GENERAL NOTES on NFP’s (and extract from a local NFP)
Contributions.
A unique characteristic of contributions is that they are often subject to externally imposed restrictions that specify how the resources contributed are to be used or, in some cases, that they be maintained permanently. (Note: cannot internally restrict a contribution - can only internally restrict net assets or fund balances).
Not-for-profit organizations have three types of contributions to report: endowment contributions, restricted contributions and unrestricted contributions.
There are two acceptable methods for accounting for contributions: the deferral method and the restricted fund method.
The following decision tree shows the alternative methods of presentation of financial statements of not-for-profit organizations.
DEFERRAL METHOD
Under the deferral method, contributions for which externally imposed restrictions have not been met are accumulated as deferred contributions in the statement of financial position. Under this method, endowment contributions are not recognized as revenue at all since they must be maintained permanently.
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 (including unrestricted contributions) are reported as revenue of the current period
* Endowment contributions will never be available to meet expenses associated with the organization's service delivery activities. Therefore, an organization following the deferral method would exclude such contributions from revenue available for current expenses by recognizing them as direct increases in net assets.
RESTRICTED FUND METHOD
The restricted fund method is a specialized use of fund accounting in which the organization presents total general funds and at least one restricted fund and an endowment fund where applicable. Most restricted contributions and endowment contributions are reported separately from unrestricted resources by using restricted funds and an endowment fund.
Under the restricted fund method of accounting:
· restricted contributions other than endowment contributions and other externally restricted revenue would be reported as revenue in a restricted fund. (All revenue reported in a restricted fund is externally restricted.)
· Endowment contributions and investment income (subject to restrictions stipulating that it be added to the principal amount of the endowment fund) would be reported as revenue in the endowment fund.
· All other contributions are recorded in the general fund
o unrestricted revenue is recognized as revenue of the restricted fund when the contribution is received
o restricted contributions (for which no corresponding restricted fund is presented) are deferred under General fund until expensed.
Note: segregating financial statement information by program or geographical area does not constitute restricted fund accounting.
So…what is the best method to recommend? (Note: first you would provide a brief explanation of the differences in these methods.) Determine who the users of the statements will be, what their needs are, and the extent to which recommendations provide relevant and reliable information for these users. This will help you determine the method which is best suited for your organization.
For an NFP that receives recurring restricted contributions, the restricted fund method may provide donors with simple but relevant information on how their donations are being used
The deferred contribution method may be more difficult for users to understand. Since contributions for future periods are deferred and not reported until used this adds a level of complexity to those users expecting immediate recognition..
Membership Fees
Some membership fees have characteristics of both fees for services and contributions. Such fees would be divided into the portion that relates to fees for services and the portion that is in substance a contribution. (Look for these hints in the case facts.)
Contributed materials and services
.An organization may choose to recognize contributions of materials and services, but should do so only when a fair value can be reasonably estimated and when the materials and services are used in the normal course of the organization's operations and would otherwise have been purchased.
.Organizations may receive a significant amount of contributed materials and services. Often these contributions are not recorded because of record-keeping and valuation difficulties. For example, it may be impractical to record the receipt of contributed services where the organization depends heavily on the use of volunteers to provide services.
A contribution of assets other than cash would be measured at fair value. Fair value would be estimated using market or appraisal values. For contributed materials and services that are normally purchased, fair value would be determined in relation to the purchase of similar materials and services. (FYI: “free” rent is a common example)
Note: Donated capital assets should be reported at fair value (if reasonably determinable) or at a nominal value and amortized over their estimated useful lives.
OTHER:
Incentives
Typically NFP’s do not have excess funds to pay out for compensation. Also, it is most likely that the individuals working for the NFP’s do so partially out of the desire to make a contribution to a program that benefits a segment of society. Creating an incentive program requires you to recognize the financial constraints while being cognizant of the motivation for individuals to accept employment at an NFP.
KPI’s (key performance indicators) – it is necessary to look at these from the perspective of the key users (donors; government agencies). Donors are particularly interested in the effective use of donations made. They are interested in how many donations have been made – of cash and other items. Thus, this indicates there is merit in recording contributed materials and services. (Hint: This gives you the opportunity to integrate the issue of non recorded contributed materials/services and a related KPI.)
How could this knowledge be tested in a case question?
Example of case facts:
NFP Organization uses the restricted fund method of accounting for contributions with three separate funds – operating fund, capital fund and endowment fund .Capital assets are capitalized and amortized, as applicable, over their estimated useful lives.
Using donated funds from various sources, the Club established an endowment fund for paying scholarships on an annual basis. This fund was established on at the beginning of the year (January 1) with the condition that the principal amount of $100,000 be invested in 3% corporate bonds to be held to their maturity dates. The interest earned is to be used for the scholarships.
Extract from suggested solution:
Scholarship funding
Since the restricted-fund method is used and an endowment fund is set up, both the $100,000 and the interest income from corporate bonds will be presented as a revenue item as part of the endowment fund.
· Formulates, analyzes, and processes transactions in accordance with applicable professional standards and policies (PK:FA:1)
EXHIBIT 1 Example of an NFP
(narrative provided by a Manitoba student who works in a non profit organization)
SMB prepares their own set of financial records and is also required by the agreement with the Province of Manitoba to ensure that the sport partners that are funded are complying with all terms and conditions of funding. One of the many compliance terms is that they must also prepare audited financial statement for SMB.
The deferred method used by SMB will be addressed below and then there will be a brief discussion of the restricted fund method chosen by some of SMB’s partners.
SPORT MANITOBA INC
Sport Manitoba Inc (SMB) is a not-for-profit umbrella organization, funded through an agreement with the Province of MB. SMB’s purpose is to lead and support participation and achievement in sport by all Manitobans. As a not-for-profit SMB is exempt from income taxes.
Significant Accounting Policies
Revenue Recognition
As a not-for-profit Sport MB has the option of using either the deferral method or the restricted method for recognizing contributions. SMB has chosen to follow the deferral method of accounting for contributions, including for government grants.
All unrestricted contributions and operating grants are recognized as revenue when received or receivable (as long as the amount can be reasonably estimated). The unrestricted program support from the government is an example of this type of revenue.
Externally restricted contributions and grants are recognized as revenue in the year in which the related expenses are recognized.
Endowment contributions are recognized as an increase in net assets when received. They are not reflected at any point in time in the statement of operations as they will never be considered to have related expenses.
Inventories
Inventories are valued at the lower of cost and estimated realizable value with cost being determined using FIFO.
Capital Assets
Capital Assets are stated at cost. Amortization is recorded on a straight-line basis using the following terms.
Leasehold improvements are also recorded at cost and are amortized on a straight line basis over the remaining term of the lease.
Any gain or loss on disposal of these assets is charged to operations in the year of disposal.
Internally restricted funds:
SMB currently has two funds which are internally restricted by the Board of Directors.
The first fund – the initiative program is be used to meet exceptional or one time initiative and to support SMB’s pro-active participation in collaborative projects with partners in sport.
The second fund represents funding to the MB Games Council, Host Society and Regions for the biannual planning and running of the Summer and Winter Games.
Princess Royal Pan Am Scholarship Endowment
SMB received $100,000 to establish the Princess Royal Pan Am Scholarship endowment. The principal cannot be used to fund programs. The investment income earned is used to provide annual scholarships.
Deferred contributions
Deferred contributions relate to expenses of future periods that represent restricted funding that has been received for future expenses. SMB has two programs that use deferred contributions funds and they are the Western Canada Summer Games, and Future Bids as well as the Bilateral program. The revenue is received and set up as deferred contribution until the matching expense takes place.
Required Statements of a not-for-profit
Sport Manitoba’s audited financial statements consist of the following:
Statement of Financial Position
Statement of Operations
Statement of Changes in Net Assets
Statement of Cash Flows (only required to report two classifications to cash flows from operations and cash flows from financing and investing).
Statement of Financial Position areas of classification – Deferred method (SMB)
As required our statement of financial position is broken down into the following classifications (major areas but not limited to):
Assets
Current Assets (Cash, Marketable Securities, AR, Inventory etc)
Capital Assets (Furniture equipment less accum. Amortization)
Liabilities and Net Assets
Current liabilities (AP, accrued liabilities)
Deferred contributions for expenses of future periods
Net assets:
Unrestricted
Internally restricted funds
Scholarship Endowment
Invested in Capital Assets
Revenue and Receipts
SMB’s revenue and receipts consists of several types of income, including but not limited to:
Province of Manitoba
Program Support (unrestricted or restricted)
Federal Government
Program Support (unrestricted or restricted)
Other Income
Endowment contribution
PARTNER OF SPORT MANITOBA – EXAMPLE OF RESTRICTED FUND METHOD
SMB requires that their sport partners that receive funding submit annual audited statements. A few of these partners use the restricted fund method of accounting, and follow GAAP for not-for-profit entities. An extract of the policies and relevant commentary is included below.
Significant Accounting Policies
Fund Accounting
Fund accounting procedures result in a self-balancing set of accounts for each fund established by legal, contractual, or voluntary actions. Each organization’s number and types of funds will vary based on requirements however as a minimum require one general fund, at least one restricted fund, and an endowment account if contributions are received.
Revenue Recognition
Entity follows the deferred method of accounting for contributions.
Restricted Reserve
Certain funds have been received by the organization and their use is restricted. The restricted assets are comprised of XXX
Investments – Restricted Assets
Investments in G.I.C, interest rate xx, matures month, day, year.
Deferred Revenue
The deferred revenue represents funds received in the current fiscal year which relate to expenditures that will be made in the following fiscal year. The majority of deferred revenues was funding for XXS program.
Statement of Financial Position areas of classification -
The presentation of this statement differs from the SMB statement as the classifications are broken down as follows:
Assets
Current Assets
Restricted Assets
Property and Equipment
Liability
Current Liabilities
Accounts payable and accrued liabilities
Deferred revenue
Restricted Reserve
Net Assets
Unrestricted Net Assets
Net Assets Invested in Property and Equipment
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