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2012-05-29 Contributions & Net Assets
1. Accounting for
Contributions and Net
Assets ASC 958
Jean Gilbert, CPA, Senior Manager
May 29, 2012
Thrive. Grow. Achieve.
2. OBJECTIVES
• Discuss key revenue sources unique to nonprofit organizations.
• Differentiate between contributions, exchange and agency transactions and how
to apply appropriate accounting treatment.
• Review documentation to determine how contributions should be classified.
• Apply key accounting principles related to net assets including, differentiating
among unrestricted, temporarily restricted, and permanently restricted net
assets.
Acct for Contributions ASC 958 / Page 2
3. IDENTIFYING NONPROFIT REVENUE
TRANSACTIONS
• Does the income received represent a contribution, revenue in exchange?
• Does the income received represent a pass-through?
Acct for Contributions ASC 958 / Page 3
4. DEFINITIONS
• Unconditional and voluntary transfer of
cash or other assets or services to an
Contribution
Transaction entity, or a cancellation of liabilities in a
voluntary nonreciprocal transfer by an
entity acting other than an owner
• Reciprocal transfer between two entities
Exchange that are in substance purchases of goods
Transaction or services in which each party receives
and sacrifices commensurate value.
• Transfer of assets to an organization
Agency
who, in turn, must transfer the assets to a
third-party donee according to the donor's
instructions.
Acct for Contributions ASC 958 / Page 4
5. IDENTIFYING NONPROFIT REVENUE
TRANSACTIONS
• Are there restrictions or conditions to the contribution?
• Are there promises of future support? If so is it conditional or unconditional?
Acct for Contributions ASC 958 / Page 5
6. CONTRIBUTION DEFINITIONS
• Funds donated for no specific
Unrestricted purpose other than to support the
organization
Temporarily
restricted for
• Promises to give to be paid over
time more than one accounting period
Temporarily • Funds donated to be used for a
restricted specific purpose, usually over a
for purpose
period of time
Acct for Contributions ASC 958 / Page 6
7. CONTRIBUTION DEFINITIONS
• Funds donated to be held in
perpetuity, with the intent that the
Permanently
restricted income derived from the funds
would support the organization or a
specific program
• Usually specifies a future and
Conditional
uncertain event and the occurrence
or non-occurrence determines if the
organization will receive funding
Acct for Contributions ASC 958 / Page 7
8. PROMISES TO GIVE
• Sufficient verifiable evidence should exist to document that a promise was
made by the donor
̵ Written agreement
̵ Pledge card
̵ Oral promises documented by letters, tape recordings, emails, etc.
• Does not need to be legally enforceable in order to be recorded
Acct for Contributions ASC 958 / Page 8
9. CONTRIBUTION REVENUE
• Sufficient verifiable evidence should exist to document that a promise was
made by the donor
̵ Written agreement
̵ Pledge card
̵ Oral promises documented by letters, tape recordings, emails, etc.
• Does not need to be legally enforceable in order to be recorded
Acct for Contributions ASC 958 / Page 9
12. REVENUES WITH CHARACTERISTICS OF
BOTH CONTRIBUTION AND EXCHANGE
TRANSACTIONS
• Associations and membership dues
• Federal grants
• Sponsorships
• Special events revenue
Acct for Contributions ASC 958 / Page 12
13. IS IT A CONTRIBUTION: PART I
Unconditional? Contribution
yes
no
Either not recorded or
recorded as a liability if
physical assets have
been transferred to
non-profit
Acct for Contributions ASC 958 / Page 13
14. IS IT A CONTRIBUTION: PART II
Nonreciprocal (value
received in
Voluntary?
yes exchange is nominal
or nonexistent)?
yes
Might be a
Not a contribution contribution:
“Other” additional testing
required
Acct for Contributions ASC 958 / Page 14
17. REVENUE RECOGNITION
Contribution
• Recognized in
period received
Exchange
• Recognized in
period earned
Agency • Not recognized
Acct for Contributions ASC 958 / Page 17
18. RECOGNITION PRINCIPLES FOR
PROMISES TO GIVE
• Pledges or contributions receivable
What? • Written or oral
When? • At the time the promise is made
• At fair value
• Temporarily restricted, unless:
• Donor stipulates it is permanently
How? restricted
• Donor states the contribution is to
be used for current or prior period
Acct for Contributions ASC 958 / Page 18
19. RECOGNITION PRINCIPLES FOR
CONTRIBUTIONS
PROMISES TO GIVE
• In the example below, as of December 31, 2009, there are three pledges receivable, each
one payable under different terms.
– Donor 1: is promising $5.9 million over 3 years
– Donor 2 is promising $5,000 in 2013
– Donor 3 is promising $20,000, in equal installments in 2012 and 2013.
– Each donor has a history of giving with the organization, and pays as agreed
Acct for Contributions ASC 958 / Page 19
20. PROMISES TO GIVE: FAIR VALUE
Journal entry 12/31/2009 DR CR
Promises to give $5,925,000
PV Discount $ 542,860
Contribution, Temporarily Restricted 5,382,140
Acct for Contributions ASC 958 / Page 20
21. PROMISES TO GIVE: FAIR VALUE
Journal entry Adjust PV-12/31/2010
PV 2009 542,860
DR CR
PV 2010 273,753
PV Discount $269,107
Contribution, Temporarily Restricted $269,107 JE 269,107
Acct for Contributions ASC 958 / Page 21
22. PROMISES TO GIVE: FAIR VALUE
Journal entries DR CR
3/31/2011
Cash 2,000,000
PV 2010 273,753
Promises to give 2,000,000
TRNA released from restriction 2,000,000 PV 2011 91,190
Releases from restriction 2,000,000
12/31/2011 JE 182,563
PV Discount 182,563
Contribution, Temporarily Restricted 182,563
Acct for Contributions ASC 958 / Page 22
23. RECOGNITION PRINCIPLES FOR
CONTRIBUTIONS (CONTINUED)
DONOR-IMPOSED CONDITIONS
• Asset transfer dependent on a future and uncertain event
Discussion 1
A donor promises to contribute $10,000 to a charity, if they are able to raise an additional
$10,000 in 10 days.
1. The charity raises $8,000 in 10 days – What do they book?
2. The charity raises $12,000 in 10 days– What do they book?
Discussion 2
A donor promises to contribute $1,000 to a school for every football game the team
wins.
1. When can they book the contribution?
Acct for Contributions ASC 958 / Page 23
24. RECOGNITION PRINCIPLES FOR
CONTRIBUTIONS (CONTINUED)
• Intentions to Give
– Are conditional, therefore not booked
Discussion
•A donor says “I put you in my will for $1 million”
•A donor says “I promise to give you $1 million
when I die”
•A donor says “If I win the lottery, I’ll give you $1
million”
Are any of the above statements a
contribution, conditional, an intention?
Acct for Contributions ASC 958 / Page 24
25. RECOGNITION PRINCIPLES FOR
CONTRIBUTIONS (CONTINUED)
• Contributed Services and Gifts in Kind
̵ Services that create or enhance a non-financial asset
̵ Would typically need to be purchased
̵ Require specialized skills
̵ Measured at fair market value (adequate documentation)
Discussion
•CPA provides carpentry services to aid with set design for
a local theater company (under supervision of carpenter)
•Doctor provides data entry services for a children’s soccer
league
•Board members review audit engagement letter
Acct for Contributions ASC 958 / Page 25
26. RECOGNITION PRINCIPLES FOR
CONTRIBUTIONS (CONTINUED)
• Donor-imposed restrictions (purpose or time)
̵ No restrictions – Unrestricted
̵ If limitations are temporary; may expire over time or incurrence of expenditures –
Temporarily Restricted
̵ If limitations are permanent; corpus of the gift must be maintained permanently –
Permanently Restricted
Acct for Contributions ASC 958 / Page 26
27. NET ASSETS
• Unrestricted
– Designated-Boards can designate
• Temporarily Restricted
– Only donors can restrict
• Permanently Restricted
Acct for Contributions ASC 958 / Page 27
28. UNRESTRICTED NET ASSETS
• Donor places no restrictions or is silent to use of funds.
• Donor imposed restrictions should not be considered restrictions unless they are
more specific than the broad limits imposed by the organization’s purpose and
nature.
• Donors can impose restrictions on an organization’s unrestricted net assets which
would result in a reclassification of UR to TR.
• If organization meets donor-imposed restrictions in the same reporting period in
which received than maybe reported as UR (need policy).
Acct for Contributions ASC 958 / Page 28
29. UNRESTRICTED NET ASSETS
• Board Designations do not create restrictions on otherwise unrestricted net
assets:
̵ Only Donors can restrict.
̵ Boards can designate.
̵ Amounts can be segregated and displayed separately within the unrestricted net
asset section of the Statement of Financial Position.
Acct for Contributions ASC 958 / Page 29
30. TEMPORARILY RESTRICTED NET ASSETS
• If limitations are temporary; may be restricted for time or purpose.
• It is not possible to release more restricted amounts than available. Any
“overspending” of restricted net assets should be charged to UR.
• No expenses should be shown in TR – only releases from restrictions.
• Expiration of donor-imposed restrictions should be shown separately as
reclassifications.
Acct for Contributions ASC 958 / Page 30
31. CONDITIONS FOR RELEASES
• Payment received - Donor stipulated time has elapsed
• Donor stipulated purpose has been fulfilled.
• The expiration of donor-imposed restriction is recognized in the period in which
the stipulations have been met or expired.
• If expenses are incurred for purposes for which both UR and TR net assets are
available, use TR before UR.
Acct for Contributions ASC 958 / Page 31
32. PERMANENTLY RESTRICTED NET ASSETS
• Result from donor imposed restrictions that the inflow must be maintained
permanently.
• Usually part or all of the income resulting from investing the restricted revenue
may be used.
Acct for Contributions ASC 958 / Page 32
33. CLASSIFICATION PRINCIPLES FOR
INCREASES TO NET ASSETS
Discussion
•Donor promises to give $1 million over three years for
general operating expenses of an organization
•Investment revenue results in a an overall gain.
Organization has endowments.
•Organization’s board agrees to spend 5% of the
organization’s endowments.
•Donor gives $1 million for the charity to invest for 15 years,
and proceeds are to be used to fund a scholarship program
•Donor gives $1 million for the charity to invest in perpetuity,
and proceeds are to be used to fund a scholarship program
How would you classify each of these revenues?
Acct for Contributions ASC 958 / Page 33
34. NET ASSETS INS AND OUTS
Category “In” “Out”
Unrestricted •New donor contributions with •Operating activities
no restrictions as to their use expenses
•Operating income from •Investment declines
exchange transactions and •Other losses
other income •Endowment investments
•Assets released from restriction underwater
Temporarily •New donor contributions with •Assets released from
Restricted time or purpose restrictions. restriction due to fulfillment
•Income on permanently of time or purpose
restricted net assets and restriction.
endowments •Investment declines on
endowments/limited to
aggregated gains
Permanently •New donor contributions with •Changes by the donor to
Restricted the stipulation they must be release these funds from
invested in perpetuity. restriction.
•Possibly income on •Investment declines if
permanently restricted net designated by the donor
assets (i.e.: split-interest
agreements, trusts.)
Acct for Contributions ASC 958 / Page 34
Key distinguishing factor of a contribution from other types of revenue transactions:It is a nonreciprocal transfer (the donor receives no benefits in exchange for the assets transferred)It represents a transfer to or from entities acting other than owners (there is no such thing as a contribution from a wholly-owned taxable subsidiary to its nonprofit shareholder)It is made or received voluntarily (this is an interesting aspect…the US is a litigious society, and so, frequently, corporations are sued for poorly designed or dangerous products. So, a pharma manufacturer may be sued for non-effective drugs…and may be court ordered to provide XXX in funding to a charity for the purpose of eradicating a disease. An Organization may be the recipient of the funds, but it would not be considered a contribution, because it is not voluntary. How would you classify it?
Key distinguishing factor of a contribution from other types of revenue transactions:It is a nonreciprocal transfer (the donor receives no benefits in exchange for the assets transferred)It represents a transfer to or from entities acting other than owners (there is no such thing as a contribution from a wholly-owned taxable subsidiary to its nonprofit shareholder)It is made or received voluntarily (this is an interesting aspect…the US is a litigious society, and so, frequently, corporations are sued for poorly designed or dangerous products. So, a pharma manufacturer may be sued for non-effective drugs…and may be court ordered to provide XXX in funding to a charity for the purpose of eradicating a disease. An organization may be the recipient of the funds, but it would not be considered a contribution, because it is not voluntary.
A promise to give does not have to be legally enforceable in order to be bookedThere is new fair value guidance for contributionsOne has to evaluate contributions for risk of default.A nonprofit might look at the donor’s history or affinity for the organization to determine the likelihood of collection
Also, the organization uses fair value accounting, so FV is adjusted each year
In 2009, we know that we will not receive payment until 2011…so we need to account for the time value of money-and we assume this is risk free. The risk free rate is 5%.
In 2010, we adjust the FV (assuming the risk free rate remains the same) so that what is due in a year or less is not discounted. The following two years are adjusted. Note the change in fair value is recorded as a contribution.
Once again, the fair value increases, because the time is reduced.
Look back at slide 4 A contribution is unconditional and voluntary.Is the donor’s death certain? Then it is not conditional. How would we book the contribution?
The idea that the charity would not purchase the assets if they were not given to them does not preclude the charity from booking the donated service or gift in kind.Let’s think about the second discussion point…the doctor provides on-field medical attention-this would be a donated service.
When a board designates funds, it is incumbent on the accounting staff to account for this designation as though it is a restriction.
You’ll see that I return to the revenue side when I am discussing net assets. This is because revenue is the key to the increases to net assets. Decreases to unrestricted net assets are due to expenses, losses.
Remember, accounting staff must treat board designations, quasi endowments with the same care that they treat temp restricted and perm restricted net assets.
Temporarily restricted promise to giveTemporarily restricted gain (unless endowment donor said it is for general operations, then it is unrestricted)Release from restriction Temporarily restricted endowment-need to understand donor’s intent after 15 years/proceeds are temporarily restrictedPermanently restricted endowment-proceeds are temporarily restricted