What is a Nonprofit Organization



KEY ACCOUNTING & REPORTING ISSUES FOR NONPROFITS—REVENUES RECOGNITION

By Larry L. Perry, CPA

CPA Firm Support Services, LLC

LEARNING OBJECTIVES

• Understand principles of revenue recognition in Statements of Financial Accounting Standards for nonprofit organizations

• Be able to properly account for revenues of nonprofit organizations

• Understand basic principles of accounting and reporting for revenues accounts presented on the statement of activities

• Become familiar with internal controls over cash receipts and revenues that enable their proper recognition in financial statements

KEY SFASs AFFECTING NONPROFIT ORGANIZATIONS

Most nonprofit organizations (NPOs) adopt the accounting and reporting requirements of US generally accepted accounting principles (GAAP). When financial statement users permit, some NPOs are utilizing other comprehensive bases of accounting (reporting frameworks) such as modified cash or the income tax basis. For-profit and nonprofit organizations may also adopt International Financial Reporting Standards (IFRS) or IFRS for Small and Medium-Size Entities as an alternative reporting framework that is recognized as GAAP by the FASB and the AICPA.

Our discussions in this series will focus on accounting and reporting requirements included in US GAAP. A brief discussion of Statements of Financial Accounting Standards (SFASs) that specifically affect NPOs accounting and reporting for revenues is included below.

FASB Summary of Statement No. 116 (Topic 958)—Accounting for Contributions Received and Contributions Made

This Statement establishes accounting standards for contributions and applies to all entities that receive or make contributions. Generally contributions received, including unconditional promises to give, are recognized as revenues in the period received at their fair values. Contributions made, including unconditional promises to give, are recognized as expenses in the period made at their fair values. Conditional promises to give, whether received or made, are recognized when they become unconditional, that is, when the conditions are substantially met.

This Statement requires not-for-profit organizations to distinguish between contributions received that increase permanently restricted net assets, temporarily restricted net assets, and unrestricted net assets. It also requires recognition of the expiration of donor-imposed restrictions in the period in which the restrictions expire.

This Statement allows certain exceptions for contributions of services and works of art, historical treasures, and similar assets. Contributions of services are recognized only if the services received (a) create or enhance nonfinancial assets, or (b) require specialized skills, are provided by individuals possessing those skills, and would typically need to be purchased if not provided by donation. Contributions of works of art, historical treasures, and similar assets need not be recognized as revenues and capitalized if the donated items are added to collections held for public exhibition, education, or research in furtherance of public service rather than financial gain.

This Statement requires certain disclosures for collection items not capitalized and for receipts of contributed services and promises to give.

Issues Related to Reporting Frameworks

With the exception of a few disclosure requirements, GAAP is basically the same for large and small entities. As an alternative to GAAP, management may elect to prepare its financial statements on another comprehensive basis of accounting (OCBOA), such as the modified cash or income tax basis. When such presentations are acceptable to users of the financial statements, accountants may audit, review, or compile OCBOA statements. IFRS and IFRS for Small and Medium-Size Entities are also recognized as GAAP by the AICPA and FASB as alternatives to US GAAP.

GAAP-basis financial statements are usually required by accountability organizations, government agencies and grantors. In these circumstances, all the requirements of generally accepted accounting principles applicable to nonprofit organizations must be met, if material. When auditing entities that receive federal funds, governmental accounting and reporting principles, and requirements of oversight agencies, must also be reflected in performing the engagement and preparing reports.

NONPROFIT ORGANIZATION FINANCIAL STATEMENTS

Basic nonprofit organization financial statements include:

Statement of Financial Position

This statement reports total assets, liabilities, and net assets of an organization and any consolidated subsidiaries. SFAS No. 117 (Topic 958) requires net assets to be reported as permanently restricted net assets, temporarily restricted net assets, and unrestricted net assets. Unrestricted net assets may include designations made by an entity’s board of directors or trustees.

Statement of Activities

This statement reports the changes in permanently restricted net assets, temporarily restricted net assets, unrestricted net assets, and the total change in net assets. Revenues are reported in the classes to which they apply. Temporarily restricted revenues are reclassified as unrestricted when time and purpose designations have been accomplished. Revenues from permanently restricted net assets will be accounted for as specified in the related agreements or, if not specified, as unrestricted. All expenses will be recorded as unrestricted in functional categories, program services, management and general, fundraising and, if applicable, member development.

Statement of Cash Flows

This statement follows the requirements of SFAS No. 95. The statement of cash flows reports cash flows in total rather than by the three classes of net assets. One significant difference is that certain restricted donations (usually permanently restricted) are classified as cash flows from financing activities and not included in income from operations.

Statement of Functional Expenses

Voluntary health and welfare organizations must present this statement in a matrix format that identifies major categories of expense and their allocation among major categories of program services, management and general and fundraising expenses. Other nonprofit organizations may voluntarily present this statement to provide financial statement users a better understanding of the entity’s use of resources.

ILLUSTRATIVE FINANCIAL STATEMENTS AND FOOTNOTES

DISASTER RELIEF, INC.

STATEMENT OF FINANCIAL POSITION

December 31, 2014

ASSETS

CURRENT ASSETS

Cash:

Unrestricted $192,712

Restricted 87,896

Inventories of merchandise and supplies 33,214

Prepaid expenses and deposits 9,188

Total Current Assets 323,010

INVESTMENTS 215,632

PROPERTY AND EQUIPMENT 167,946

TOTAL ASSETS $706,588

LIABILITIES AND NET ASSETS

CURRENT LIABILITIES

Current portion of long-term debt $ 32,259

Accounts payable 15,333

Payroll tax liabilities 3,115

Total Current Liabilities 50,707

LONG-TERM DEBT 113,839

NET ASSETS

Unrestricted (Board designated—$29,672) 454,146

Temporarily restricted 87,896

Total Net Assets 542,042

TOTAL LIABILITIES AND NET ASSETS $706,588

See Accompanying Notes to Financial Statements.

DISASTER RELIEF, INC.

STATEMENT OF ACTIVITIES

Year Ended December 31, 2014

Temporarily

Unrestricted Restricted Total .

SUPPORT AND REVENUES

Contributions:

Unrestricted $3,676,820 $3,676,820

Restricted $ 240,960 240,960

In-kind 205,000 205,000

Unrealized gain on investments 863 863

Interest 1,101 1,101

Net assets released from restrictions 153,064 (153,064) -0-

Total Support and Revenues 4,036,848 87,896 4,124,744

EXPENSES

Program services 2,593, 401 2,593,401

Supporting services

Management and general 751,923 751,923

Fundraising 563,710 563,710

Total Expenses 3,909,034 3,909,034

INCREASE IN NET ASSETS 127,814 87,896 215,710

NET ASSETS AT BEGINNING OF YEAR 326,332 -0- 326,332

NET ASSETS AT END OF YEAR $ 454,146 $ 87,896 $ 542,042

See Accompanying Notes to Financial Statements.

DISASTER RELIEF, INC.

STATEMENT OF CASH FLOWS

Year Ended December 31, 2014

CASH FLOWS FROM OPERATING ACTIVITIES

Increase in net assets $ 215,710

Adjustments to reconcile increase in net assets to net cash

provided by operating activities

In-kind contributions (205,000)

Depreciation 18,738

Increase in unrealized gains and losses on investments (863)

Increase in accounts payable 6,886

Increase in payroll tax liabilities 1,175

NET CASH PROVIDED BY OPERATING ACTIVITIES 36,646

CASH FLOWS USED IN INVESTING ACTIVITIES

Purchase of tractor/trailer (64,031)

CASH FLOWS USED BY FINANCING ACTIVITIES

Payments on debt obligations __ (54,229)

NET DECREASE IN CASH (81,614)

CASH AT BEGINNING OF YEAR 362,222

CASH AT END OF YEAR $ 280,608

See Notes to Accompanying Financial Statements.

DISASTER RELIEF, INC.

NOTES TO FINANCIAL STATEMENTS

Year Ended December 31, 2014

NOTE A—SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Organization

Disaster Relief, Inc. was organized in 1983 and is a nonprofit organization, exempt from income taxes under Section 501 (c) (3) of the Internal Revenue Code. It’s purpose if to distribute life-sustaining supplies and services to residents of areas of the United States that have suffered natural or man-made disasters. The Organization receives a majority of its support and revenues from contributions made by the general public.

The Organization maintains operating relationships with several affiliated entities but has no monetary investment in, or substantial influence or control over, these entities. These financial statements, therefore, include only the accounts of Disaster Relief, Inc.

Summary of Significant Accounting Policies

Method of Accounting:

The financial statements of Disaster Relief, Inc. have been prepared on the accrual basis of accounting and in accordance with the American Institute of Accountants’ Audit and Accounting Guide, Not-for-Profit Organizations. The significant accounting policies followed are described below to enhance the usefulness of the financial statements to the reader.

Basis of Presentation

Financial statement presentation follows the recommendations of the Financial Accounting Standards Board in its Statement of Financial Accounting Standards (SFAS) No. 117 (ASC 958), Financial Statements of Not-for-Profit Organizations. Under SFAS No. 117, the Organization is required to report information regarding its financial position and activities according to three classes of net assets: unrestricted net assets, temporarily restricted net assets, and permanently restricted net assets.

Unrestricted Net Assets:

Unrestricted net assets are resources over which the Board of Directors has discretionary control and are available for the various programs and administration of the Organization.

Temporarily Restricted Net Assets:

Temporarily restricted net assets are resources subject to donor imposed restrictions which will be satisfied by actions of the Organization or the passage of time. Donor restricted contributions for which restrictions are met in the same reporting period are reported as unrestricted support.

Permanently Restricted Net Assets:

Permanently restricted net assets are resources subject to donor imposed restrictions that neither expire by the passage of time nor can be fulfilled or otherwise removed by actions of the Organization. There currently are no permanently restricted net assets.

Inventory of Merchandise and Supplies

The inventory consists of merchandise and supplies used in the Organization’s program services. The purchased inventory is valued at average cost, which is less than market value. Donated merchandise and supplies are recorded at their fair value at the date of donation.

Property and Equipment

Property and equipment expenditures of $1,000 or more are capitalized at cost and depreciated over the estimated useful lives of the respective assets on a straight-line basis. Donated fixed assets are capitalized at fair market value and depreciated on a straight-line basis. Routine repairs and maintenance are expensed as incurred.

Revenue Recognition

All contributions are considered to be available for unrestricted use unless specifically restricted by the donor. Amounts received that are designated for future periods or restricted by the donor for specific purposes are reported as temporarily restricted support, which increases that category of net assets. When a donor restriction expires, that is, when a stipulated time restriction ends or the purpose of the restriction is accomplished, temporarily restricted net assets are reclassified to unrestricted net assets and reported in the statement of activities as net assets released from restrictions.

Income Taxes

Disaster Relief, Inc. is a nonprofit organization that is exempt from income taxes under Section 501 (c) (3) of the Internal Revenue Code. Management has reviewed all open tax years for all tax jurisdictions and there are no uncertain tax positions or other provision for income taxes that should be recognized in these financial statements. The Organization has also been classified as an entity that is not a private foundation within the meaning of IRC Section 509(a) and qualifies for deductible contributions as provided in IRC Section 170(b)(1)(A)(vi).

Use of Estimates

The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates.

Concentrations Risk

Concentrations risk consists of cash deposits. The Organization maintains its cash in various bank deposit accounts that, at times, may exceed federally insured and other insured limits. The Organization has not experienced any losses in such accounts nor does it expect to incur any such losses in the future.

Cash

Cash consists of funds on deposit at financial institutions. The Organization has no cash equivalents.

NOTE B—INVESTMENTS

The Organization has invested in various marketable equity securities. All of the investments are accounted for using fair value accounting (Topic 820) in accordance with SFAS Nos. 124 (Topic 958-320). All securities were valued based on quoted market prices on the New York Stock Exchange as of December 31, 2014.

Unrealized

Description Shares Input Level Gains and Losses Fair Value

Dorcus, Intl. 100 Level 1 $ 298 $ 8,432

Pork Belly Feeds 390 Level 1 1,398 43,315

Shovels, Inc. 510 Level 1 5,135 88,999

Bean Bagger Co. 10,105 Level 1 1.133 50,250

U.S. Motors 215 Level 1 (7,101) 24,636

$ 863 $215,632

NOTE C—PROPERTY AND EQUIPMENT

Property and equipment, at cost, consists of the following at December 31, 2014:

Office furniture and equipment $ 87,789

Delivery trucks 124,664

212,453

Less accumulated depreciation 44,507

$ 167,946

Depreciation expense was $18,738 for the year ended December 31, 2014.

NOTE D—RELATED PARTY TRANSACTIONS

The Organization purchases merchandise and supplies from affiliated organizations dedicated to disaster relief. The Organization has no monetary investment in any of the affiliates or the power to control their operating activites. These organizations and the volume of transactions during the year ended December 31, 2014 are:

• Pure Water, Inc.—Purchased bottled water--$ 39,548

• Surplus Supplies—Purchased canned rations --$ 71,598

• Tents and Poles—Purchased tents--$ 149,713

All purchase prices in these transactions were at arms-length and approximated fair market value.

NOTE E—DEBT OBLIGATIONS

Debt obligations as of December 31, 2014 consist of:

Note payable to bank, payable in monthly installments of

$ 1,252 including interest at 1.75%, collateralized

by 2010 Gruman van $ 15,768

Installment contract payable to GMAC, payable in

monthly installments of $ 1,250 including

interest at 3.5%, collateralized by 2011 GMC

tractor/trailer 64,765

Installment contract payable to Easy Credit Company,

payable in monthly installments of $ 668 including

interest at 5.99%, collateralized by 2012 Ford F350

flatbed 22,646

Installment contract payable to Legal Lenders, payable in

monthly installments of $ 497 including interest at

10.25%, collateralized by 2008 Strato-Liner 42,919

146,098

Less current portion (32,259)

$ 113,839

Principal maturities on these obligations are:

Year Ending December 31,

2015 $ 32,259

2016 19,288

2017 20,999

2018 19,132

2019 16,257

2020 and thereafter 38,163

$146,098

Interest paid during the year ended December 31, 2014 amounted to $ 12,196.

NOTE F—RESTRICTED NET ASSETS

Unexpended temporarily restricted net assets as of December 31, 2014 result from gifts containing donor restrictions requiring use of the funds in the following locations:

New Orleans Galveston Total

Balance, January 1, 2014 $ -0- $ -0- $ -0-

Contributions 210,980 29,980 240,960

Change in net assets 210,980 29,980 240,960

Transfer to unrestricted funds

upon satisfaction of

purpose restrictions (135,255) (17,809) (153,064)

Increase in temporarily restricted

net assets 85,725 2,171 $ 87,896

Balance, December 31, 2014 $ 85,725 $ 2,171 $ 87,896

One individual contributed $ 100,000 of these designated funds during the year ended December 31, 2014.

NOTE G—OPERATING LEASE

The Organization leases office facilities under an operating lease. As of December 31, 2014, the lease payments are as follows:

Year Ended December 31,

2015 $ 62,112

2016 63,729

2017 65,670

2018 10,999

$202,510

Rental expense for the year ended December 31, 2014 amounted to $ 64,887.

NOTE H—DONATED SERVICES

A number of volunteers have donated significant amounts of their time to the organization’s program services and administrative operations. These donated services are not reflected in the financial statements since none are specialized and, therefore, these services do not meet the criteria for recognition as contributed services.

NOTE I—NON-CASH TRANSACTIONS

Non-cash transactions during the year ended December 31, 2010, not included in the Statement of Cash Flows, consist of the following:

1. Purchase of 2006 GMC tractor/trailer on an installment contract for $ 69,399.

2. Donations of bedding and linens recorded at fair market value of $ 205,000.

NOTE J—JOINT COST ALLOCATION

In 2014, the Organization conducted activities that were multi-functional, i.e., they contained program, management and general and fundraising components. Such activities were special events, conferences, workshops and direct mail campaigns. Joint activity costs not directly attributable to these activities are $31,000. Joint costs for each activity were $5,000, $10,000, $9,000 and $7, 000, respectively. These costs were allocated to functional components as follows:

• New Orleans relief $ 8,000

• Galveston relief 4,000

• Management and general 10,000

• Fundraising 9,000

Total $31,000

UNDERSTANDING REVENUE RECOGNITION

All principles of revenue recognition discussed in these materials are based on US accounting standards. On July 1, 2009, the Financial Accounting Standards Board (FASB) launched its online Accounting Standards Codification (ASC) which is the one authoritative source of US GAAP. The FASB combined all accounting standards included in the existing GAAP Hierarchy from SFAS No. 162 in the ASC, all of which is now considered authoritative GAAP. While other literature may be useful for guidance in accounting and reporting activities, it is not considered authoritative.

To understand principles of revenue recognition for both for-profit and nonprofit organizations, we must begin with the authoritative standards from the ASC.

Revenues and Gains Overview:

605-10-25-1: The recognition of revenue and gains of an entity during a period involves consideration of the following two factors, with sometimes one and sometimes the other being more important consideration:

a. Being realized or realizable. Revenue and gains generally are not recognized until realized or realizable. Paragraph 83(a) of FASB Concepts Statement No. 5, Recognition and Measurement in Financial Statements of Business Enterprises, states that revenue and gains are realized when products (goods or services), merchandise, or other assets are exchanged for cash or claims to cash. That paragraph states that revenue and gains are realizable when related assets received or held are readily convertible to known amounts of cash or claims to cash.

b. Being earned. Paragraph 83(b) of FASB Concepts Statement No. 5, Recognition and Measurement in Financial Statements of Business Enterprises, states that revenue is not recognized until earned. That paragraph states that an entity’s revenue-earning activities involve delivering or producing goods, rendering services, or other activities that constitute its ongoing major or central operations, and revenues are considered to have been earned when the entity has substantially accomplished what it must do to be entitled to the benefits represented by the revenues. That paragraph states that gains commonly result form transactions and other events that involve no earning process, and for recognizing gains, being earned is generally less significant than being realized or realizable.

Not-for-Profit Entities--Revenue Recognition—958-605-25

General Note: The Recognition Section provides guidance on the required criteria, timing, and location (within the financial statements) for recording a particular item in the financial statements. Disclosure is not recognition.

General:

958-605-25-1: Revenue from exchange transactions follow generally accepted accounting principles (GAAP); for example, revenue derived from membership dues in exchange transactions shall be recognized over the period to which the dues relate. Nonrefundable initiation and life membership fees received in exchange transactions shall be recognized as revenues in the period in which the fees become receivable if future fees are expected to cover the costs of future services to be provided to members. If nonrefundable initiation and life membership fees, rather than future fees, are expected to cover those costs, nonrefundable initiation and life member fees received in exchange transactions shall be recognized as revenue over the average duration of membership, the life expectancy of members, or other appropriate time periods.

Contributions Received:

958-605-25-2: Except as provided in paragraphs 958-605-25-16 through 25-18, contributions received shall be recognized as revenues or gains in the period received and as assets, decreases of liabilities, or expenses depending on the form of the benefits received. The classification of contributions received as revenues or gains depends on whether the transactions are part of the NFP's ongoing major or central activities (revenues), or are peripheral or incidental to the NFP (gains). A contribution made and a corresponding contribution received generally are recognized by both the donor and the donee at the same time, that is, upon occurrence of the underlying event—the nonreciprocal transfer of an economic benefit.

958-605-25-3: Donor-imposed restrictions place limits on the use of contributed resources and may affect an entity's performance and its ability to provide services. However, limitations on the use of donated resources do not change the fundamental nature of the contribution transaction or conclusions about when to recognize the underlying event.

958-605-25-4: A major uncertainty about the existence of value may indicate that an item received or given should not be recognized. For example, a gift of clothing or furniture has no value unless it can be utilized in either of the following ways:

• Used internally by the not-for-profit entity (NFP) or for program purposes

• Sold by the NFP

If an item is accepted solely to be saved for its potential future use in scientific or educational research and has no alternative use, it may have uncertain value, or perhaps no value, and shall not be recognized. For example, contributions of flora, fauna, photographs, and objects that are identified with historic persons, places, or events often have no value or have highly restricted alternative uses.

958-605-25-5: However, contributed tangible property worth accepting generally possesses the common characteristic of all assets—future economic benefit or service potential. The future economic benefit or service potential of a tangible item usually can be obtained by exchanging it for cash or by using it to produce goods or services. Certain forms of contributed resources may be more difficult to measure reliably than others, but the form of the contributed resources alone should not change conclusions about whether to recognize the underlying event.

The following section discusses the application of nonprofit accounting and reporting standards to the statement of activities.

STATEMENT OF ACTIVITIES—REVENUES

Contributions

Paragraph 5 of SFAS No. 116 (ASC 958-605) describes a contribution as an unconditional transfer of assets or settlement of liabilities in a voluntary nonreciprocal transfer. Transferred assets may be cash, securities, property, use of facilities or utilities, materials and supplies, services, and unconditional promises to give those items in the future.

Unconditional promises to give, contributions, must be distinguished from:

• Intentions to Give—planning to or intending to give.

• Exchange Transactions—“This for that” transactions in which tangible benefits are transferred in exchange for payments. Selling merchandise or collecting fees in connection with program services are examples. Some government grants that require the grantee to perform services are usually considered exchange transactions.

• Agency or Intermediary Transactions—Transfers of assets as an agent or intermediary, not as the principal beneficiary of a transaction.

Contributions received and promises to give are recorded at their fair value and reported as an increase in net assets when received as unrestricted, temporarily restricted, or permanently restricted. When the donor has imposed restrictions on the gift that will be met in the future reporting period, the gift is restricted, not deferred revenue.

Restricted Contributions

When the donor has restricted the use of a contribution, or its use to a future time period, the contribution is restricted. Gifts for building programs, specific program services or projects, or endowments will be recorded as a restricted contribution. The use of gifts can be expressly specified in letters, trust agreements or other written documents given in response to an appeal in a newsletter or conference. In any case, there must be some evidence of the promise to give and the restrictions on its use.

Temporary and Permanent Restrictions:

Temporary restrictions usually give the recipient organization control over the disposition of the funds in accordance with the donor-imposed restrictions. Permanent restrictions usually establish endowments that prohibit invasion of the principal but usually permit unrestricted use of the income from the endowment’s assets. The trust instrument creating an endowment may restrict the use of income for specified purposes, in which case a temporary restriction would be created.

Temporarily restricted contributions are recognized as support when received and reclassified to unrestricted net assets when time and purpose restrictions have been satisfied.

Unrestricted Support:

Contributions not subject to donor-imposed time and purpose restrictions are recorded in unrestricted net assets when received or promised. When contributions are promised for future periods, they are recorded in temporarily restricted net assets unless the donor specifies their use in a current period.

Restrictions on Contributions Met in the Same Year:

Restricted contributions may be reported as unrestricted support if:

a) the restrictions are met in the same reporting period,

b) that policy is followed consistently,

c) the policy is disclosed, and

d) the organization has a similar policy for accounting for restricted investment income and gains.

Designations Imposed by the Board of Directors:

The board of directors or trustees of a nonprofit organization may designate portions of unrestricted net assets for specific purposes. Amounts may be set aside to accommodate special needs of certain programs, unusual expenses or other expenditures consistent with the organization’s exempt purposes. Different from restricted net assets, these designations can be reversed by the governing board. They are, therefore, presented as a sub-category of unrestricted net assets.

Donated Materials or Merchandise:

Donated materials or merchandise are generally recorded as contributions and inventory or expenses in the period received. Such donations are recorded at their fair value on the date of donation.

Materials or merchandise donated for a specific program or purpose would be recorded as restricted contributions. Unconditional promises to give materials and merchandise should be recorded as contributions even though the promise is for a future date. The requirements of SFAS No. 157 (ASC 820) should be followed in determining fair value. An established market price may be determined from industry valuation services, catalogs, vendor price lists, independent appraisals, or subsequent sales prices. Donations of unusable assets should not be recorded.

The Internal Revenue Code and Regulations permit certain nonprofit organizations to receive donations from manufacturers and retailers of usable products and merchandise. These NPOs redistribute the products and merchandise to other tax-exempt organizations, charging only a small administrative fee. The manufacturers and retailers receive a contributions deduction on their tax returns for one-half the difference between cost and the last sales price of the products or merchandise. These in-kind contributions are recorded at their fair market values by the recipient organizations.

The downside is, however, that recipients of products must maintain detailed inventory records and track the disposition of each individual donated item. Penalties can run as high as the fair value of all products and merchandise received under the program.

Organizations may receive contributions of gifts-in-kind (such as tickets, gift certificates, or merchandise) to be used for raffles, auctions or giveaways for fundraising purposes. Contributions of these items should be recognized as contribution and measured at fair value. Any differences in amounts received in exchange for these donated items should be recognized as adjustments to the contributions revenues.

Donated Long-lived Assets and Free Use of Facilities:

Contributions of long-lived assets or the free or below-market use of facilities should be recorded in the period received at fair value. Unconditional promises to give are recorded on the date of the promise. When the free use of facilities is not promised for a specified period of time, the contribution and expense would be recorded in each period of occupancy. Long-term promises of free use of facilities should be recorded in restricted net assets and reclassified as time periods expire. The long-term free use of facilities may be classified according to the nature of the facility, e.g., office space, building, recreation center, etc.).

Donated Services:

SFAS No. 116 (ASC 958-605) requires the fair value of donated services to be recorded if the services:

• Create or enhance a nonfinancial asset or

• Require specialized skills, are provided by entities or persons possessing those skills, and would need to be purchased if they were not donated.

The value of services are recorded as in-kind contributions in the period provided and charged to a nonfinancial asset (such as a building) or to an expense account, depending on their nature.

SFAS No. 116 (ASC 958-605) requires that organizations receiving donated services disclose the activities or programs for which those donated services were used, the nature and extent of those services, and the amount recognized as revenue during the period. An organization may disclose the number of volunteer hours received during the year and their estimated fair value, even though they cannot be recorded under SFAS No. 116.

A major benefit or recording in-kind donations is that they become program services expenses as they are used or consumed. Increased program services expenses lower the ratio of general and administrative expenses to total expenses. Accountability organizations, grant agencies and potential donors look for low general and administrative expense ratios to maximize the use of their support in accomplishing the exempt purposes of the nonprofit organization.

Agency Transactions:

A donor may transfer assets to the organization and instruct the organization to distribute to a beneficiary:

• the assets received,

• income from those assets, or

• both.

Agency transactions are voluntary transfers of assets to recipient organizations that have little or no discretion in determining the use of the transferred assets. When a recipient organization can choose the beneficiary of the gift, i.e., has variance power, it would normally record the gift as a contribution. If an organizations receives gifts to be passed through to designated beneficiaries, these gifts would be recorded as liabilities until paid to the beneficiaries.

Exchange Transactions:

Exchange transactions are essentially purchases of goods and services from another entity and are not contributions. Government grants are often exchange transactions because they provide assets in exchange for goods or services. Grants from non-governmental organizations are normally recorded as contributions because there is no reciprocal exchange.

Recognizing Other Accrual Basis Revenues:

Recognizing revenue on the accrual basis for nonprofit organizations follows the same principles as for-profit organizations: revenue is recognized in the period when it is earned. Other than contributions revenue for nonprofit organizations may consist of the following:

• Special events

• Program service fees

• Sales of merchandise and publications

• Third-party reimbursements

• Investment income and gains and losses

Special Events

Fundraising events most commonly include dinners, benefit concerts and appearances by artists, or athletic events. Funds received by the nonprofit organization normally include an exchange transaction and a contribution. The portion of the funds that represents the fair value of the tangible benefits received by the donor is the exchange transaction. Any amount in excess of the tangible benefits would be the donor’s deductible contribution.

Nonprofit accounting principles require that the gross amounts of revenues and expenses from special events be reported in the statement of activities if they are major activities in the organization’s fundraising plan. If the special events are only held occasionally, expenses may be netted against revenues. Income tax regulations, however, prohibit netting revenues and expenses from special events in an organization’s Form 990. To avoid possible penalty assessments in the event of an IRS audit, a good practical rule is to always present the gross amounts of special event’s revenues and expenses in both financial statements and information returns.

Service Fees/Dues

Service fees are usually exchange transactions that are recorded when services are provided. Fees for ticket sales that relate to events in future periods should be deferred until the period in which the event occurs.

Membership dues may include a contribution as well as an exchange transaction. The portion considered a contribution should be recorded as such. The exchange transaction would be recognized over the period of benefit. An example of the exchange portion of dues would be when a member receives a magazine or a monthly service throughout the period covered by the dues.

Sales of Merchandise and Publications

Merchandise and bookstores are operated by many nonprofit organizations to earn revenue. Sales of merchandise, books, subscriptions and other products are sold through these and other outlets. Sales of these items are recorded at the time of sale or shipment. The sales of subscriptions, on the other hand, should be recognized over the period to which the subscription applies.

Third-Party Reimbursements

Health and welfare organizations are often reimbursed by third parties for the costs of providing the services to the public. These reimbursements should be recognized in the same period reimbursable costs are incurred.

ASSERTIONS, INTERNAL CONTROLS AND REVENUE RECOGNITION

For management’s representations in financial statements (assertions) regarding support and revenues to be accurate, an effective system of internal control should be designed and operating. A system of internal control should contain entity-level and activity-level controls. Entity-level control procedures are normally performed by management personnel, while activity-level control procedures are performed by accounting and other personnel.

Financial Statement Assertions

Here is an easy way to remember the common, relevant assertions for account balances, transactions and footnotes:

C ompleteness

To determine that all transactions and accounts that should be presented

have been included in the financial statements.

O ccurrence and cutoff

To determine that all transactions occurring during the period have been

recorded in the financial statements in the proper period.

V aluation and accuracy

To determine that all asset, liability, revenue and expense components

have been included in the financial statements at accurate amounts, classified properly.

E xistence

To determine that all recorded assets and liabilities exist at a given

date.

R ights

To determine that the entity has rights to all assets recorded at a given date.

O bligations

To determine that all liabilities are obligations of the entity at a given date.

D isclosure and Presentation

To determine that all components of the financial statements and other transactions and events are accurately classified, clearly described and disclosed.

For both for-profit and nonprofit organizations, the completeness assertion is often the most difficult to establish. Management of an entity is responsible for designing internal controls that provide reasonable assurance all transactions that exist have been recorded. Since auditors may not be able to evaluate the completeness assertion by performing substantive tests, at least limited tests of controls may be necessary for this purpose. Therefore, the presence or absence of effective internal controls will directly affect the completeness of the revenues classifications in nonprofit organizations.

Entity-Level Controls

The following are some examples of entity-level or key controls for cash receipts for a small nonprofit organization.

• The director receives bank and credit card statements directly either by mail or electronically.

• The director reviews contents of bank and credit card statements and investigates unusual items.

• The director receives or picks up unopened mail or uses a bank lock box for receipts.

• The director opens mail, supervises opening and/or reviews a daily listing of cash receipts.

• The director prepares the daily deposit or supervises and reviews its preparation.

Activity-level Controls

Examples of activity-level controls for cash receipts that can help prevent errors from occurring and going undetected in a small nonprofit organization are:

• Mail and cash receipts are recorded as received and deposited intact, daily.

• Duplicate deposit slips are prepared, matched with bank receipts and retained.

• Mail and cash receipts are counted by two independent persons other than the person entering the receipts in the accounting records.

An Illustration of Effective Counting Procedures for Cash Receipts (Activity-Level Controls)

Procedures for Counting Mail Receipts, Can Collections, Offerings and Other Cash Receipts

General Notes

• Two people must perform all counts. Two people must remain with uncounted cash at all times.

• Receipts will be counted daily.

• For neighborhood campaigns, the control procedures for distributing and collecting donation devices must be followed. The counting procedures below begin with the receipt of donations in the office, at conferences or at special events.

• References to donation devices may include envelopes, cans, remittance devices, solicitation devices or other container or document accompanying a gift or receipt.

Specific Counting Procedures

1. Label count sheet with current date and time.

2. Separate all offering envelopes into 3 piles:

a. Un-identified cash (any $ without an donation device)

b. Un-identified cash (or $ in a donation device without giver information on it.)

c. Identified cash (any money given which identifies the giver).

Note: If both cash and check are in one donation device, separate these into two devices and mark each one for the appropriate cash or check pile.

3. Counting checks:

a. Open each device and remove check. Circle the amount on the device indicating it matches check amount. Write check number on each device. Write address information on device if the gift is from a first time giver.

b. Tape orders and payments for merchandise, retreats, conferences, etc. should not be included with the regular mail or other cash receipts count. Make a separate deposit slip for each class of these items.

c. Any check received without a donation device must have one. Fill out a device if one is not included.

d. If a giving designation is on the check (i.e. missions purpose, a missionary, a program, a restricted gift, etc.), note this information on the device.

4. Stamp “check” on bottom front of all devices containing checks. Date stamp the backs of all check devices.

5. Run an adding machine tape of the checks. Rubber-band the tape to the checks and write “checks, date and time” on tape.

6. Run an adding machine tape of the devices containing checks. If the total is the same as the checks, rubber-band it to these envelopes and write “check devices, date and time” on this tape.

7. Enter check amount on count sheet.

8. Counting Identified Cash

a. Verify that amount in each device is the actual amount inside. Circle the total amount on each device.

b. Stamp “cash” on bottom front of each device. Date stamp backs of all devices.

c. Separate all cash and coin by denomination and face all bills in the same direction.

d. One person counts each denomination and fills in amounts on the count sheet.

e. Run adding machine tape from the devices for cash. Verify that amount matches actual cash counted. Label tape “cash devices, date and time” on the tape.

f. Place the currency and coin in a business envelope and write “identified cash, amount, date and time” on the envelope. Seal envelope and place in bank bag.

9. Counting Un-identified Cash (Any money without an envelope or in a blank envelope)

a. Separate all cash and coin by denomination and face all bills in the same direction.

b. One person counts each denomination and fills in amounts on the count sheet.

c. Second person recounts the currency and coin to verify total.

d. Place the currency and coin in a business envelope and write “un-identified cash, amount, date and time” on the envelope. Seal envelope and place in bank bag.

10. Complete count sheet totals. When all totals balance, both counters should sign the front of the count sheet. Prepare deposit slip, include one copy with cash and checks for deposit and retain a duplicate copy in the deposit slips packet.

11. Place count sheet, bundled check devices and bundled cash devices in manila folder marked with the date and time of count and deliver to the director’s office.

12. Bank bag can be locked (bundled checks, coin and currency and deposit slips inside) and delivered to director for safekeeping.

These counting procedures ensure the accuracy of each count of cash receipts and the completeness of receipts and revenues in the financial statements of nonprofit organizations. They also generate documentation for inspection by independent auditors and for satisfaction of any IRS inquiries or examination questions.

CONCLUSION

Accurate revenue recognition is one of the most important elements in a nonprofit organization’s financial statements and footnotes. Nonprofit organization’s financial statements and footnotes are often widely distributed and used by grantors, donors, and others. In these materials, we’ve learned the generally accepted accounting principles for recording nonprofit organization revenues, their presentation and disclosures in financial statements, and the effects of an entity’s internal controls on revenue recognition. Combined with materials from Part 1 (Key Accounting & Reporting Issues for NonProfits – Introduction, Overview and Statement of Position) and Part 3 (Key Accounting & Reporting Issues for NonProfits – Expense Accounting) of this series, preparers and auditors of nonprofit organization financial statements have a basic resource library that can be used to ensure high-quality financial reporting.

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