THE NEW NOT-FOR-PROFIT ORGANIZATIONS GUIDE: PRACTICAL ACCOUNTING IMPLEMENTATION ISSUES

By Thomas A. Ratcliffe

In June 1996, the AICPA issued a new audit and accounting guide, Not-for-Profit Organizations (the guide). The May 1997 issue of The CPA Journal provided an overview of the major substantive provisions of the new guide. Presented here are implementation issues from an accounting perspective. A similar article on the auditing implementation issues will appear in next month's Auditing Department.

Custodian Funds/Agency Transactions

In September 1996, the FASB issued FASBIN No. 42 in an attempt to clarify paragraph 4 of SFAS No. 116 that indicates the provisions of that statement are not applicable to transfers of assets where the reporting entity acts as an agent, trustee, or intermediary, rather than as a donor or donee. The FASB was asked to clarify whether a transfer of assets by a resource provider to a not-for-profit organization should be accounted for as a contribution received by the organization if the resource provider a) directs the organization to distribute the transferred assets, income from the assets, or both to a specified third-party beneficiary, and b) grants the organization the unilateral power to redirect the use of the transferred assets away from the specified third-party beneficiary.

A recipient organization that is directed by a resource provider to distribute transferred assets, income from those assets, or both to a specified third-party beneficiary acts as a donee and a donor, rather than an agent, trustee, or intermediary, if the resource provider explicitly grants the recipient organization the unilateral power to redirect the use of the transferred assets to another beneficiary. This unilateral power to redirect the use of assets is referred to as variance power. As used in FASBIN No. 42, "explicitly grants" means the recipient organization's unilateral power to redirect the use of assets referred to in the instrument transferring the assets, and "unilateral power" means the recipient organization can override the resource provider's instructions without approval from the resource provider, specified third-party beneficiary, or any other interested party.

Agency (or custodian) funds are used by not-for-profit organizations to account for resources held by the entity as an agent for resource providers before those resources are transferred to third-party recipients specified by those resource providers. The entity has little or no discretion over the use of those resources. The new guide stipulates that because the assets and liabilities always are equal in agency funds, no net assets should be reported in the financial statements.

Fund-Basis Information/
Comparative Data

Footnote 5 to SFAS No. 117 stipulates that reporting by fund groups is not a necessary part of external financial reporting. As such, while SFAS No. 117 does not preclude entities from providing desegregated information by fund groups (as long as the required aggregated amounts for each of the three classes of net assets--unrestricted, temporarily restricted, and permanently restricted--are displayed), reporting by individual funds no longer is required.

In certain circumstances, not-for-profit organizations present comparative information for a prior year or years only in total rather than by net asset class. This summarized information may not include sufficient detail to constitute a presentation in conformity with generally accepted accounting principles. When prior year financial information is summarized and does not include minimum information required by SFAS No. 117 and the new guide (e.g., if the statement of activities does not present revenues, expenses, gains, and losses by net asset class), the nature of the prior year information should be described by use of appropriate titles on the face of the financial statements and in a note to the financial statements.

Appropriate titles to financial statements should include a phrase such as "with summarized financial information for the year ended September 30, 19x1." An example note that meets the requirements of the new guide would be as follows:

The financial statements include certain prior-year summarized comparative information in total but not by net asset class. Such information does not include sufficient detail to constitute a presentation in conformity with generally accepted accounting principles. Accordingly, such information should be read in conjunction with the organization's financial statements for the year ended September 30, 19x1, from which the summarized information was derived.

Property and Equipment

At times, not-for-profit organizations receive contributions of property and equipment (including unconditional promises to give property and equipment). At the date of the contribution, these assets should be recognized in the financial statements of the not-for-profit entity at fair value and, depending on donor-imposed restrictions and the organization's accounting policy, should be included in unrestricted net assets, temporarily restricted net assets, or permanently restricted net assets. If donors stipulate how or how long contributed property and equipment must be used by the organization, the contribution should be recorded as restricted support. In those circumstances where donors do not specify such restrictions, the contribution should be reported as restricted support if the organization has adopted an accounting policy of implying a time restriction on the use of the assets that expires over the useful lives of the assets.

In the absence of donor restrictions or entity or organizational policy of implying time restrictions, contributions of property and equipment should be reported as unrestricted support. Unconditional promises to receive these assets should be recognized as receivables in conformity with the provisions of SFAS No. 116.

Not-for-profit organizations may receive unconditional contributions of the use of property and equipment where the donor retains legal title to the assets. Organizations receiving this type of contribution should recognize contribution revenue in the period in which the contribution is received and expenses in the period the assets are used. If the transaction is an unconditional promise to give for a specified number of periods, the promise should be reported as a contribution receivable and as restricted support that increases temporarily restricted net assets.

Practice Note. Paragraphs 9.13 through 9.15 of the guide contain required property and equipment disclosures. One of the disclosures commonly overlooked in practice is the required disclosure applicable to the organization's capitalization policy. For example, it is not uncommon for entities to capitalize contributed/acquired property and equipment items with a fair value/cost of $500 or more; assets with a fair value/cost of less than $500 are expensed. This capitalization policy needs to be disclosed in the policy notes to the financial statements.

Board-Designated Restrictions

Pursuant to the guidance in SFAS No. 117, financial statements of not-for-profit entities should be prepared to focus on the entity as a whole. The net asset section of the statement of financial position should be segregated into three classes of net assets: unrestricted, temporarily restricted, and permanently restricted net assets. The statement of activities should disclose all changes in these three net asset classes. Amounts reflected in these three net asset classes are based on donor-imposed restrictions.

Assets are not required to be desegregated because of donor-imposed restrictions on their use. For example, cash available for unrestricted current use need not be reported separately from cash received with donor-imposed restrictions that also is available for current use. However, cash or other assets either a) designated for long-term purposes, or b) received with donor-imposed restrictions that limit their use to long-term purposes should not be aggregated on a statement of financial position with cash or other assets that are available for current use. For example, cash that has been received with donor-imposed restrictions limiting its use to the acquisition of property and equipment should be reported under a separate caption, such as cash restricted to investment in property and equipment, and displayed near the section in the statement of financial position where property and equipment are displayed.

Very importantly, the three net asset classes should be based solely on
the existence or absence of donor-imposed restrictions. Board-designated limitations on the use of unrestricted net assets are permitted to be disclosed.

Intermediate Measure of Operations

The statement of activities of a not-for-profit organization should focus on the organization as a whole and should report the amount of change in net assets for the period using a descriptive term such as change in net assets. Organizations may elect to incorporate classifications into the statement of activities.

An intermediate measure of operations (e.g., excess or deficit of operating revenues over expenses) may be reported in a statement of activities as long as the measure is clear either from the details provided on the face of the statement or from a description contained in a note to the financial statements. If an intermediate measure of operations is used, it must be in a financial statement that, at a minimum, reports the change in total unrestricted net assets for the period.

Practice Note. Not-for-profit health-care organizations are required to include a performance indicator in the statement of activities and it clearly should be labeled with a descriptive term such as revenue over expenses, revenues and gains over expenses and losses, earned income, or performance earnings.

Deferred Revenue

Resources received in exchange transactions from customers, patients, and other service beneficiaries for specific projects, programs, or activities that have not taken place should be reported as liabilities to the extent the earnings process has not been completed. For example, resources received from the advance sale of season theater tickets should be recognized as deferred revenue, representing the obligation to hold the performances. That revenue is earned as the performances are held.

Practice Note. The deferred revenue provisions in the guide relate only to exchange transactions. Contributions (including unconditional promises to give) should be reflected in the financial statements as increases in unrestricted net assets, temporarily restricted net assets, or permanently restricted net assets, depending on the existence or absence of donor-imposed restrictions.

Discounting Contributions

Contribution revenue should be measured at the fair value of the assets or services received or promised. Contributions arising from unconditional promises to give that are expected to be collected within one year of the financial statement date may be measured at net realizable value (there is no need to discount these contributions). The fair value of contributions arising from unconditional promises to give cash that will be collected outside one year from the financial statement date should be determined based on the present value of the future cash flows.

From the perspective of the not-for-profit organization, the present value computation related to these unconditional promises to give should be measured using a risk-free rate of return appropriate for the expected term of the promise to give. A risk-free rate of return (rather than the donor's borrowing rate) is the appropriate rate for the donee because other factors (e.g., the creditworthiness of the donor, the organization's collection experience, and its policies concerning the enforcement of promises to give) already should have been considered in determining estimated future cash flows to be discounted.

Practice Note. Paragraph 20 of SFAS No. 116 requires that the interest element associated with unconditional promises to give be reported as contribution income (not interest income) by the not-for-profit entity. *

Thomas A. Ratcliffe, PhD, CPA, is chairman of accounting and finance programs and professor of accounting at Troy State University.