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Thrive. Grow. Achieve.
Accounting for Contributions and Net Assets
ASC 958
• Jean Gilbert, CPA • March 5, 2013
1
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 -
21
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?
23
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
24
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.
28
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?
32
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.)
