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Not-for-Profit Accounting Made Easy Second Edition Warren Ruppel John Wiley & Sons, Inc Not-for-Profit Accounting Made Easy Second Edition Not-for-Profit Accounting Made Easy Second Edition Warren Ruppel John Wiley & Sons, Inc This book is printed on acid-free paper Copyright © 2007 by John Wiley & Sons, Inc All rights reserved Wiley Bicentennial Logo: Richard J Pacifico Published by John Wiley & Sons, Inc., Hoboken, New Jersey Published simultaneously in Canada No part of this publication may be reproduced, stored in a retrieval system, or transmitted in any form or by any means, electronic, mechanical, photocopying, recording, scanning, or otherwise, except as permitted under Section 107 or 108 of the 1976 United States Copyright Act, without either the prior written permission of the Publisher, or authorization through payment of the appropriate per-copy fee to the Copyright Clearance Center, Inc., 222 Rosewood Drive, Danvers, MA 01923, 978-750-8400, fax 978-750-4470, or on the Web at www.copyright.com Requests to the Publisher for permission should be addressed to the Permissions Department, John Wiley & Sons, Inc., 111 River Street, Hoboken, NJ 07030, 201-748-6011, fax 201-748-6008, or online at http://www.wiley.com/go/permission Limit of Liability/Disclaimer of Warranty: While the publisher and author have used their best efforts in preparing this book, they make no representations or warranties with respect to the accuracy or completeness of the contents of this book and specifically disclaim any implied warranties of merchantability or fitness for a particular purpose No warranty may be created or extended by sales representatives or written sales materials The advice and strategies contained herein may not be suitable for your situation You should consult with a professional where appropriate Neither the publisher nor author shall be liable for any loss of profit or any other commercial damages, including but not limited to special, incidental, consequential, or other damages For general information on our other products and services, please contact our Customer Care Department within the United States at 800-762-2974, outside the United States at 317-572-3993 or fax 317-572-4002 Wiley also publishes its books in a variety of electronic formats Some content that appears in print may not be available in electronic books For more information about Wiley products, visit our Web site at www.wiley.com ISBN: 978-0-471-78979-6 Printed in the United States of America 10 Contents Chapter Chapter Chapter Preface ix Understanding the Basics of Not-for-Profit Accounting What Are Generally Accepted Accounting Principles? Why Is Preparing GAAP Financial Statements Important? Definitions and Examples of Assets, Liabilities, Revenues, and Expenses Usually Found in Not-for-Profit Organizations’ Financial Statements What Is Meant by the Accrual Basis of Accounting? How Does This Differ from the Cash Basis of Accounting, and Which Is Better? What Happened to Fund Accounting? Summary Basic Financial Statements of a Not-for-profit Organization Statement of Financial Position Statement of Activities Statement of Cash Flows Summary Accounting for Contributions When Should Contributions Be Recorded? Understanding the Impact of Donor Restrictions on the Reporting of Contributions Accounting for Contributed Services Accounting for Other Noncash Contributions Pass-Through Contributions Summary v 36 40 42 43 44 46 56 63 65 66 72 74 75 76 82 Chapter Chapter Accounting for Investments and Financial Instruments Accounting for Investments Accounting and Financial Reporting for Financial Instruments Summary Accounting for Activities with Joint Costs and Indirect Cost Allocation Accounting for the Costs of Activities that Include Fund-Raising Allocation Methods Indirect Cost Allocation Plans Summary 83 84 98 107 109 110 117 119 124 Chapter Affiliated Organizations Affiliated Organizations For-Profit Subsidiaries Related-Party Disclosures Summary 125 126 135 137 140 Chapter Collections What Is a Collection? Accounting for Collections Summary 141 142 143 146 Chapter Split-Interest Agreements Accounting Fundamentals Revocable Split-Interest Agreements Irrevocable Split-Interest Agreements Examples of Split-Interest Agreements Summary 147 148 149 150 153 158 Chapter Accounting for Pension and Other Postretirement Employee Benefit Plans Accounting for Pension Plans Determining Pension Expense Determining Pension Liability Actuarial Assumptions and Calculations Required Disclosures Deferred Compensation Plans Other Postretirement Benefits Disclosures Summary 159 vi 160 164 165 168 171 172 173 176 177 Chapter 10 Lease Accounting Fundamentals Lease Accounting Operating versus Capital Leases Operating Leases Operating Leases with Scheduled Rent Increases Free Rent Periods Capital Leases Summary 179 180 180 185 187 188 189 193 Chapter 11 Analyzing the Financial Health of Not-for-Profit Organizations Financial Statement Analysis Independent Auditor’s Report Comparative Financial Statements Functional Expense Ratios and Other Analyses Budget Considerations in Financial Analysis Relation of the Budget to the Financial Statements Methods of Budgetary Control Summary 195 197 197 201 203 213 214 216 218 Current Developments in Not-for-Profit GAAP Recent FASB Statements Summary 221 222 228 Index 229 Chapter 12 vii Recent FASB Statements 225 funded status of these plans are reported on the employer’s financial statements, including those of not-for-profit organizations, for employers that sponsor single-employer defined benefit plans and OPEB plans FASB 158 requires an employer to recognize the funded status of a benefit plan in its statement of financial position The funded status is the difference between the assets of the plan (at fair value) and the benefit obligation For a pension plan, the benefit obligation is the projected benefit obligation For any other postretirement benefit plan, the benefit obligation is the accumulated postretirement benefit obligation This is a significant change to the accounting for these plans Given that many of these plans are likely to be underfunded, an additional liability will need to be recorded in the statement of financial position of not-for-profit organizations, with a corresponding decrease in unrestricted net assets (For those plans that are overfunded, an asset will be recorded in the statement of financial position, with a corresponding increase in unrestricted net assets.) But wait, there is more Not-for-profit organizations are probably more dramatically affected by FASB 158 than commercial enterprises That is because the changes in the net liability (or asset) from year to year that are caused by various actuarial calculations (in addition to the net periodic pension cost) are reported in the statement of activities Although this net change is required to be reported on a separate line, it is still effectively flowing the change in the liability or asset through the not-forprofit organization’s “income” statement Commercial enterprises are less affected because a number of years ago, when FASB statements were causing too many nasty things to flow through companies’ income statements, the FASB invented the concept of “comprehensive income” which is a way of keeping some of these nasty things (such as the impact discussed in the preceding paragraph) out of the income statement of companies, and essentially being directly reported as changes in stockholders’ equity To sum up, there is no such relief available to not-for-profit organizations The asset and liability recognition and related disclosure requirements of FASB 158 for nonpublic entities (such as not-for- 226 Current Developments in Not-for-Profit GAAP profit organizations) are basically effective for fiscal years ending after June 30, 2007 FASB 158 also has detailed provisions regarding accounting for multiemployer plans, transition rules and requirements for handling the remnants of accounting entries that were made when the original FASB statements were implemented One additional provision that is worth mentioning in detail is the requirement that the calculation of the funded status of the plan be made as of the fiscal year-end of the organization (Currently, many times these actuarial calculations are performed as of the beginning, not the end, of the fiscal year This requirement is effective for fiscal years ending after December 15, 2008 Accounting for Mergers and Acquisitions of Not-for-Profit Organizations This chapter of the first edition of this book reported that the FASB was actively working on a project to bring its guidance for “business combinations” issued for commercial organizations to the world of not-for-profit organizations In the five years since the first edition, there is now and Exposure Draft of an anticipated new standard that will address how mergers and acquisitions of not-for-profit organizations should be accounted for and reported Not-for-profit organizations that merged their entities in the past often used an accounting method called the pooling of interest method, in which essentially the financial statements of the two merger organizations were added together For commercial enterprises, the FASB has already eliminated the pooling-ofinterest method as an acceptable method accounting for the merger or acquisition of two entities Instead, the accounting treatment is required to be the “purchase” method, under which the assets and liabilities of the entity that is being acquired are accounted for at fair value by the acquiring organization If the acquiring organization paid more than the net fair value of the acquired enterprise, the difference is reported as an asset called goodwill The Exposure Draft of the proposed new rules would also require not-for-profit organizations to use the purchase method Recent FASB Statements 227 Since there is often not a clear-cut acquirer in the not-for-profit world because there is nothing being paid to any “owners” of the acquired organization as in the commercial world, special rules and considerations are needed to determine which organization is the acquirer In the absence of consideration transferred, the “acquirer” not-for-profit organization would recognize a contribution that is inherent in a situation where the fair value of the net assets of the acquired organization exceeded the fair value of its liabilities Accounting for Goodwill and Other Intangible Assets There is also an Exposure Draft for proposed requirements for accounting for goodwill and other intangible assets that are acquired in a merger or acquisition This essentially makes the requirements that were applicable from previous statements to commercial organizations now applicable to not-for-profit organizations Goodwill and other intangible assets that have indefinite lives are no longer “amortized” (i.e charged to expense over some arbitrary period) Rather, they will be evaluated for “impairment,” which essentially is a decline in their value to the organization, which would cause the recorded amount to be evaluated as to determine whether some or all of the amount should be written off as an asset and charged to expense Convergence with International Standards While not a specific pronouncement, one trend that the nonaccountant should be aware of is what is being referred to as “convergence” of generally accepted accounting principles in the United States with international accounting standards International accounting standards are promulgated by the International Accounting Standards Board (A similar trend is occurring with auditing standards generally accepted in the United States as promulgated by the AICPA with international auditing standards.) A significant effort is underway to harmonize accounting standards across country lines, which is particularly important for global organizations 228 Current Developments in Not-for-Profit GAAP Why is this important to not-for-profit accounting, particularly since many not-for-profit organizations are small, local organizations? The answer is the trickle-down impact these future standards will have on all organizations that are covered by the FASB’s statements This is not to say that the FASB is simply adopting international standards whenever there is a conflict with its own standards The term “convergence” means a gradual moving together that will occur over time In understanding future trends in accounting, knowledge of this process will assist the reader in understanding the direction that some accounting standards take SUMMARY In understanding GAAP for not-for-profit organizations, it is important to keep one eye on the horizon for accounting requirements that are new or likely to be finalized in the near future Not-for-profit organizations can use this information to plan for upcoming accounting rules and the impacts that they will have on their financial statements These potential impacts should also be considered for how they affect (or should affect) a not-for-profit organization’s budget Index Auditor independence standards, Continuing education, 200 International Auditing Standards, 227, 228 As source of GAAP, 3, 221 Statements of Position See Statements of Position Web site, 222 American Stock Exchange, 86 Art and historical treasures, collections of Accounting options, 143–146 Collection defined, 142 Fair value issues, 141, 142 Noncash contributions, accounting for, 76 Notes to financial statements, 62 Assets Defined, Fixed assets, purchase of, 58 See also Property, plant, and equipment Gain or loss on sale of, 36 Generally Accepted Accounting Principles (GAAP), 7–21 Impairment, 19, 94 Long-lived, 73 Net assets See Net assets Restricted See Donor restrictions Sequencing, 45, 46, 48 Types of, 7, Audit and Accounting Guide for Notfor-Profit Organizations, 85, 93–95, 147 Auditors, independent And consolidation of financial statements, 132, 133 And conversion from fund accounting, 42 Engagement level and level of assurance, 199, 200 A Accounts payable, 21–23, 101 Accounts receivable, 7, 10–13, 101 Accrual basis of accounting, 36–38, 214, 215 Actuarial assumptions and calculations, pension benefits, 164– 171 Adjustments Annual financial statements, Cash flows from operating activities, indirect method, 58 Cash to accrual accounting, 40 Consolidated financial statements, 135 And equity method of accounting, 96, 97 And hedging instruments, 106 By independent auditor, Affiliated organizations Accounting treatment, 127–133 Consolidated financial statements, 133–135 For-profit subsidiaries, 135–137 Related-party disclosures, 137–140 Types of affiliations, 126, 127 Allocation Costs, generally, 53, 109, 124 Costs of activities that include fundraising, 109–116 Indirect costs, 119–124 Methods, 117–119 American Institute of Certified Public Accountants (AICPA) Alternative investments, practice aid on valuation of, 95 Audit and Accounting Guide for Notfor-Profit Organizations, 85, 93–95, 147 229 Index 230 Opinion letter, 4, 5, 39, 198 Report, analysis of, 197–200 Role of, 3, B Bad debt expense, 12 Balance sheet, 7, 44–47 See also Statement of financial position Bank overdraft, 23 Board of directors Board-designated investment funds, 84 Designations of assets, 29, 84 Financial statements, analysis of See Financial statements Investment committee, 96 Quarterly financial reports to, Bonds See also Debt securities Interest rate swaps, 103, 104 Issuance of, 25, 103 Noncash contributions, accounting for, 75, 76 Budgets Control methods, 216–218 Financial statements, relation to, 214– 216 Importance of, 214 Modification, 218 Use of in financial analysis, 196, 197, 213, 214 Business combinations, 127, 128, 226, 227 C Capital improvements, 25 Case statement, 208 Cash, 6–9 And cash flow statement, 57 Disbursements, 38, 57–59 Equivalents See Cash equivalents As financial instrument, 100 Quick ratio, 212 Receipts, 38, 57–59 Revenues, 32 Cash basis of accounting, 5, 36, 38–40, 214, 215 Cash equivalents, 6, 7, And cash flow statement, 57 Investments, 84, 85 Quick ratio, 212 Cash flow statements See Statement of cash flows Certificates of deposit, 84 Charitable gift annuities, 151, 153, 156, 157 Charitable lead trusts, 153–155 Charitable remainder annuity trust (CRAT), 156 Charitable remainder trust, 153, 155, 156 Charitable remainder unitrust (CRUT), 156 Checks, accounting for payment by, 22, 23 Closely-held corporations, equity securities in, 87 Collateralized mortgage obligation (CMO), 86 Collections Accounts receivable, 12, 13 Art and historical treasures See Art and historical treasures, collections of Pledges, 70–72 Colleges and universities, 85, 94 Commodity funds, 95 Concept Statement No 6, Elements of Financial Statements (FASBCS 6) Assets defined, Expenses defined, 34 Liabilities defined, 21 Revenues defined, 32 Consolidated financial statements, 125, 127, 128, 131–137, 139, 140 Contra accounts, 17, 18 Contracts with government agencies Analysis of revenues from, 209 Fee-for-service activities, revenue recognition, 33 And financial statements, 2, 3, 10, 11 And indirect cost allocation plans, 119, 120 Contributions Accounting for, generally, 65, 66, 82 Analysis of revenues, 209 Defined, 66 Donor conditions See Donor conditions Donor restrictions See Donor restrictions FASB 116, Accounting for Contributions Received and Contributions Made See Financial Accounting Board Statements Index Noncash contributions, 65, 75, 76 Pass-through, 76–82 Promises to give (pledges), 7, 10, 68– 72 Ratio to fund-raising expenses, 205– 207 Recording, 66–72 Services, accounting for, 65, 74, 75 As source of revenue, 32 Unconditional transfers, 66–68 Costs Activities that include fund-raising, 109, 110–116 Allocation, generally, 53, 109, 124 Allocation methods, 117–119 Direct versus indirect, 120 Indirect cost allocation, 119–124 Credit, commitments to extend, 102 Credit risk, 99, 100, 102, 103 Current ratio, 211, 212 D Debt, 24–26, 101 Debt ratio, 212 Debt securities, 75, 85, 86, 88 Deferred compensation plans, 160, 172, 173 Deferred income, 26–28, 30, 33 Deferred revenue, 67 Defined benefit pension plans, 160, 161, 163–169, 171, 174, 175 Defined contribution pension plans, 160–163, 171, 173, 176 Depreciation And accrual basis of accounting, 38 And budgeting, 215 Expense classification, 35 And notes to financial statements, 62 Property, plant, and equipment, 17, 18 And statement of activities, 58 Derivatives, 99, 105 See also Financial instruments Derivatives Implementation Group (DIG), 99 Direct method of calculating cash flow, 58, 60, 61 Disclaimer of opinion, 198 Disclosures, 63 See also Notes to financial statements Affiliated organizations, 131, 132 Auditor recommendations, 231 Contributed services, value of, 74 Credit line, existence of, 25 Donor restrictions, 44, 73, 91 Fair value, 100–102 Financial instruments, 99–103, 106, 107 Investment expenses netted against investment income, 92 Market value, 94 Nonfinancial assets, pass-through contributions, 78 Other postretirement employee benefits (OPEBs), 176, 177 Pension benefits, 171 Related parties, 132, 137–140 Discount rate, 69 Dollar value retail LIFO method, 15, 16 Donor conditions, 27, 28, 30 Defined, 66, 67 Restrictions compared, 67 Donor restrictions, 28–31, 49, 50 Conditions compared, 67 And consolidated financial statements, 134 Disclosure, 44, 73, 91 Endowments, 31, 73, 74, 91 Equity securities, 73–75 Gains and losses, 91 Investment income, 74, 84, 148, 149 Notes to financial statements, 44, 73 Permanent restrictions, 28, 31, 41, 44, 48, 49, 72–74, 151–153 And split-interest agreements See Split-interest agreements And statement of activities, 92 And statement of financial position, 44 Temporarily restricted assets, 28–31, 41, 44, 48, 49, 72–74, 84, 148, 149, 151–153 Donors Financial statements, use of, 195, 208 Noncash transactions and cash flow statement, 60 And split-interest agreements, 148, 149 See also Split-interest agreements E Employee benefits Pension plans See Pension benefits Index 232 Postretirement See Other postretirement employee benefits (OPEBs) Employees Financial statements, use of, 196 Salary expenses, 24, 35, 37, 54 Endowments And donor restrictions, 31, 73, 74, 91 And fund accounting, 41 Investments, accounting for, 84 Losses, 91, 92 “Other investments,” 93 Equity method of accounting, 80, 95– 98, 136, 137 Equity securities, 85–90 Noncash contributions, accounting for, 75, 76 Unrestricted, temporarily restricted, and permanently restricted assets, 73–75 Expenses Accrual basis of accounting, 37, 38 Accrued, 21, 23, 24 Cash basis of accounting, 38 Classification of, 34, 35 Defined, 34 And functional reporting, 51–56, 92 Gains and losses distinguished, 35, 36 Interest, 26 Investment, 92 Prepaid, 8, 20 Reimbursement of, 13, 119, 120, 123, 124 Reporting on gross basis, 50 Revenue matching, 26, 27, 163, 174 F Fair market value, 10, 75 Fair value Affiliated organizations, assets and liabilities, 135 Alternative investments, 95 Collections of art and historical treasures, 141–146 Differences in and financial statement analysis, 202 Endowment fund assets, 91, 92 Equities and debt securities, 85–90, 97, 107 FASB 157 See Financial Accounting Board Statements Financial instruments, 100–102, 104– 107 Investments, 10, 75, 76 Noncash contributions, 75, 76 “Other investments,” 93–95 Pass-through contributions, 78, 80 Services, contributed, 75 Split-interest agreements, 149–151, 155–158 FASB See Financial Accounting Board Statements FASBCS See Concept Statement No 6, Elements of Financial Statements (FASBCS 6) Federal Deposit Insurance Corporation (FDIC), 102 Federated fund-raising organizations, 77 Fee-for-service activities Analysis of revenues, 209 As source of revenue, 32, 33 Fiduciary duties, board of directors, 218 Financial Accounting Board Statements Business combinations, Exposure Draft, 226, 227 FASB 13, Accounting for Leases, 180, 181, 189 FASB 57, Related-Party Disclosures, 137–140 FASB 87, 167, 170, 224 FASB 88, 224 FASB 95, Statement of Cash Flows, 9, 56, 58 FASB 106, Employers’ Accounting for Postretirement Benefits other than Pensions, 173, 174, 224 FASB 107, Disclosures about Fair Value of Financial Instruments, 100–102 FASB 116, Accounting for Contributions Received and Contributions Made, 65, 66, 68–70, 73–76, 80, 141–146 FASB 117, Financial Statements of Not-for-Profit Organizations, 41, 43, 45, 50, 51, 55, 56 FASB 124, Accounting for Certain Investments Held by Not-for-Profit Organizations, 85–89, 91, 93, 97 Index FASB 132, Employers’ Disclosures about Pensions and Other Postretirement Benefits, 171, 176 FASB 132(R), 224 FASB 133, Accounting for Derivative Financial Instruments and Hedging Activities, 99, 100, 105, 106 FASB 136, Transfers of Assets to a Not-for-Profit Organization or Charitable Trust That Raises or Holds Contributions for Others, 77– 81 FASB 144, Accounting for the Impairment or Disposal of LongLived Assets, 19 FASB 154, Accounting Changes and Error Corrections, 222, 223 FASB 157, Fair Value Measurements, 223, 224 FASB 158, Employer’s Accounting for Defined Benefit and Other Postretirement Plans, 165, 171, 174, 224–226 Goodwill and other intangible assets, Exposure Draft, 227 Recent statements, 222–228 Financial Accounting Foundation (FAF), Financial Accounting Standards Board (FASB) Business combinations, 127 Concept Statement No (FASBCS 6), 7, 21, 32, 34 And GAAP, 3, 221 Statements See Financial Accounting Board Statements Web site, 222 Financial guarantees, 102 Financial instruments Accounting treatment, generally, 83, 84, 98–100, 107 Credit risk disclosures, 102, 103 Defined, 100 Derivatives, 103–106 Disclosure requirements, 106, 107 Fair value disclosures, 100–102, 104– 107 Hedges, 100, 106 Financial statements Adjustments, Analysis of, 197–213 And budget considerations, 214–219 233 Comparative, 201–203 Consolidated, 125, 127, 128, 131– 137, 139, 140 Contributions, reporting See Contributions Functional expense ratios, 203–207 Horizontal analysis, 201 Independent auditor’s report, 197– 200 Liquidity analysis, 211–213 Management responsibility for, 3, Net assets (bottom-line) analysis, 207, 208 Notes to See Notes to financial statements Ratio analysis, 204–207, 211–213 Revenue sources, analysis of, 208– 210 Statement of activities See Statement of activities Statement of cash flows See Statement of cash flows Statement of financial position See Statement of financial position Users of, 195–197 Vertical analysis, 201 Financing activities, cash flow, 56, 59 First-in, first-out (FIFO), 15, 16 Fixed assets, purchase of, 58 See also Property, plant, and equipment Flow assumption, 15 Foreign currency exposure hedges, 103, 105, 106 Form 990, 216 403(b) plans, 172, 173 See also Pension benefits Functional classifications, 110, 119, 124, 203 Functional reporting, 51–56, 92 Fund accounting, 40–42 Fund-raising expenses, 35, 54, 110 And cost allocation See Costs Ratio to total expenses, 205 Future cash flows, 69–71, 80 G Gains and losses Colleges and universities, 94 Derivatives, changes in fair value, 105 And donor restrictions, 91 Expenses distinguished, 35, 36 234 Index Investments, 36, 50 Net assets, 49 Realized, 90 Reporting, 50 Sale of assets, 36 And statement of activities, 49, 88–90 Unrealized, 88, 90, 105, 215, 216 Generally Accepted Accounting Principles (GAAP) As accounting standard, 1, Accrual basis of accounting, 36–38 Assets, 7–21 See also Assets Cash and cash equivalents, 6–9 Cash versus accrual basis of accounting, 37–40 Changes, need for keeping up with, 221 Comparative financial statements, 201 Expenses, 34, 35 Failure to follow, consequences of, 4– Financial Accounting Standards Board See Financial Accounting Standards Board (FASB) Financial statements See Financial statements And fund accounting, 41 Gains and losses, 35, 36 Importance of, 2, And independent auditor’s report, 197, 198 And international standards, 227, 228 Liabilities, 21–27 Management responsibility, 3, Matching principle, 26, 27, 163, 174 Net assets, 28, 29 Notes to financial statements, 43, 62, 63 See also Notes to financial statements Pronouncements, Revenues, 32, 33 Sources of, 3, 221 See also Financial Accounting Board Statements And state laws, 39, 40 Generally Accepted Auditing Standards (GAAS) And independent auditor’s report, 197 And levels of engagement, 199, 200 Goodwill, accounting for in mergers and acquisitions, 224, 227 Government, contracts with See Contracts with government agencies Government Auditing Standards (GAS), 200 Governmental Accounting Standards Board (GASB), Grantors, use of financial statements, 195, 196 Grants Analysis of revenues from, 209, 210 Cost reimbursements, 119, 120, 123, 124 Receivables, accounting treatment of, 13 Gross basis reporting, 50 H Health care service providers, accounting for investments, 85 Health insurance and other postretirement benefits See Other postretirement employee benefits (OPEBs) Hedge funds, 95 Hedging activities, 99, 100, 103, 105, 106 Horizontal analysis, 201 I Impairment of assets, 19, 94 Income, deferred, 26–28, 30, 33 Income, investment Board-designated fund, 29 Colleges and universities, 94 And donor restrictions See Donor restrictions Expenses, netting against, 92 Gross basis reporting, 50, 51 Realized gains and losses, 90 Unrealized gains and losses, 88–90 Income statement, 46 See also Statement of activities Indirect method of calculating cash flow, 58, 60, 61 Insurance, as prepaid expense, 20 Interest expense, 26 Interest rate swaps, 103, 104 International Accounting Standards Board, 227 Inventories, 8, 13–16, 213 Investments Index Accounting treatment, generally, 7, 83–85, 107 Alternative investments, 93–96 Cash equivalents, 84, 85 Cash flow, 56, 58, 59 Equities and debt securities, 85–92 Equity method of accounting, 96–98 Fair value, 10, 75, 76 Gains and losses, 36 Income See Income, investment Long-term, 101 Short-term, 100 Stocks and bonds, 85–92 J Joint activities, cost allocation See Costs L Last-in, first-out (LIFO), 15, 16 Leasehold improvements, 16, 17 Leases Accounting issues, generally, 179, 180, 193 Capital, 16, 17, 60, 180–185, 189– 193 Lessees, 179, 180, 185–192 Lessors, 179, 180, 185–189, 192, 193 Operating, 180, 181, 185–189 Liabilities And affiliated organizations, 130, 133–135 Current versus noncurrent, 46 Deferred income, 26–28, 30, 33 Deferred revenue, 67 Defined, 21 And donor conditions, 67 Forgiveness of, 76 Generally Accepted Accounting Principles (GAAP), 21–27 Liquidity, 45 And pass-through contributions, 77, 78, 80 Sequencing, 45, 46, 48 And statement of financial position, 44 Lines of credit, 24, 25 Liquidity Cash equivalents See Cash equivalents Financial ratios, 211–213 235 And statement of financial position, 7, 45, 46, 84 Loans See also Debt And financing activities, 59 Mortgages, 25, 26 Receivable, 101 Short-term, 24 Use of financial statements by lenders, 196 M Management Quarterly financial reports to, Responsibility for financial statements, 3, And valuation of alternative investments, 95, 96 Management and general (administrative) expenses, 34, 35, 52– 54, 110 Cost allocation See Costs Ratio to total expenses, 204 Management and general functions, 111, 113–116 Matching principle, 26, 27, 163, 174 Membership development expenses, 35, 54, 110, 119 Mergers and acquisitions See Business combinations Minority interest, 135 Money market funds, 84 Mortgage notes, investments in, 93 Mortgages, 25, 26, 60 Mutual funds, 87 N National Association of Securities Dealers Automated Quotations (NASDAQ), 87 National Quotation Bureau, 87 Natural classification of expenses, 35, 54, 55 Net assets Changes in, 48–50 Classification, 28–31, 72 And financial statement analysis, 202, 203, 207, 208 Restricted See Donor restrictions And statement of activities, 48–50 And statement of financial position, 44 Index 236 Unrestricted, 28, 29, 41, 44, 48, 72, 74, 84, 148, 149, 151–153 Net realizable value, 70–72 New York Stock Exchange, 86 Noncash activities Art and historical treasures, collections of See Art and historical treasures, collections of And cash flow statement, 60 Contributions, accounting for, 65, 75, 76 Notes payable, 24 Notes to financial statements, 43, 62, 63 See also Disclosures Accounting methods, 62 Affiliated organizations, 131, 132 Cash basis accounting, 39 Contributed services, value of, 74 Credit line, 25 Disclosure requirements, fair value of financial instruments, 101 Donor restrictions, 44, 73 Financial instruments, fair value, 101 Investment expenses, netting, 92 “Other” receivables, 13 Related-party transactions, 138 O Off-balance-sheet risk, 99 Offshore funds, 95 Oil and gas interests, 93 One-line consolidation, 97 See also Equity method of accounting Operating activities, cash flow, 56–58 Operating statement, 46 See also Statement of activities Opinion letters Adverse opinion, 198 And cash versus accrual basis of accounting, 39 Disclaimer, 198 Management responsibility for financial statements, Qualified, Unqualified, Other comprehensive basis of accounting (OCBOA), 5, 39 Other postretirement employee benefits (OPEBs), 173–176 See also Pension benefits Accounting issues, 159, 160, 177 Disclosures, 176, 177 FASB 158 See Financial Accounting Board Statements P Partnership interests, 93 Pass-through contributions, 65, 76–82, 134 Pension benefits Accounting issues, 159, 160, 177 Actuarial assumptions and calculations, 164–171 Deferred compensation plans, 160, 172, 173 Defined benefit pension plans, 160, 161, 163–169, 171, 174, 175 Defined contribution pension plans, 160–163, 171, 173, 176 Disclosures, 171 Expense accounting, 164, 165 FASB 158 See Financial Accounting Board Statements Liability for future benefits, 162, 163, 165–167 Vesting, 161, 168, 176 Perpetual trust held by third party, 153, 155 Physical units method of cost allocation, 117, 118 Pledges, 68–72 Pooled (life) income funds, 153, 157, 158 Present value, 69, 70, 80 Private equity funds, 93, 95 Program expenses, 34, 52, 110 Cost allocation See Costs Ratio to total expenses, 204 Program functions, 112–116 Property, plant, and equipment, 8, 16–19, 41 Purchase method, accounting for business combinations, 226, 227 Q Quick ratio, 212 R Ratio analysis, 204–207 Real estate Investments, 93, 95 Noncash contributions, accounting for, 76 Index Receivables, Accounts receivable, 7, 10–13, 101 Pledges See Pledges Turnover ratio, 212, 213 Types of, 13 Reclassifications, 49, 50 Refundable advances, 149 Regulatory compliance and financial statements, 2, 196 Reimbursement of expenses And indirect cost allocation, 119, 120, 123, 124 Receivables, 13 Related parties, 127, 132, 137–140 Relative direct method of cost allocation, 118 Rent, 35, 37, 54 See also Leases Accounting for, 185–189 Costs, allocating, 121 Free rent periods, 188, 189 Scheduled increases, 187, 188 Restricted assets See Donor restrictions Return on investment (ROI), 59 Revenue Accrual basis of accounting, 37 Analysis of sources of, 208–210 Cash, 32 And cash basis of accounting, 38 Contributions See Contributions Deferred, 33, 67 Defined, 32 Expense matching, 26, 27 Expenses, matching, 26, 27, 163, 174 Fee-for-service activities, 32, 33, 209 Gains and losses distinguished, 35, 36 Generally Accepted Accounting Principles (GAAP), 32, 33 Recognition, 11, 12, 33 Renewable sources, 210 Reporting on gross basis, 50 Sources of, 32, 208–210 S Salary expenses, 24, 35, 37, 54 Savings accounts, 84 Securities and Exchange Commission (SEC), 86, 171 Services, accounting for contributions of, 65, 74, 75 Software, accounting, 41 Split-interest agreements 237 Accounting fundamentals, 148, 149 Accounting issues, 147, 158 Charitable gift annuity, 153, 156, 157 Charitable lead trusts, 153–155 Charitable remainder trusts, 153, 155, 156 And financial statements, 153 Irrevocable, 148, 150–153 Perpetual trust held by third party, 153, 155 Pooled (life) income funds, 153, 157, 158 Revocable, 148, 149 Types of, 147, 153–158 Stand-alone cost method, 118, 119 Standby letters of credit, 102 Statement of activities, 43, 46, 48–56 And cash flow from operating activities, 58 Contributions, 68 Depreciation expense, 17, 58 Derivatives, 99, 106, 107 Disclosures, 106, 107 And donor conditions, 67 And donor restrictions, 92 And equity method of accounting, 97, 98 Interest rate swap, changes in fair value, 104 Investment expenses, 92 Investments, changes in fair value, 10 Net assets, changes in, 28, 106 And pass-through contributions, 81 Postretirement benefit expense, 175 Realized gains and losses, 90 Unrealized gains and losses, 88–90 Statement of cash flows, 43, 56–61, 202 Statement of financial position, 43–48 Accumulated postretirement benefit obligation, 175–177 Assets, 7–15, 17, 19 Board-designated investment funds, 84 Debt, 25, 26 Defined contribution pension plans, 163 Derivatives, 99, 105, 107 And donor conditions, 67 Equity and debt securities, 86, 88, 89, 107 Index 238 And equity method of accounting, 96–98 And fair value disclosures, 101 Liabilities, 21, 23, 24, 26, 76 Operating activities, 57, 58 Postretirement benefit obligation, 175 Revenue, deferred, 33 And statement of cash flows, 57 Unfunded accumulated benefit obligation, 166, 167, 177 Statements of Position SOP 79-10, Accounting Principles and Reporting Practices for Certain Nonprofit Organizations, 94 SOP 94-3, Reporting of Related Entities by Not-for-Profit Organizations, 127–131, 136 SOP 98-2, Accounting for Costs of Activities That Include FundRaising, 111–115, 117, 119 Stock, restricted, 76 See also Equity securities Subsidiaries, for-profit, 135–137 Support and revenue See Revenue Supporting services, 110 Swap contracts, 86 See also Interest rate swaps U Unrelated business income, 135 U.S Treasury bills, 84, 103 Utilities, 35, 37, 38, 54 V Valuation Fair value See Fair value Inventory, 15 Noncash contributions, 75, 76 Pass-through contributions, 80 Unconditional promises to give cash, 69–71 Vendors, use of financial statements, 196 Venture capital funds, 93, 95 Vertical analysis, 201 Voluntary health and welfare organizations Investments, accounting for, 85, 94 Natural and functional classification of expenses, 54, 55 Volunteers, accounting for contributed services, 65, 74, 75 W Web sites American Institute of Certified Public Accountants, 222 Financial Accounting Standards Board, 222 Working capital, 211 Write-offs, accounts receivable, 12, 13