Advanced Accounting: Accounting For Not-for-Profit Organizations

Advanced Accounting
Thirteenth Edition, Global Edition
Chapter 22
Accounting for Not-
for-Profit
Organizations
Copyright © 2018 Pearson Education, Ltd. All Rights Reserved.

Not-for-Profits: Objectives
22.1 Learn about the four main categories of not-for-
profit organizations.
22.2 Differentiate between governmental and
nongovernmental not-for-profit organizations.
22.3 Introduce FASB not-for-profit accounting principles.
22.4 Apply not-for-profit accounting principles to
voluntary health and welfare organizations.

22.1: Categories of Not-For-Profits
Accounting for Not-for-Profit Organizations

Characteristics
Not-for-profit characteristics
– Contributions without expected commensurate
returns
– Purpose is other than providing goods or
services at a profit
– Lacks ownership interests
Accounting for not-for-profits
– Governmental: follow GASB
– Nongovernmental: follow FASB

Categories of NFPs
1. Voluntary health and welfare
2. Hospitals and health care
3. Colleges and universities
4. Other not-for-profits
● Churches
● Museums
● Other NFPs are similar to voluntary health
and welfare, without requiring a statement of
functional expenses.

22.2: Governmental and
Nongovernmental Not-For-Profits

Governmental NFPs
Governmental not-for-profits are NFPs with
– Officers elected or appointed by government
– Government can unilaterally dissolve with
assets reverting to government
– Power to enact/enforce taxes
Follow GASB

Nongovernmental NFPs
NFPs that lack the governmental element
Follow FASB
FASB ASC 958 incorporates the two previous FASB

Statements which provided guidance for
Nongovernmental Not-for-Profits:
FASB Statement No. 116
● Contributions
FASB Statement No. 117
● Financial statements

22.3: Accounting Principles

Financial Statements
Statement of financial position
Statement of activities
● Replace with "Statement of operations" and
"Statement of changes in net assets" for
hospitals and health care
Statement of cash flows
Statement of functional expenses
● Required only for voluntary health and
welfare organizations

Statement of Financial Position
• The statement of financial position or balance sheet
reports assets, liabilities, and net assets.
• It reports net assets in total and by the three classes of net
asset- unrestricted, temporarily restricted, and permanently
restricted.
• Permanently and temporarily restricted amounts appear on
the face of the balance sheet or in notes.
• Assets received with donor imposed restrictions that limit
their use to long-term purposes should be separated from
assets available for current use.
• Comparative statements from the prior period are not
required.

Statement of Activities
The statement of activities provides information about the
change in amount and nature of net assets and reports how
resources are used to provide various programs or services.
Changes in net assets shown separately for
● Unrestricted net assets
● Temporarily restricted net assets
● Permanently restricted net assets
Revenues and contributions are shown in all three categories,
but expenses are shown only in unrestricted net assets.
Reclassifications
● Move amounts from temporarily restricted to
unrestricted net assets
- Expiration of time restrictions
- Fulfillment of purpose restrictions
Statement of Functional Expenses
• VHWOs (Voluntary Health and Welfare Organizations)
must report expenses classified by function and by
natural classification (salaries, rent, etc.) in a matrix
format as a separate statement.
• Other NFP organizations are encouraged, but not
required, to provide this additional expense information.

Contributions
• For some NFP entities, contributions are a major source of revenue.
• GAAP defines a contribution
“An unconditional transfer of cash or other assets to an entity or a

settlement or cancellation of its liabilities in a voluntary, nonreciprocal
transfer by another entity acting other than as an owner.”
• Examples of other assets include buildings, securities, the use of
facilities or services, and unconditional promises to give.

Contributions
• GAAP describes a promise to give as
“a written or oral agreement to contribute cash or other assets to another entity.”
The promise should be verifiable by evidence such as pledge cards or tape

recordings of oral promises. A promise to give may be conditional or
unconditional.
• conditional promise to give depends on the occurrence of a specified future
and uncertain event to bind the promisor. For example, a church parishioner
may pledge to contribute a sum of money if a local government approves a
proposed church renovation.
• Organizations recognize conditional promises to give as contribution revenue
and receivables when the conditions are substantially met (in other words,
when the conditional promise to give becomes unconditional);
• However, they account for a conditional gift of cash or other asset that may
have to be returned to the donor if the condition is not met as a refundable
advance (liability).

Contributions
• An unconditional promise to give depends only on the passage of time or
demand by the promisee for performance.
• Organizations recognize unconditional promises to give as contribution
revenue and receivables in the period in which the promise is received.
• Generally, NFP organizations measure restricted and unrestricted contributions
at fair value and recognize them as revenues or gains in the period in which
they are received.
Contributions are separated into the three classes of net assets on the statement
of activities:
 Those that increase unrestricted net assets,
 Those that increase temporarily restricted net assets, and
 Those that increase permanently restricted net assets.

Contributions (continued)
donor-imposed restrictions
● Contribution revenue is temporarily
restricted (time or purpose) or permanently
restricted.
● When temporary restriction is met, reclassify
temporarily restricted net assets as
unrestricted net assets.
Gifts of long-lived assets
● Temporarily restricted net assets if donor
imposed

Transfers (Non-contribution)
Contributions do not include several
items:
• Transfers that are exchange transactions
• Transfers in which the NFP enterprise is
acting as an agent, trustee, or intermediary
for the donor;
• or possibly gifts in kind.

Transfers (Non-contribution)-Exchange
transactions
• In which both parties give and receive approximately equal value.
Sales of products and services are exchange transactions.
• Sometimes difficult to distinguish from contributions.
• Assume that an NFP organization sends calendars (premiums) to
potential donors in a fund-raising appeal. The recipients keep the
premium whether or not they make a donation. In this case, the
donations that result from the calendar mailing are contributions, and
the cost of premiums is a fund-raising expense.
• If donors receive gifts that approximate the value of their donations,
the transaction is an exchange.
• Resources received in exchange transactions are classified as
unrestricted revenues and unrestricted net assets even if the resource
provider limits use of the resources.

Transfers (Non-contribution)-Agency
transactions
An agency transaction is one in which assets are transferred to the
NFP organization, but the NFP organization has little or no discretion
over the use of those assets, and the assets are passed on to a third
party.
The resource provider is using the NFP entity as an agent or
intermediary to transfer assets to a third-party donee.
For example, the United Way often acts as an agent by collecting
contributions for distribution to a number of local organizations.
Under GAAP, the receipt of assets in an agency transaction increases
the assets and liabilities of the NFP agent, and disbursement of those
assets decreases assets and liabilities.
No contribution revenue or program expense is recorded by the agent.
The NFP agent reports the cash received and paid as cash flows from
operating activities in the statement of cash flows.
Transfers (Non-contribution)-Gifts in Kind
• Gifts in kind are noncash contributions, such as clothing, furniture,
and services.
• They are contributions if the NFP entity has discretion over the
disposition of the resources. Otherwise, the entity will account for the
gifts as agency transactions.
• Organizations measure gifts in kind that are contributions at fair
value, if practicable.
• When fair value cannot be reasonably determined, NFP entities
should not record the gifts as contributions. Instead, they record the
items as sales revenue when they are sold. Cost of sales is the cost
of getting the inventory ready for sale.

22.4: Voluntary Health and Welfare

VHWO-CONTRIBUTIONS
• As part of its fund-raising effort in 2016, NHN distributed
decals to all residents in the community. The decals cost
NHN $145. As a result of the campaign, the organization
received unrestricted cash contributions of $4,000 and
unconditional promises to give totaling $6,000. Of this
$6,000 contribution receivable, $2,000 is not collectible
until 2017. A presumption exists that the $2,000 due in
2017 is restricted for use in 2017. NHN estimates that 10
percent of the pledges will be uncollectible and makes the
following entries in 2016:

Contributions:
Expenses - supporting services - fund raising 145 blank
Cash blank 145
Cash 4,000 blank
Unrestricted support – Contribution blank 4,000
Contribution receivable 6,000 blank
Allowance for uncollectible contributions blank 600
Unrestricted support—contributions 3,600
Temporarily restricted support—contributions 1,800
NHN collected $3,600 of the contributions receivable due in 2016 and wrote off
the remaining $400 as uncollectible:
Cash 3,600 blank
Allowance for uncollectible contributions 400
4,000b
Contribution receivable lank

Contributions:
Assume NHN collects the full $2,000 due in 2017 during that year. When
the receivables are collected, NHN reports any difference between the estimated
amount of uncollectibles and the actual amount as a gain or loss in the
appropriate net asset class. The implied time restriction is met, so NHN
reclassifies $1,800 of temporarily restricted net assets as unrestricted net assets:
Cash 2000 blank
Allowance for uncollectible contributions 200
Contribution receivable 1800
Unrestricted support – Contribution 200
Temporarily restricted net assets—reclassifications

out 1800 blank
Unrestricted net assets—reclassifications in 1800

Contributions:
A donor gives NHN $1,000 that is restricted for a playground project. NHN
purchases supplies for the playground project for $900 and reports the expenses as
changes in unrestricted net assets. The organization makes an entry to reclassify
$900 of temporarily restricted net assets. The reclassification
is entered even though unrestricted resources were used to pay for the playground
supplies: Cash 1,000 blank
To record a gift restricted for a special project.
Expenses—program services—community service 900
Cash 900
To record purchase of supplies used in the playground project
out 900
To reclassify net assets restricted for the playground project for which
the restriction has been met.

DONATED LONG-LIVED ASSETS
NHN has a policy of implying a time restriction on donated
fixed assets over the life of each asset. On January 1, 2016,
Martin Construction donated a used van to the organization.
The fair value of the van is $1,500, and it has a three-year
remaining useful life. The van will be used in the
organization’s community service program.
NHN initially records the donated van as temporarily
restricted support. Later, NHN records depreciation expense
on the van as a program expense. The amount of
depreciation expense is reclassified from temporarily
restricted net assets to unrestricted net assets, because all
expenses decrease unrestricted net assets.

DONATED LONG-LIVED ASSETS
Equipment 1,500 blank
To record receipt of donated van.
Expenses—program services—community service 500
Accumulated depreciation—equipment 500
To record depreciation.
out 500
To record reclassification of net assets for which the
temporary restriction is satisfied.

SPECIAL EVENT FUND-RAISERS
A fund-raising event for NHN featured a dinner and dance.
Ticket sales for the dinner totaled $950, and expenses of the
fund-raiser amounted to $650. VHWOs generally report gross
revenues and expenses for special events related to the major
ongoing activities of the organization in which attendees receive
a benefit. If the special event is incidental to the activities of the
organization, the organization may report the proceeds of the
special event as gains net of direct costs:
Cash 950 blank
Unrestricted gains—special event blank 950
To record proceeds from a fund-raising event.
Unrestricted gains – special event 650
Cash 650
To charge costs of fund-raising event against support from the event.

GIFTS IN KIND
Throughout the summer, NHN receives donations of used housewares and
furniture that are then sold at a rummage sale held in August. Fair values for the
donated items cannot be reasonably determined, but the cost of storing and
moving the items to the rummage sale location is $550. Proceeds from the sale
are $6,595. Because the fair value cannot be determined, NHN cannot record the
items as contributions:
Cost of goods sold 550

Cash 550
To pay costs of storing and moving rummage sale items
Cash 6,595
Unrestricted revenues—sales 6,595
To record proceeds from rummage sale.

GIFTS IN KIND
• if the fair value of donated items can be reasonably determined, the gifts in
kind are recorded as contributions.
• Office-Mate Company donates office supplies with a fair value of $390 to NHN.
Office-Mate puts no restrictions on the use of the donated items. The
organization records the gift as follows:
Materials and supplies inventory 390

Unrestricted support—contributions 390
To record receipt of office supplies.

MEMBERSHIP FEES
• Memberships give members certain benefits, such as the right to receive the
organization’s newsletters.
• In cases in which the fair value of member benefits is less than the amount of dues,
VHWOs divide the transfers between contributions and revenues. An organization may
have different levels of memberships, but the more-expensive memberships do not
necessarily entitle the members to additional benefits. The excess payments are
classified as contributions.
• NHN offers regular memberships for $10 and sustaining memberships for $50 and over.
All members are entitled to the same newsletter and local discount coupons that are
distributed when the dues are received. NHN received 500 regular memberships
($5,000) and 130 sustaining memberships ($6,500), which it records as follows:
Cash 11,500
Unrestricted revenues—dues [(500 + 130)* 10] 6,300
Unrestricted support—contributions(130 * 40) 5,200
To record revenue and support from the sale of memberships.

DONATED SECURITIES AND
INVESTMENT INCOME
• NHN receives securities (fair value of $5,000) with a stipulation that they permanently
endow a park enhancement project. Income earned on the securities is restricted to use
for the park enhancement project. Dividend income is $475:
Securities 5,000
Permanently restricted support—contribution 5,000
To record receipt of securities permanently restricted for a park enhancement project.
Cash 475
Temporarily restricted revenue—investment income 475
To record investment income restricted for a park enhancement project.

SUPPLIES
• NHN had supplies on hand of $1,600 at January 1, 2016. The organization purchased
supplies for $1,500 during the year and received donations of supplies that had a fair
value of $2,050 in addition to the $390 already received. At the end of 2016, the
inventory on hand was $750. The supplies used were allocated to recreation programs,
$2,000; community service programs, $1,400; fund-raising expenses, $600; and
management and general $790:
Materials and supplies inventory 3,550
Unrestricted support—contributions 2,050
Cash 1,500
To record donated materials and supplies and to record purchase of supplies.
Expenses—supporting services—management and general 790
Expenses—program services—recreation programs 2,000
Expenses—program services—community service 1,400
Expenses—supporting services—fund-raising 600
Materials and supplies inventory 4,790
To record allocation of supplies expense.

DONATED SERVICES AND PAYMENT OF SALARIES
An accounting firm donated its services to audit the books of NHN. The audit would have
cost the association $1,200 if the services had not been donated. NHN also paid salaries
allocated to program services and supporting services as follows: recreation programs,
$6,000; community services, $4,000; management and general, $1,500; and fund-raising
$500:
Expenses—supporting services—management and general 1,200
Unrestricted support—donated services 1,200
To record donated services allocated to management and general expenses.
Expenses—supporting services—fund-raising 500
Cash 12,000
To record salaries allocated to program services and supporting services.

DEPRECIATION
Equipment owned by NHN is used to travel through the neighborhood and provide park
programs. There are no explicit or implicit donor-imposed restrictions on the fixed assets,
so the equipment has been recorded as an unrestricted asset. The organization allocates
the $8,000 depreciation expense on the equipment to its program services and supporting
services as follows:
Accumulated depreciation 8,000
To record depreciation allocated to program services and supporting services.

FIXED ASSET PURCHASE WITH
RESTRICTED RESOURCES
• NHN purchased equipment costing $4,000. The equipment was financed by $3,000 from
contributions with donor-imposed restrictions that were accumulated for the purchase of
the equipment and $1,000 from general resources:
Equipment 4,000
Cash 4,000
To record payment for the purchase of equipment.
Temporarily restricted net assets—reclassifications out 3,000
Unrestricted net assets—reclassifications in 3,000
To record reclassification of temporarily restricted net assets.

Advanced Accounting: Accounting For Not-for-Profit Organizations

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Advanced Accounting

Thirteenth Edition, Global Edition

Copyright © 2018 Pearson Education, Ltd. All Rights Reserved.

Copyright © 2018 Pearson Education, Ltd. All Rights Reserved.

Copyright © 2018 Pearson Education, Ltd. All Rights Reserved.

Copyright © 2018 Pearson Education, Ltd. All Rights Reserved.

Copyright © 2018 Pearson Education, Ltd. All Rights Reserved.

Copyright © 2018 Pearson Education, Ltd. All Rights Reserved.

Copyright © 2018 Pearson Education, Ltd. All Rights Reserved.

FASB ASC 958 incorporates the two previous FASB

Copyright © 2018 Pearson Education, Ltd. All Rights Reserved.

Copyright © 2018 Pearson Education, Ltd. All Rights Reserved.

Copyright © 2018 Pearson Education, Ltd. All Rights Reserved.

Copyright © 2018 Pearson Education, Ltd. All Rights Reserved.

Copyright © 2018 Pearson Education, Ltd. All Rights Reserved.

“An unconditional transfer of cash or other assets to an entity or a

Copyright © 2018 Pearson Education, Ltd. All Rights Reserved.

“a written or oral agreement to contribute cash or other assets to another entity.”

The promise should be verifiable by evidence such as pledge cards or tape

Copyright © 2018 Pearson Education, Ltd. All Rights Reserved.

 Those that increase temporarily restricted net assets, and

 Those that increase permanently restricted net assets.

Copyright © 2018 Pearson Education, Ltd. All Rights Reserved.

Copyright © 2018 Pearson Education, Ltd. All Rights Reserved.

Copyright © 2018 Pearson Education, Ltd. All Rights Reserved.

Copyright © 2018 Pearson Education, Ltd. All Rights Reserved.

Copyright © 2018 Pearson Education, Ltd. All Rights Reserved.

Copyright © 2018 Pearson Education, Ltd. All Rights Reserved.

Copyright © 2018 Pearson Education, Ltd. All Rights Reserved.

Copyright © 2018 Pearson Education, Ltd. All Rights Reserved.

Cash 2000 blank

Allowance for uncollectible contributions 200

Contribution receivable 1800

Unrestricted support – Contribution 200

Temporarily restricted net assets—reclassifications

Copyright © 2018 Pearson Education, Ltd. All Rights Reserved.

Copyright © 2018 Pearson Education, Ltd. All Rights Reserved.

Copyright © 2018 Pearson Education, Ltd. All Rights Reserved.

Copyright © 2018 Pearson Education, Ltd. All Rights Reserved.

Copyright © 2018 Pearson Education, Ltd. All Rights Reserved.

Cost of goods sold 550

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Materials and supplies inventory 390

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To record revenue and support from the sale of memberships.

Copyright © 2018 Pearson Education, Ltd. All Rights Reserved.

Permanently restricted support—contribution 5,000

To record receipt of securities permanently restricted for a park enhancement project.

Temporarily restricted revenue—investment income 475

To record investment income restricted for a park enhancement project.

Copyright © 2018 Pearson Education, Ltd. All Rights Reserved.

Materials and supplies inventory 3,550

Unrestricted support—contributions 2,050

To record donated materials and supplies and to record purchase of supplies.

Expenses—supporting services—management and general 790

Expenses—program services—recreation programs 2,000

Expenses—program services—community service 1,400

Expenses—supporting services—fund-raising 600

Materials and supplies inventory 4,790

To record allocation of supplies expense.

Expenses—supporting services—management and general 1,200

Unrestricted support—donated services 1,200

To record donated services allocated to management and general expenses.