general function should be allocated between those cost objectives and fund-raising.

Criteria of (1) purpose, (2) audience (3) content must be met in order to conclude that a bona fide program or management & general function has been conducted in connection with fund-raising.

Goes beyond SOP 87-2 by covering total costs, not just joint costs, and applying to state and local governmental entities, as well as to NPOs.

Convery 2013 18

Convery 2013 19

Accounting for Certain Investments Held by Not-for-Profit Organizations

• Mark equity and debt investments to market. • Report realized and unrealized gains and losses

and investment income in the Statement of Activities

• Report income and gains and losses as changes in unrestricted net assets, unless their use is restricted by the donor or legally restricted by state law

• Similar to SFAS No. 115 for businesses and GASB Statement No. 31 for governments, but simpler

Investments SFAS No. 124

Convery 2013 20

NPOs have varied relationships with other NPOs, for-profit businesses, and governments characterized by:

Ownership - financial equity interest in another organization

Control - having the power to appoint the majority of Board members

Economic interest - having the right to receive or use resources, receive income or services, or obligated to pay the debt of another organization.

Financially Interrelated Entities

“Transfers of Assets to a Not-for-Profit Organization or Charitable Trust That Raises or Hold Contributions for Others” (June 1999)

An organization that receives financial assets from a donor and agrees to transfer them to a specified “unaffiliated” beneficiary should recognize the fair value of those assets as a liability, not revenue. ◦ i.e., acting as an intermediary◦ e.g., most federal fund-raising foundations, such as United

Ways and community foundations.

An organization that receives “variance power” to redirect the assets to another beneficiary, or if the recipient organization and the specified beneficiary are “financially interrelated” organizations recognizes the assets as contributions received. ◦ i.e., acting as a donee and donor◦ e.g., captive fund-raisers, such as institutionally-related

foundations

Convery 2013 21

If the designated beneficiary organization is “financially interrelated” to the recipient NPO, then it records an interest in net assets of the intermediary

If not financially related, then no accounting prior to the transfer.

Convery 2013 22