Week 4 Homework
Susanne Henderson Jun 8, 2015 3:05 PM

1.  A not-for-profit organization receives a restricted gift. When, and in which type of fund, should it recognize the revenue? When, and in which type of fund, should it recognize the related expense? What is the reason for the apparent inconsistency between the fund types in which the revenues and expenses are reported?
According to SFAS No 116, “all contributions are reported as revenue, in the restricted class of net assets… at the time of receipt of the gift. The presence or absence of explicit or implicit donor-imposed time or purpose restrictions on the use of a gift do not affect the timing of revenue recognition, only the class of net assets in which they are reported.” (Graham, 2012). The reason for the gift would determine to which type of fund it would be assigned to (temporarily restricted, permanently restricted). The record of a restricted gift includes a debit in cash and a credit in a restricted fund. According to SFAS No. 117, “All expenses are reported in the unrestricted class. Temporarily restricted net assets are reclassified to match related expenses and the expiration of time restrictions”. Expenses using resources that are temporarily restricted would be matched by a reclassification of resources from temporarily restricted to unrestricted net assets. A related expense can be recognized when incurred, debiting net assets released from restriction and crediting a cash account. The statement of activities incorporates revenues as a negative position. According to FASB Statement No. 117, the statement of activities should report on the organization as a whole not each fund.

Answers are correct but the statement did not answer the last question which is the reason for inconsistency. It should state that the reason is due to the restrictions on the gift and the expenditure of the resource is often not recognized in the same accounting period.

3.Members of the National Accounting Association, a not-for-profit organization, are charged annual dues of $150. Of this amount, $50 is restricted, per association policy, to covering the cost of the association’s journal, which every member receives. In what category of restrictiveness should the association report the portion of revenues associated with the journal? Explain.

According to FASB Accounting Standards Codification (2010), “In an exchange transaction, the potential public benefits are secondary to the potential proprietary benefits to the resource provider. The term contribution revenue is used to apply to transactions that are part of the entity’s ongoing major or central activities, or are peripheral or incidental to the entity.” Hence, the portion of the dues restricted to covering the cost of the journal appears to be more the result of an exchange transaction than a contribution and should be classified as unrestricted because the it is not donor restricted.

The answer is correct, it is unrestricted and a result of an exchange transaction, and not classified as a contribution.

References

FASB. (2010). Not-for-profit entities (Topic 958). Retrieved from http://www.fasb.org/cs/BlobServer?blobcol=urldata&blobtable=MungoBlobs&blobkey=id&blobwhere=1175820195550&blobheader=application/pdf

Graham,L., & Carmichael,D.R. (2012).Accountants' handbook. Hoboken, NJ: Wiley.

Wiley Insight. (2015). Wiley Not-for-Profit GAAP 2013: Interpretation and Application of Generally Accepted Accounting Principles. Retrieved from http://ifrs.wiley.com/chapters/w9781118363249c09

Week 4 Discussion - Anderson
Cynthia Anderson Jun 8, 2015 11:11 AM

2. A foundation promises to donate $1 million to a local public broadcasting station (a not-for-profit organization) in one year. When, and in what amount, should the station recognize revenue? The station applies a discount rate of 10 percent to all pledges. Would your response be the same if the foundation pledged to donate the funds only if and when the station agreed to carry a particular program? Why do many not-for-profits object to the standards pertaining to revenue recognition of pledges?

Pledges should be recognized in a restricted fund upon receipt and should be measured at the present value of estimated future cash flows using a risk free rate. Hence the station should recognize revenue of $909,091 (the present value of $1 million discounted for one year at 10 percent) upon receiving the pledge. If the pledge were conditional upon agreeing to carry a particular program, then it should be recognized as revenue only when the program airs. Many NFPs object to the requirement that pledges be recognized as revenue because the donation is not available for expenditure until ithas been received. For this reason, opponents contend that the entity’s financial statements leave the impression that the organization has command of greater resources than it actually does.

The answer is correct, revenue recognized upon receiving pledge is $909,091. Also, the answers given to the questions are fairly reasonable.

3. Members of the National Accounting Association, a not-for-profit organization, are charged annual dues of $150. Of this amount, $50 is restricted, per association policy, to covering the cost of the association’s journal, which every member receives. In what category of restrictiveness should the association report the portion of revenues associated with the journal? Explain.

The portion of the dues restricted to covering the cost of the journal appears to be more the result of an exchange transaction than a contribution. Therefore, since it is not donor restricted, it should be classified as unrestricted.

The answer is correct, it is unrestricted and a result of an exchange transaction, and not classified as a contribution.

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