ACCOUNTING FOR NFPOS

Dr. David W. Peters

 Topics
• Fund Accounting
• NFP Reporting Today
• CICA Handbook Sections Applicable to NFPOs
• Accounting for Contributions
• Net Assets Invested in Capital Assets
• Donated Capital Assets and Other Goods and
Services
• Budgetary Control and Encumbrances
• Accounting for Governments
 Fund Accounting
• The resources of an NFPO can be broken down into
unrestricted resources, restricted resources and
endowments. Unrestricted resources can be used
for any purpose. Restricted resources can only be
used for specific purposes in accordance with the
wishes of the contributor. Endowments are a
special type of restricted fund that cannot be spent
but the investment income generated by the
endowment income can be spent for specific
purposes.
 Fund Accounting (continued)
• When fund accounting is used, financial statements
are prepared for each fund. For instance, there may
be a set of financial statements for the unrestricted
fund, restricted fund and the endowment fund. In
practice, the statement of operations (income
statements) of the funds is often presented in
columnar fashion on the same page. It is also
common to present a combined balance sheet for
the funds, but in a way that makes it clear what the
net worth of each fund is.
 NFPO Reporting Today
• Prior to 1997, there was too much variety in the
way that NFPOs did their financial reporting. In
1997, the CICA Handbook made some very
significant changes. Many sections of the CICA
Handbook that previously applied only to profit-
oriented organizations also became applicable to
NFPOs. In addition, several new sections of the CICA
Handbook were created to specifically deal with
issues involving NFPOs.
 CICA Handbook Sections Applicable to
NFPOs

Section Topic
4400 Financial Statement Presentation by NFPOs
4410 Revenue Recognition of Contributions
4420 Contributions Receivable
4430 Capital Assets Held by NFPOs
4440 Collections Held by NFPOs
4450 Reporting Controlled and Related Entities by NFPOs
4460 Disclosure of Related Party Transactions by NFPOs
4470 Disclosure of Allocated Expenses by NFPOs
Financial Statement Presentation by NFPOs
• Section 4400 deals with the topic of Financial Statement Presentation by
NFPOs. NFPOs are required to provide the following financial
statements:
• (1) Statement of Financial Position
• (2) Statement of Operations
• (3) Statement of Changes in Net Assets
• (4) Statement of Cash Flows
• The equity section should be broken down into:
• (1) Net Assets Maintained Permanently in Endowments
• (2) Internally Restricted and Other Externally Restricted Net Assets
• (3) Unrestricted Net Assets
 Revenue Recognition of Contributions

• Section 4410 deals with the topic of Revenue

Recognition of Contributions. Restricted revenues
should be matched to expenses. If an outside party
were to donate money to the NFPO so that the
NFPO can spend money for a specific purpose in
the future, these contributions should either be
deferred (using the deferral method) or recorded as
revenue to a restricted fund (using the restricted
fund method).
 Contributions Receivable
• Section 4420 deals with the topic of Contributions
Receivable. Contributions Receivable should be
recognized as an asset when: (1) the amount to be
received can be reasonably estimated, and (2) the
collection is reasonably assured.
• In practice, religious organizations do not set up
pledges from members as assets because they are
not legally enforceable. Bequests are also not
typically set up as assets.
 Capital Assets Held by NFPOs
• Section 4430 deals with the topic of Capital
Assets Held by NFPOs. NFPOs are now
required to capitalize and amortize all capital
assets. NFPOs with 2-year average revenues
under $500,000 are exempted from this rule
but are encouraged to conform to it.
 Collections Held by NFPOs
• Section 4440 deals with the topic of Collections
Held by NFPOs. Collections are things such as works
of art and historical treasures. NFPOs are allowed to
choose an accounting policy to deal with
collections, and must disclose their chosen
accounting policy. The alternative accounting
policies are as follows:
• (1) Expense when acquired
• (2) Capitalize but not amortize
• (3) Capitalize and amortize
Reporting Controlled and Related Entities by
NFPOs
• Section 4450 deals with the topic of
Reporting Controlled and Related Entities by
NFPOs. NFPOs, like profit-oriented firms,
may have significant control over other
entities where the entities they control might
be either other NFPOs or profit-oriented
firms. The reporting requirements are shown
as follows:
 Reporting Requirements in Section 4450
Type of Investment Reporting Requirement

Control of an NFPO Consolidate or Disclose (see 4450.22 and

4450.26)
Control of a Profit-Oriented Consolidate or use Equity Method ( specific
Entity disclosure is required when using Equity
method, see 4450.32)
Joint Arrangements Proportionate Consolidation or Equity Method

Significant Influence over NFPO Full disclosure of relationship required

Significant Influence over Profit- Equity Method

Oriented Entity
Economic Interest Full disclosure of relationship required

Other Investment in Profit- Cost Method

Oriented Entity
Disclosure of Related Party Transactions by
NFPOs
• Section 4460 deals with the topic of
Disclosure of Related Party Transactions by
NFPOs. Related party transactions must be
disclosed.
Disclosure of Allocated Expenses by NFPOs

• Section 4470 deals with the topic of

Disclosure of Allocated Expenses by NFPOs.
NFPOs are required to disclose details
related to any allocated of fundraising and
general support costs to different functions.
 Accounting for Contributions

• To satisfy the matching concept, NFPOs can

choose between 2 different methods to
account for contributions. The NFPO must
choose which method to use and stay with it.
The 2 methods are:
• Deferral Method
• Restricted Fund Method
 Deferral Method
• Unrestricted contributions are reported as revenue in the
period received.
• Endowment contributions are not shown in the operating
statement but are shown in the statement of changes in net
assets.
• Restricted contributions for expenses in the current period
are recognized as revenue in the current period.
• Restricted contributions for expenses in future periods are
deferred and recognized as revenue in the same period as
the related expenses.
 Deferral Method (continued)
• Restricted contributions for the acquisition of
depreciable capital assets are recognized as
revenue when the asset is amortized.
• Restricted contributions for non-depreciable capital
assets are not recognized as revenue but are
reported in the statement of changes in net assets.
• Special rules apply to investment income.
 Restricted Fund Method
• When an NFPO uses the restricted fund method,
there must be at least a general fund and one
restricted fund.
• Unrestricted contributions are reported as revenue
in the general fund.
• Endowment contributions are reported as revenue
in the endowment fund.
 Restricted Fund Method (continued)

• Restricted contributions will be reported as revenue

in the appropriate restricted fund.
• Special rules apply to investment income.
• When the restricted fund method is used, a
Statement of Changes in Fund Balances is prepared
rather than a Statement of Changes in Net Assets.
 Net Assets Invested in Capital Assets

• An NFPO may decide to report Net Assets Invested

in Capital Assets. However, NFPOs are not required
to do this. This is shown in the balance sheet of
NFPOs since it indicates that this portion of net
assets not available for future spending. If the
deferral method is used, it is the unamortized
portion of assets (net of applicable debt) purchased
with unrestricted funds. If the restricted fund
method is used, it is the unamortized portion of all
capital assets (less applicable debt).
 Donated Capital Assets and Other Goods
and Services
• An NFPO should try to obtain information on the fair value
of capital assets donated.
• If the deferral method is used, initially the capital asset
account will be debited and deferred contributions credited.
As the asset depreciates, amortization expense is debited,
accumulated amortization credited, deferred contributions
debited and contribution revenue credited.
• If the restricted fund method is used, the capital asset
account in the capital fund will be debited and contributions
in the capital fund account will be credited. In later periods,
the capital asset will be amortized.
 Donated Capital Assets and Other Goods
and Services (continued)
• If goods or services are donated, the NFPO has the
option of reporting or not reporting these
transactions. If the goods or services will be
consumed in the current period, an expense
account for the type of donated service (or good)
will be debited and contribution revenue will be
credited. If part of the good or service will be
consumed in future periods and the deferral
method is used, a deferred contribution account
will be credited for the portion not used in the
current period.
 Budgetary Control and Encumbrances

• Some NFPOs may wish to record

encumbrances, i.e., commitments to spend
part of the NFPO’s budget on particular
items. This is shown on page 658-9 of the
Hilton and Herauf text.
 Accounting for Governments
• Governments should follow the recommendations
of the Public Sector Accounting Handbook.
Governments are required to present 4 financial
statements:
• (1) Consolidated Statement of Financial Position
• (2) Consolidated Statement of Operations
• (3) Consolidated Statement of Changes in Net Debt
• (4) Consolidated Cash Flow Statement
 Accounting for Governments (continued)

• Details of the required contents of these

statements are discussed on pages 683-4 of the
Hilton and Herauf textbook.
• The reporting government must consolidate all
organizations that it controls except when it
controls a business organization. The government
should account for its investment in the business
organization using the modified equity method.