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March 1990

Update on not-for-profit organizations.

by Fetterman, Allen L.

    Abstract- The Financial Accounting Standards Board (FASB) has been studying the accounting, auditing, and reporting practices of non-profit organizations. It has been generally accepted that pledges received are recognized as assets, but the timing of recognition of related revenues varies among various guidelines. The FASB has reached the conclusions that: unconditional contributions and pledges should be recognized as revenue when received; unconditional pledges should be recognized as receivables; and the recognition of conditional pledges should not occur until the conditions have been met and pledges becomes unconditional. Private colleges and universities and healthcare entities should follow FASB-promulgated Generally Accepted Accounting Principles, while their public counterparts should follow Government Accounting Standards Board regulations.


The FASB has been studying accounting for contributions since March 1986. This project is concerned with recognition and measurement issues associated with receiving or making contributions, including cash, goods, or services.

Although it has been generally accepted for many years to recognize pledges receivable as assets (except by colleges and universities), the timing of recognition of the related revenue varies among the current AICPA accounting and audit guides, especially for restricted contributions. These guides have been the source of accounting principles in the absence of specific FASB guidelines. The Voluntary Health and Welfare Guide requires recognition when a gift is received, whether in cash or a pledge, unless the grantor specifies its use for a future period. SOP 78-10, "Accounting Principles and Reporting Practices for Certain Non-Profit Organizations," requires recognition when the donor's restriction is satisfied, usually through the expenditure of the funds.


The FASB has defined several relevant terms as part of this project:

Contribution. A voluntary nonreciprocal transfer from or to borrowers of cash or other assets.

Pledge. A written or oral promise to contribute cash or other assets.

Conditional pledge. A pledge that depends on a specified future and uncertain event to be binding.

Unconditional pledge. A pledge that depends only on the passage of time or demand for performance by the pledgee.

The FASB differentiates between a donor-imposed restriction and a donor-imposed condition.

Donor-imposed restriction. Specifies the use for which the asset was contributed. Remedies for failure to comply with a donor-imposed restriction are primarily directed toward seeing that the donor's expressed wishes are carried out.

Donor imposed condition. Specifies a future and uncertain event whose occurrence or failure to occur releases the pledger from its obligation to deliver its asset(s) or gives the pledger a right to return of the asset(s) it has advanced.


The FASB has reached the following conclusions:

* Unconditional contributions, including unconditional pledges, should be recognized as revenue (expense) when received (made). This applies to both unrestricted and restricted contributions.

* Unconditional pledges should be recognized as receivables.

* Conditional pledges should not be recognized until the conditions have been substantially met, i.e., when the pledge becomes unconditional. Any cash transferred in relation to a conditional pledge should be accounted for as a refundable advance.

Accounting for unrestricted contributions, under this set of conclusions, remains substantially unchanged from current practice. It is FASB's intention that accounting for restricted contributions, currently diverse, become uniform.

These conclusions create two problems:

* The differentiation between a donor-imposed restriction and a donor- imposed condition is difficult to determine, which will hamper uniformity of revenue recognition.

* The recognition of revenue from a restricted contribution prior to the donee's meeting the restriction will result in an overstatement of the excess of revenue over expenses and of total fund balances.

As to the first problem, at times it will be difficult to determine whether the donor has intended to place a condition or a restriction on the contribution. Take, for example, the following two donor statements:

* I pledge $100,000 for the ABC Charity's research program.

* I pledge $100,000 if the ABC Charity conducts a research program.

According to FASB, the first would be a donor-imposed restriction, resulting in recognition of revenue, while the second would be a donor- imposed condition, with no revenue recognition. One could make the argument that any restriction is a condition. The first pledge could be reworded, as follows:

I pledge $100,000 for the ABC Charity conditioned upon its being spent on ABC's research program.

Does this change a restriction to a condition? The author thinks not. However, it is easy to imagine the confusion that might result in the charitable sector if FASB's conclusion remains as is.

This brings up the second issue--recognizing restricted contributions as revenue when received versus when expended in accordance with the donor's wishes. The FASB has opted for the former. The author maintains however, that the latter makes more economic sense. A charity has not "earned" such revenue until it has complied with the donor's restrictions. Until the charity has expended the funds as the donor has stipulated, they may have a liability to return it. Further, this treatment will result in a more proper matching of revenue and expenses, since revenue would be recognized only when the expense is incurred. This would avoid the wild bottom line swings seen when a charity receives a restricted contribution in one year and expends it in the next. Lastly, it would resolve the problem of differentiating between a donor-imposed restriction and a donor-imposed condition, since the difference between the two becomes moot for accounting purposes.

The AICPA committee wrote in SOP 78-10 that donor-restricted contributions should be recognized to the extent expended in accordance with the donor's wishes. At this time, the author sees no economic or accounting justification to change that conclusion.

An exposure draft of a FASB Statement on Financial Accounting Standards is expected to be issued shortly.

The second issue in this update relates to the display of information in the financial statements of not-for-profits.


At the end of 1988, the AICPA Not-for-Profit Display Issues Task Force completed its three-year project and issued its report to the FASB. The report was in the form of advisory conclusions related to each of the three primary financial statements (balance sheet, statement of changes in net assets, and statement of cash flows). The vote of the task force on the conclusions ranged from 10 in favor, zero opposed to six in favor, four opposed. Thus, there are still issues where disagreement exists. It will be up to the FASB to resolve the issues.

Some of the advisory conclusions are:

Balance Sheet

* The balance sheet should be presented as a single self-balancing column. Organizations should be permitted, however, to disaggregate the balance sheet by net asset class, by managed fund groups or by segment, with a total column. The basis for disaggregation should be disclosed. A layered balance sheet should not be used.

* A classified balance sheet should be presented. Alternatively, illiquid assets should be highlighted by displaying fixed assets less related liabilities separately in the net asset section of the balance sheet.

* Net assets should be shown in the balance sheet by class-- unrestricted, temporarily restricted and permanently restricted--and in total. The nature and amount of restrictions should be disclosed, including expected expiration dates for time restrictions.

Statement of Changes in Net


* The three classes of net assets should be presented separately in the statement of changes in net assets. A total column should be permitted, but not required. A class of net assets may be disaggregated; however, the total for that class should be displayed. Subtotals for any two classes of net assets should not be permitted.

* The three classes of net assets may be presented on a single page, with or without organization-wide totals, or on separate pages by class, with no organization-wide totals. However, organization-wide totals should not be presented without information by class.

* Revenues should be displayed by source. Expenses should be displayed by function. Expenses may be reported by natural classification within functional groups. All expenses should be reported in the unrestricted class of net assets.

* Revenues, expenses, gains and losses may be displayed in any sequence, with certain exceptions, pertaining to reclassification. The change in net assets should be the last line of the statement, except possibly for the beginning and ending balances of net assets, which may be shown as the last two lines or as a separate statement.

Statement of Cash Flows

* Not-for-profit organizations should be encouraged to present cash flows in a single column. However, the statement of cash flows could be disaggregated consistent with the statement of changes in net assets, with a required total column.

* Cash flow should be classified within four categories--operating, capital, financing, and investing activities. The direct method should be used and a reconciling statement should not be required.

In February 1989, the FASB added financial statement display to its not-for-profit project. The FASB used the report of the AICPA Display Issues Task Force as an integral part of its invitation to comment, which was issued in August 1989.

FASB/GASB Jurisdiction

The issue of jurisdiction over separately issued financial statements of public colleges, universities and health care entities is settled for the moment. The GASB has convinced the governing bodies that, as a part of a government structure, these entities should fall under its jurisdiction. Private colleges and universities and private health care entities, such as voluntary hospitals, will follow FASB-promulgated GAAP, while their public counterparts will be subject to the GASB's authority to select which aspect of FASB-GAAP will apply and to give its own guidance.

The third section of this update covers the status of revisions to AICPA audit and accounting guides in the not-for-profit sector.

Not-for-Profit Guide Task


The AICPA has appointed a task force to revise the accounting and audit guides, i.e., those relating to voluntary health and welfare organizations, colleges and universities, and certain other not-for- profit organizations encompassed in SOP 78-10. The task force has been working for one year and hopes to have a draft ready in 1991. As guidance in particular areas is formalized, the task force will give consideration to issuing SOPs.

Some of the thorny issues the task force is dealing with include:

* Materiality--does it run to the total column, each individual column, or all columns, for both reporting and auditing purposes?

* Can there be co-existing financial statements for a single entity-- one prepared in conformity with GAAP, the other on a government regulation basis? What is the auditor's reporting responsibility in such a circumstance?

* The potential inconsistency between an entity's financial statements and separately-issued statements for one fund, such as a government- funded grant. If a proposed adjustment to the entity's financial statements is passed due to immateriality, what should be done if the adjustment is material to the separately-issued special purpose report?

* The reporting of service efforts and accomplishments. The task force has also identified an issue which demands immediate attention-- the accountant's responsibility level with respect to the federal Form 990.

Form 990

Some Form 990s are prepared by the accountant from audited financial statements on which the accountant has rendered an opinion. Other Form 990s are compiled by the accountant from an organization's books and records. In both situations, the accountant signs the form as preparer.

Form 990, however, is not like other returns filed with the IRS. Since 1986, any person can get a copy of an organization's Form 990 by requesting it in person at the organization's office. This makes the form a public document and raises the question of responsibility when the accountant has signed the form.

It is apparent that a user will associate the signing accountant with the form. If the form has been compiled by the accountant, should he or she attach a compilation report? Should an audit report be attached if the financial statements have been audited? The AICPA and the IRS need to join together to resolve this dilemma. Some sort of special report should be devised, to be attached to the Form 990, so that the user understands the accountant's level of responsibility. Also under study by the AICPA is the issue of the not-for-profit reporting entity.

Related Parties and Combined

Financial Statements

The AICPA Not-for-Profit Organizations Committee is preparing a proposed Statement of Position (SOP) on reporting on consolidation and combinations involving not-for-profit organizations. This statement will require a reporting not-for-profit entity to include in combined financial statements all entities which it controls or which solicit funds in the name of the reporting entity, with its approval, if substantially all the funds so raised are intended by the contributor to be transferred to the reporting entity, or are required to be so transferred.

Control is defined as the written authority to direct an entity's activities, management or policies. This would include indirect control, such as the authority to appoint the other organization's governing board. An affiliation agreement is not necessarily an indication of control, if it does not provide one entity the authority to establish policy for the other entity.

The proposed SOP will contain several examples of situations either requiring or not requiring the preparation of combined financial statements.

Common Interest Realty


The AICPA Accounting Standards Executive Committee is also involved with not-for-profits with its recently approved for release Accounting and Audit Guide for Common Interest Realty Associations (CIRAs). CIRAs include condominium associations and cooperative housing corporations. This project has been in process for several years due to many contentious issues, not the least of which is the accounting and reporting for common property, such as clubhouses, swimming pools and the outside walls and roofs of the residences.

The guide will require the recording of common property only if the property in question can be segregated and sold by the CIRA, with the funds retained by the CIRA. Prevalent practice is the reason given for not requiring the recording of all common property.

Other requirements include disclosure of anticipated future repairs and maintenance expenses and common charges.

Compliance Auditing

The final area for update is compliance auditing as it relates to government funding. In July 1988, the U.S. General Accounting Office (GAO) issued the revised Government Auditing Standards, popularly known as "The Yellow Book." This document, among other things, sets the standards for audits of government funds received by not-for-profit organizations, to be followed when required by law, regulation, agreement, contract, or policy. The revised standards are effective for audits beginning January 1, 1989.

When a not-for-profit organization is the recipient of federal funds, it is incumbent upon the independent auditor to determine whether the grantor agency requires an audit in accordance with the Yellow Book.

The Yellow Book incorporates GAAS, and the scope of the government- related audit is the same as an audit in accordance with GAAS. However, the Yellow Book adds the following:

* The audit firm should have a quality control system in place and participate in an external quality control review system.

* Auditors responsible for planning, directing, conducting or reporting on government audits should complete 80 hours of continuing education every two years. Those responsible for planning, directing, or conducting substantial portions of the field work or for reporting on the government audit should complete at least 24 of those 80 hours in subjects directly related to the government environment.

With the possible exception of the 24 hour continuing education requirement in the government environment, many practitioners, because of state and AICPA requirements, are already in compliance. The Yellow Book also requires a report on internal control and a report on compliance with laws and regulations.

In April 1989, the AICPA issued SAS 63 "Compliance Auditing Applicable to Governmental Entities and Other Recipients of Governmental Financial Assistance." This pronouncement establishes standards for testing and reporting on compliance with laws and regulations in an audit in accordance with GAAS, government auditing standards, and the Single Audit Act of 1984. It applies to audits of both governmental entities and nongovernmental agencies, e.g., not-for-profit organizations.

Compliance Audit Guide

Currently, the AICPA Not-for-Profit Organizations Committee is drafting a compliance auditing guide for audits of not-for-profit organizations. This potentially lengthy document should provide auditors with guidance regarding compliance auditing requirements of the AICPA, the GAO, and the U.S. Office of Management and Budget (OMB).

Finally, OMB is working on Circular A-133 (A-133), which will replace Circular A-110 as the implementing circular for audits of federal funds received by not-for-profit organizations. A-133 is patterned after Circular A-128, the implementing circular for the Single Audit Act. A- 133, as currently drafted, requires an organization-wide audit with tests of compliance with laws and regulations for "major" (as defined) federal assistance programs and for transactions selected for other audit purposes. Similar to A-128, additional reports beyond those required by the Yellow Book would be required concerning compliance with laws and regulations and on internal control with respect to major federal assistance.

Auditors with not-for-profit organization clients receiving federal funds, either directly or indirectly through state or local pass-through grants, must be thoroughly familiar with all these requirements, or they could be in danger of conducting a substandard audit.


The great flurry of activity that started affecting the not-for-profit sector in 1986, has continued unabated. It is anticipated that the issues discussed in this article should be resolved over the next three years.

Allen L. Fetterman, CPA, is a partner of Loeb & Troper, CPAs. He is a member of the AICPA Not-For-Profit Organizations Committee and the AICPA Not-For-Profit Guide Task Force. Mr. Fetterman previously served on the NYSSCPA Accounting for Nonprofit Organizations Committee.

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