Advanced Financial Accounting I
ADMS 4520 – Winter 2012 – Patrice Gelinas
Lecture 12 – Accounting for Notforprofit Organizations and Governments – Mar
30
Introduction
Notforprofit organizations (NFPOs) are defined in the Handbook 4400.02 as:
o … entities, normally without transferable ownership interests, organized and
operated exclusively for social, educational, professional, religious, health,
charitable or any other notforprofit purpose. A notforprofit organization’s
members, contributors and other resources providers do not, in such capacity,
receive any financial return directly from the organization
NFPOs differ from profitoriented organizations in the following ways:
o In fulfilling their objectives, they typically provide services or goods to
identifiable segments of society without the expectation of profit
o Their resources are provided by individual and government contributors without
the expectation of gain or repayment; often these contributions have restrictions
attached to them
o They have no readily identifiable ownership interests that can be sold, transferred,
or redeemed
o They are governed by volunteers although some NFPOs also have paid employees
The Basics of Fund Accounting
Funding received by NFPOs can be categorized as unrestricted or restricted
o Unrestricted resources can be used for any purpose consistent with the NFPO’s
goals and objectives
o Restricted resources can only be used as specified by the external contributor, e.g.
a donation may be received with a condition that it be spent in some specified
manner
o Endowments are restricted donations that must be maintained in perpetuity by the
organization, only the interest earned on the endowed funds can be spent
Not for profit organizations require a mechanism to identify and track restricted funds.
Fund accounting provides such a mechanism
o Fund accounting comprises … a selfbalancing set of accounts for each fund
established by legal, contractual, or voluntary actions of an organization.
Elements of a fund can include assets, liabilities, net assets, revenues, and
expenses … Fund accounting involves an accounting segregation, although not
necessarily a physical segregation, of resources. [Handbook 4400.02]
In many notforprofit organizations, a basic objective of financial reporting is often the
tracking of changes in each fund balance over the year and stewardship over fund
resources
Fund accounting provides a segregation of assets for a given purpose, a recognition of the
set of separate operations which pertain to those assets, recognition of the equities which pertain to that fund, and complete classification by fund of revenue, expense and income
accounts
The complete selfbalancing set of accounts for each fund removes the emphasis from the
overall “bottom line” and places it more closely on the individual activity of each fund
The total of assets less liabilities of the notforprofit organization will equal the total of
the fund balances, the same way that assets less liabilities equals owners’ equity in a
profitoriented business organization
The possible types of funds depends on the nature and objectives of the organization:
o In a university, for example, there are research funds, scholarship funds, residence
funds, athletic funds, and others
o In a church, there may be mission funds, memorial funds, building funds, and
operating funds
o An organization that uses fund accounting in its financial statements should
provide a brief description of the purpose of each fund reported
Funds established by the NFPO’s board of directors cannot be considered restricted
because future boards can dispose of the fund. Only external restrictions apply
NotforProfit Reporting Today
The eight Handbook sections applicable to NFPOs are as follows:
o Section 4400, “Financial Statement Presentation by Norforprofit Organizations”
o Section 4410, “Contributions – Revenue Recognition”
o Section 4420, “Contributions Receivable”
o Section 4430, “Capital Assets Held by Notforprofit Organizations”
o Section 4440, “Collections Held by Notforprofit Organizations”
o Section 4450, “Reporting Controlled and Related Entities by Notforprofit
Organizations”
o Section 4460, “Disclosure of Related Party Transactions by Notforprofit
Organizations”
o Section 4470, “Disclosure of Allocated Expenses by Notforprofit Organizations”
A number of other Handbook sections have limited applicability to NFPOs
In 2010 the CICA expects to make a decision on the December 2008 Invitation to
Comment, Financial Reporting by NotforProfit Organizations.
o This would allow privatesector NFPOs to choose between IFRS and GAAP for
private enterprises including the eight Handbook sections above. Publicsector
NFPOs could choose between IFRS and the Public Sector Accounting Handbook
Section 4420, “Contributions Receivable”:
o Contributions are defined as “a nonreciprocal transfer to a notforprofit
organization of cash or other assets or a nonreciprocal settlement or cancellation
of its liabilities” (4420.02)
o A contribution should be recognized as an asset when the amount to be received
can be reasonably estimated and the ultimate collection is reasonably assured.
Because pledges cannot be legally enforced, recognition should be delayed until
cash is received, unless the organization can estimate collectability rates based on
historical results
Section 4450, “Reporting Controlled and Related Entities by NFPOs” o Establishes NFPO presentation and disclosure standards for control, significant
influence and joint venture investments or economic interest type of relationship
in other NFPOs or profitoriented organizations
o Control over other NFPOs (for example by the ability to appoint the majority of
their directors) can be reflected either by consolidation or by disclosure set out in
paragraphs 4450.22 or 4450.26
o Control over profitoriented organizations can be reflected either by consolidation
or by accounting using the equity method with disclosure described in paragraph
4450.32
Section 4450, “Reporting Controlled and Related Entities by NFPOs” (continued)
o Joint control can be reflected either by proportionate consolidation or accounting
using the equity method
o Significant influence over another NFPO is reflected with disclosure since equity
accounting is not possible in the absence of voting shares to determine percentage
interest. Significant influence over a profitoriented enterprise is reflected using
the equity method of accounting
o Other economic interests are reflected by disclosure
Other economic interests exist if another NFPO holds resources for the
reporting organization, or if the reporting organization is responsible for
the other NFPO’s debts
Section 4460, “Disclosure of Related Party Transactions by NFPOs”
o Related parties include those over which control, joint control, significant
influence, or other economic interests exist. Section 4460 provides disclosure
standards virtually identical to those set out in Section 3840 for profitoriented
enterprises
Section 4430, “Capital Assets Held by NFPOs”
o Requires that NFPOs capitalize and amortize all capital assets, but exempts small
NFPOs with twoyear average annual revenues less than $500,000 from doing so
provided they disclose information about capital assets that are not capitalized and
amortized
Section 4440, “Collections Held by NFPOs”
o Collections consist of works of art and historical treasures that are for public
exhibition, education, and research, and the proceeds from sale of which must be
used to acquire similar items or to protect the remaining collection. Therefore
collections are excluded from the definition of capital assets with the following
choices of accounting permitted:
o Expense when acquired
o Capitalize but do not amortize
o Capitalize and amortize
o The nature of the collection should be disclosed together with the accounting
policy, the amount spent on the collection during the period, the proceeds from
any sales of collection items, and a statement of how such proceeds were used
Section 4470, “Disclosure of Allocated Expenses by NFPOs”
o When an NFPO classes its expenses by function on the statement of operations, it
may need or want to allocate certain related expenses to those functions o Certain expenses, however, may relate directly to more than one function, in
particular fundraising expenses and general support expenses
When these two types of expenses are allocated to other functions,
disclosure is required of the allocation accounting policy, the nature of the
expenses, the basis on which the allocations have been made, the amounts
of each that have been allocated, and the functions to which they have
been allocated
Sections 4400 and 4410, “Financial Statement Presentation by NFPOs” and
“Contributions – Revenue Recognition”
o Restrictions on an organization’s resources should be clearly stated in the
financial statements
o The matching concept for NFPOs must be applied in the measurement of yearly
results. In NFPO matching for restricted revenues when the fund method of
accounting is not used, expenses are recognized first and then revenues are
matched to expenses
o Section 4410 defines the nature of unrestricted, restricted, and endowment
contributions as discussed in a previous slide
Financial Statements
A NFPO must present the following financial statements:
o A statement of financial position (i.e. balance sheet)
o A statement of operations (i.e. statement of revenues and expenses)
o A statement of changes in net assets
o A statement of cash flows
A fund basis can be used in one or more statement, but not necessarily on
all statements
The statement of financial position
More
Less
