Not-For-Profit Accounting & Reporting: From Start to Finish

• Chapter 0 - A Roadmap for Today’s Course
• Chapter 1 - The Nonprofit Environment and GAAP
  • Learning Objectives
  • Introduction
  • The Nonprofit Environment
    • Key Differences
    • Unique Financial Reporting Objectives
    • Unique Accounting and Reporting Practices
  • Types of Nonprofit Organizations
    • The FASB ASC and Nonprofit Organizations
  • The FASB Accounting Standards Codificationâ„¢
    • The FASB ASC: Who, What, and When
  • Summary
  • Questions
• Chapter 2 - Financial Reporting
  • Learning Objectives
  • Introduction
  • Fund Accounting
    • A Commonly Used Tool
    • Types of Funds
  • Three Classes of Net Assets
  • The Basic Financial Statements
    • The Statement of Financial Position
    • The Statement of Activities
    • The Statement of Cash Flows
    • The Statement of Functional Expenses
    • Relationships within the Financial Statements
    • Comparative Financial Information
  • Reporting Formats
  • Notes to the Financial Statements
  • Summary
  • Questions
  • Appendix 2A
  • Appendix 2B
• Chapter 3 - Exchange Transactions, Contributions, and Agency Transactions
  • Learning Objectives
  • Introduction
  • Resources for the Mission
  • Exchange Transactions
    • Revenue Recognition
    • Distinguishing Exchange Transactions from Contributions
  • Contributions
    • Conditional Contributions
    • Restricted Contributions
    • Promises to Give
    • Contributed Services
    • Other Contributions
    • Collections
    • Measurement of Contributions
    • Split-Interest Agreements
  • Agency Transactions
  • Summary
  • Questions
  • Appendix 3A
• Chapter 4 - Gains and Losses, Expenses, and Reclassifications
  • Learning Objectives
  • Introduction
  • An Important Determination
    • Special Events and Other Fund-Raising Activities
  • Identifying Gains and Losses
  • Functional Reporting of Expenses
    • Program Services
    • Supporting Services
    • Classification of Expenses Related to More Than One Function
    • Expenses of Materials and Activities That Combine Fund-Raising Activities with Activities That Have Elements of Another Function (Joint Activities)
  • Reclassifications
  • Summary
  • Questions
  • Appendix 4A
  • Appendix 4B
• Chapter 5 - Investments and Split-Interest Agreements
  • Learning Objectives
  • Introduction
  • Investments and Investment Income
    • Initial Recognition
    • Investment Income
    • Valuation Subsequent to Acquisition
    • Unrealized and Realized Gains and Losses
    • Investment Pools
    • Donor-Restricted Endowment Funds
    • Financial Statement Presentation
    • Accounting for Derivative Instruments and Hedging Activities
  • Split-Interest Agreements
    • Initial Recording of Split-Interest Agreements
    • Recording Activities of Split-Interest Agreements
    • Recognition upon Termination of Agreement
    • Financial Statement Presentation
    • Example Journal Entries
    • Types of Split-Interest Agreements
  • Summary
  • Questions
  • Appendix 5A
• Chapter 6 - Measuring Performance and Other Key Topics
  • Learning Objectives
  • Introduction
  • Reporting Information in the Statement of Activities
  • Ratios and Other Tools
  • Input, Output, and Outcomes
  • Regulations
  • Summary
  • Questions
• Chapter 7 - Latest Developments

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Chapter 2 - Financial Reporting

Learning Objectives

After completing this chapter you should be able to

• Understand the use of fund accounting and its effect on financial reporting.
• Recognize the three classes of net assets and their effect on financial reporting.
• Understand the basic financial statements prepared by nonprofits.
• Recognize various reporting formats used by nonprofits.
• Understand where some of the unique nonprofit note disclosure requirements come from.

Introduction

Many nonprofit organizations use fund accounting for internal recordkeeping purposes. However, the financial statements presented by nonprofits are not based on fund accounting but on external restrictions. This chapter will discuss the relationship between fund accounting and net asset reporting. We will also discuss some of the reporting formats utilized by nonprofits.

Fund Accounting

A Commonly Used Tool

Many nonprofit organizations use fund accounting for internal recordkeeping purposes. Some include fund information in their external financial reports. Prior to the issuance of FASB No. 117, Financial Statements of Not-for-Profit Organizations, nonprofit organizations were required to report fund information in their external financial statements.

FASB No. 117 (now FASB ASC 958) changed the requirement to report information about funds. Instead, FASB ASC 958 focuses on reporting aggregated information about the entity as a whole. It requires reporting aggregated information about an organization's net assets that are classified based solely on donor imposed restrictions. Organizations are allowed to present disaggregated information, such as fund information, as long as the information required by FASB ASC 958 is presented.

Because funds are commonly used by nonprofit organizations, they are briefly described below. However, as we have discussed, the focus on financial reporting is on reporting information for the overall entity.

Types of Funds

Fund accounting is used to separately record resources for different purposes. Donors, granting agencies, governing boards, or others often establish how resources can be used. Organizations can establish funds to account for such resources.

A fund is defined as an accounting entity, with a self-balancing set of asset, liability and fund balance accounts. Because each fund is a separate accounting entity, financial statements can be prepared for each fund.

A nonprofit organization may have just a few funds or may have a large number of funds. However, organizations typically classify their funds into just a few types. The types of funds commonly used by nonprofit organizations are as follows:

• Unrestricted current (or unrestricted operating or general) funds – This type of fund is usually the main operating fund of an organization. The governing board typically has discretion over the resources in this fund. Normally, there is only one unrestricted current fund.

• Restricted current (or restricted operating or specific-purpose) funds – This type of fund is when the resource providers have stipulated the specific operating purposes for which the resources are to be used. The resources typically come from donations, grants, or endowment earnings. An organization may have several restricted current funds.

• Plant (or land, building, and equipment) funds – This type of fund can be used for different types of activities. It can be used to account for resources that are intended to acquire or renovate capital assets or to service debt on capital assets. The fund type can also be used to record an organization's land, building, and equipment, less any related liabilities on those assets. Resources for these funds can come from unrestricted sources or from resource providers that have stipulated how the resources are to be used.

• Loan funds – Some nonprofit organizations make loans to students, employees, and others. This type of fund is used to account for this type of activity. Again resources for these funds can come from unrestricted sources or from resource providers that have stipulated how the resources are to be used.

• Endowment funds – Some nonprofit organizations create funds where resources are invested and only the income from the investments becomes available to support activities of the organization. A permanent endowment fund is used when a donor has stipulated that the principal be held in perpetuity. A term endowment fund is similar to a permanent endowment, except at some future point, the principal becomes available for use by the organization. A quasi-endowment fund (sometimes referred to as funds functioning as endowment) is used when resources are designated by the governing board to be invested for specified purposes for a long but unspecified period.

• Annuity and life-income (split-interest) funds – Some nonprofit organizations receive resources from donors under various agreements in which the organization has a beneficial interest in the resources but is not the sole beneficiary. Some examples are charitable lead and remainder trusts, charitable gift annuities, and pooled (life) income funds. These types of donations are referred to as split-interest agreements.

• Agency (or custodian) funds – This type of fund is used to account for resources held by an organization as an agent for resource providers before the resources are transferred to other organizations or other individuals. The entity has little or no discretion over the use of the resources. Because resources held in this fund are to be transferred to others as specified by the resource providers, assets will always equal liabilities.

Fund accounting is a useful tool used by nonprofit organizations to manage resources that are to be used for different purposes. Organizations can have many different types of funds. However, the focus of financial statements is to report information about the overall entity and report aggregated information about an organization's net assets that are classified based solely on donor imposed restrictions.

Organizations can report disaggregated information about funds in the financial statement. However, they must also report aggregated information for the three classes on net assets, based on donor imposed restrictions. The next section describes in more detail the three classes of net assets. Appendix 2A is from the AICPA Audit and Accounting Guide Not-for-Profit Organizations and shows how fund balances will typically be classified into classes of net assets.

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