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Thrive. Grow. Achieve.

Advanced Nonprofit Accounting

ASC 958

• Jean Gilbert, CPA • March 5, 2013

OBJECTIVES

•DISCUSS COMPLEX CONTRIBUTION AGREEMENTS AND UNDERSTAND DONOR INTENT

•UNDERSTAND HOW TO ACCOUNT FOR REVENUE DERIVED FROM ENDOWMENTS

•OBTAIN BASIC UNDERSTANDING OF ACCOUNTING FOR SPLIT INTEREST AGREEMENTS

•DISCUSS ACCOUNTING TREATMENTS FOR DONATED GOODS AND SERVICES

•OBTAIN BASIC UNDERSTANDING OF FORWARD CURRENCY CONTRACTS

APRIL, 2011: BOSE MAKES STOCK DONATION TO MIT

Amar Bose, Founder of a company that bears his name, has given the majority of the stock of Bose corporation to the Massachusetts Institute of Technology.

The gift is in the form of non-voting shares, MIT said, and it added that

it will receive annual cash dividends on those shares when dividends are paid by Bose Corp; those cash dividends will be used by MIT to sustain and advance MIT’s education and research mission.

“Under the terms of the gift, MIT cannot sell its Bose shares and will

not participate in the management or governance of the company,” MIT said.

Asked about the value of the gift, an MIT spokesman replied by e-mail

“Dr. Bose and Bose Corp., a privately held company, keep details of financial matters confidential. MIT will honor that confidentiality and will not discuss the financial details of this gift.”

CONDITIONAL PLEDGE

Terms: $10 million to be paid each December in 2011, 2012, 2013, 2014, 2015 for the purchase of vaccines

Conditions: Funds may be used only if $1B in vaccines are distributed in the eleven months prior.

• How to record if entity is budgeted to distribute $2B in

vaccines each year through 2020? • How to record if entity is budgeted to distribute an

average of $1B in vaccines each year through 2020 • How to record if entity has only a two year projection

of vaccines, and they are $750M in 2011 and $1.25B in 2012

ENDOWMENTS

• Uniform Prudent Management of Institutional Funds Act. Essentially is a law which was adopted within the states governing how an organization may account for, invest and spend endowment funds

UPMIFA

• As defined by UPMIFA: An institutional fund or part thereof, that under the terms of a gift instrument, is not wholly expendable by the institution on a current basis. The term does not include assets that an institution designates as an endowment fund for its own use.

Endowment Fund

• Prudent investment management guidance • Spending policies Rules

ACCOUNTING FOR ENDOWMENTS: REQUIRED DISCLOSURES

•A DESCRIPTION OF THE GOVERNING BOARD’S INTERPRETATIONS OF THE LAWS THAT UNDERLIE THE ORGANIZATION’S TREATMENT OF ENDOWMENT FUNDS

•A DESCRIPTION OF THE ORGANIZATION’S SPENDING POLICY

•A DESCRIPTION OF THE ORGANIZATION’S RETURNS POLICY/EXPECTATIONS

•FINALLY, THE COMPOSITION OF AND CHANGES IN AN ORGANIZATION’S ENDOWMENT NET ASSETS

ACCOUNTING FOR ENDOWMENTS: REQUIRED DISCLOSURES

THE SPENDING POLICY OF ABC ORGANIZATION ALLOWS FOR THE GOVERNING BOARD TO DETERMINE THE AMOUNT WHICH CAN BE EXPENDED ANNUALLY FROM ENDOWMENT EARNINGS. THE AMOUNT MAY NOT EXCEED 5% OF THE ENDOWMENT CORPUS, AND IT MAY NOT BE LESS THAN 2%. IN 2012, THE BOARD VOTED TO SPEND AN AMOUNT EQUIVALENT TO 4% OF THE CORPUS.

ACCOUNTING FOR ENDOWMENTS: REQUIRED DISCLOSURES

THE INVESTMENT POLICY STATEMENT OF THE ABC ORGANIZATION AIMS FOR AN AVERAGE ANNUAL RETURN OF 7% OVER SEVEN YEARS.

ACCOUNTING FOR ENDOWMENTS: REQUIRED DISCLOSURES

Endowment accounts UR TR PR Total Endowment net assets: beginning of the year

(37,123)

1,201

473,906

437,984

Investment Income

29,321

23,288

52,609

Released from Restriction 9,076 (9,076) -0-

Spending per policy (4%) (18,956)

Contributions

112,000

112,000 Endowment net assets: end of the year

(17,682)

15,413

585,906

626,671

ACCOUNTING FOR ENDOWMENTS: CHECKLIST

SPENDING AMOUNT

1. OBTAIN UNITIZED VALUE OF EACH PRNA DONOR-(RATIO OF DONATION TO TOTAL PRNA)

2. OBTAIN THE SPENDING RATE FROM THE BOARD OF DIRECTORS AND MULTIPLY TIMES THE PRNA BALANCE

3. APPLY THE RESULT TO THE RATIO OF EACH DONOR.

ACCOUNTING FOR ENDOWMENTS: CHECKLIST

INVESTMENT ALLOCATION

1. DETERMINE TOTAL INVESTMENT EARNINGS/LOSSES

2. TAKE BEGINNING BALANCE/ENDING BALANCE OF TOTAL NET ASSETS BY NET ASSET CLASS; DETERMINE RATIO OF EACH NET ASSET CLASS BY TOTAL NET ASSETS

3. MULTIPLY RATIO BY TOTAL INVESTMENT EARNINGS.

4. DETERMINE WHETHER URNA NEEDS TO BE MADE WHOLE, (WHEN ENDOWMENTS ARE UNDERWATER) APPLY TO URNA FIRST

5. APPLY REMAINDER AS AN INCREASE TO TRNA

ACCOUNTING FOR ENDOWMENTS: CHECKLIST

DETERMINE RELEASE FROM RESTRICTION

1. RELEASES FROM RESTRICTION CANNOT EXCEED THE AMOUNTS AVAILABLE

2. RELEASE WILL GENERALLY EQUAL THE SPENDING AMOUNT, WITH THE EXCEPTION OF WHEN THE ENDOWMENT IS UNDERWATER

INVESTMENTS: VALUATION

• Initially at acquisition cost; subsequently measured at fair value (using best measurement inputs available)

Debt and equity

securities

• Organizations which took the Fair Value Option (ASC 825-10) must report all other investments at fair value. Normally reported at acquisition cost unless major impairment occurs.

Other

INVESTMENTS: ACCOUNTING

DIVIDEND, INTEREST AND OTHER INVESTMENT INCOME IS GENERALLY REPORTED AS UNRESTRICTED.

EXCEPTIONS:

•Endowment earnings

•Donor imposed restrictions as to the use of the income.

SPLIT-INTEREST AGREEMENTS

CHARITABLE REMAINDER TRUSTS (CRT)

CHARITABLE LEAD TRUSTS (CLT)

POOLED-INCOME FUNDS (PIF)

CHARITABLE GIFT ANNUITIES (CGA)

SPLIT-INTEREST AGREEMENTS

CHARITABLE REMAINDER TRUST/ POOLED INCOME FUND/ CHARITABLE GIFT ANNUITY

• The donor makes a contribution and is also guaranteed an annuity payment

• Accounting entry:

Account Title DR CR Assets held in CRT/PIF/CGA XXX

Liability under CRT/PIF/CGA agreement XXX PV Premium XXX

Contribution income (temp restricted) XXX

SPLIT-INTEREST AGREEMENTS

CHARITABLE REMAINDER TRUST/ POOLED INCOME FUND/ CHARITABLE GIFT ANNUITY

• The first annuity payment is made by charity to beneficiary (fixed pmt under CGA)

• Accounting entry:

Account Title DR CR CRT/PIF/CGA Liability XXX

CRT/PIF/CGA Liability PV Premium XXX Cash XXX

SPLIT-INTEREST AGREEMENTS

CHARITABLE REMAINDER TRUST/ POOLED INCOME FUND/ CHARITABLE GIFT ANNUITY

• Donor dies

• Accounting entry:

Account Title DR CR CRT/PIF/CGA remaining liability XXX

CRT/PIF/CGA liability premium XXX Contribution XXX

Cash XXX CRT/PIF/CGA asset XXX

DONATED GOODS AND SERVICES

•LOANS THAT ARE INTEREST FREE OR ARE BELOW MARKET

•CONTRIBUTED SERVICES

•CONTRIBUTED USE OF ASSETS

•CONTRIBUTED WORKS OF ART AND HISTORICAL TREASURES

DONATED GOODS AND SERVICES

LOANS THAT ARE INTEREST FREE OR BELOW MARKET:

DR CR Loan undertaken Loan payable xxx

Cash xxx

Payment made Cash xxx

Loan payable xxx Interest expense xxx Contribution of interest xxx

DONATED GOODS AND SERVICES

CONTRIBUTED SERVICES

•THE SERVICE CREATES OR ENHANCES A NONFINANCIAL ASSET (SUCH AS EQUIPMENT, INVENTORY, BUILDINGS AND OTHER PROPERTY), OR

•THE SERVICE REQUIRES SPECIALIZED SKILLS, IS PROVIDED BY INDIVIDUALS WHO POSSESS THOSE SKILLS AND THE SERVICE WOULD TYPICALLY NEED TO BE PURCHASED HAD IT NOT BEEN CONTRIBUTED TO THE ORGANIZATION

DONATED GOODS AND SERVICES

CONTRIBUTED USE OF ASSETS

•A DONOR MIGHT ALLOW A CHARITY TO USE ITS AN ASSET WITHOUT PAYING A LEASE PAYMENT OR RENT

•THIS WOULD BE RECORDED AS A CONTRIBUTION

•RECORDED IN THE PERIOD THE ASSET IS RECEIVED

•IF THE ASSET IS BEING DONATED OVER SEVERAL PERIODS

•RECORDED AS A CONTRIBUTION RECEIVABLE AND A CONTRIBUTION AT FAIR VALUE.

•RECEIVABLE REDUCED AND EXPENSE INCREASED AS ASSET IS USED

DONATED GOODS AND SERVICES

CONTRIBUTED WORKS OF ART AND HISTORICAL TREASURES

•A CHARITY IS NOT REQUIRED TO RECORD A CONTRIBUTION IF THE FOLLOWING THREE CRITERIA ARE MET

• THE WORKS MUST BE HELD FOR PUBLIC EXHIBITION, EDUCATION OR RESEARCH

• THE ITEMS ARE PROTECTED, UNENCUMBERED, CARED FOR AND PRESERVED, AND

• THEY ARE SUBJECT TO THE ORGANIZATION’S POLICY THAT REQUIRES THAT PROCEEDS FROM THE SALES OF COLLECTION ITEMS TO BE USED TO ACQUIRE OTHER ITEMS FOR THE COLLECTION

FORWARD CURRENCY CONTRACTS

•ORGANIZATIONS ENTER INTO PURCHASE AGREEMENTS IN CURRENCY OTHER THAN THEIR REPORTING CURRENCY.

• IN ORDER TO PROTECT AGAINST CURRENCY FLUCTUATIONS, AN ORGANIZATION MAY ENTER INTO A FORWARD CONTRACT TO PURCHASE THE CURRENCY FOR WHICH THE PURCHASE IS BEING MADE USING AN AGREED UPON EXCHANGE RATE.

FORWARD CURRENCY CONTRACTS: WHY?

ORG ENTERS INTO A CONTRACT ON JANUARY 31 FOR CHF100,000 OF SERVICES DURING FEBRUARY, PAYABLE ON FEBRUARY 28. CHF AMOUNT REMAINS CHF100,000. THE EXCHANGE RATE FOR CHF ON JAN 31 IS .96, AND ON FEB 28 IS 1.02.

1/31/2011 2/28/2011 Difference

Contract CHF 100,000 100,000 -

Cost USD 96,000 102,000 (6,000)

FORWARD CURRENCY CONTRACTS: WHY?

ORG MIGHT CONTRACT WITH A BANK ON JAN 31 TO PURCHASE CHF AT .98. THE PURCHASE IS TO OCCUR ON FEBRUARY 28 TO HEDGE AGAINST CURRENCY FLUCTUATIONS.

Forward Contract Cost Value Gain/(loss)

Reporting period 1/31 98,000 96,000 (2,000)

Settlement 2/28 98,000 102,000 4,000

Realized gain/(loss) 2,000

FORWARD CURRENCY CONTRACTS

•THE DIFFERENCE BETWEEN THE FORWARD EXCHANGE RATE (CONTRACT RATE) AND THE SPOT RATE (DAILY EXCHANGE RATE) EQUALS THE FAIR VALUE OF THE CONTRACT

•THE FAIR VALUE OF THE CONTRACT MUST BE RECORDED AND REPORTED ON THE STATEMENT OF FINANCIAL POSITION

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THANK YOU!

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