Accounting alert: not-for-profit organizations get new accounting rules

New accounting standards released last summer by the Financial Accounting Standards Board (FASB) are significantly changing the way not-for-profit organizations account for charitable contributions. In addition, all not-for-profits will be required to restructure their financial statements.

For many years, not-for-profit organizations had very little in the form of official pronouncements from FASB. Because of the variety of types of organizations that fall under the not-for-profit umbrella, there were at least four sets of rules that applied. Consequently, people interested in contributing to these organizations had difficulty comparing how dues, fees and contributions were being spent.

FASB and the American Institute of Certified Public Accountants (AICPA) agreed that some work needed to be done. Two Statements of Financial Accounting Standards (SFAS) were issued: Number 116 -- Accounting for Contributions Received and Contributions Made, and Number 117 -- Financial Statements of Not-for-profit Organizations. Keep in mind that these new rules only apply to organizations who prepare their financial statements in accordance with Generally Accepted Accounting Principles (GAAP).

For most organizations, the new standards will take effect with the fiscal year beginning after December 15, 1994. There is a one-year delay for smaller organizations with assets under $5 million and annual expenses under $1 million. Note: the size of the organization depends on its reporting entity; camp operations may be included within a much larger agency budget. Regardless of the deadline under which your camp falls, earlier compliance is encouraged.

Charitable Contributions

The new standard for contributions changes several things about the way not-for-profit organizations account for charitable contributions. The most obvious is that pledges must be recognized as income even before the payment is made. That's why in the example above, Camp A will recognize $6,500 in contributions and Camp B will recognize $1,000 (less an allowance for uncollectible pledges and a discount factor for the time value of money.) If it seems complicated, it is!

Furthermore, contributions of services will now be recognized, under limited circumstances. If contributions of services "a) create or enhance non-financial 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," they should be recorded in the financial statements. Designing an education course or facilitating a planning meeting are types of contributions that would create or enhance non-financial assets. Services of doctors, lawyers, accountants and architects would probably fall into the second category.

All contributions must be categorized in financial statements by the types of restrictions specified by the donors. (More on that requirement below.)

Financial Statements

While some not-for-profits don't receive charitable contributions, the new standard on financial statements will affect virtually every not-for-profit organization.

According to this new standard, certain items will need to be presented in every set of external financial statements. What used to be a balance sheet will now preferably be called the Statement of Financial Position. The income statement, or statement of revenues and expenses, should be titled the Statement of Activities. And for the first time, not-for-profit organizations will be required to present a Statement of Cash Flows. Lastly, the statements will need to include a complete set of footnotes.

One of the major differences between for-profit and not-for-profit financial statements is that not-for-profit organizations must categorize their expenses functionally. That means expenses are shown by categories of programs or activities instead of by typical account classifications, such as salaries and telephone.

The new terminology of choice for not-for-profit equity is net assets. FASB chose not to use the phrases funds or fund balances in the financial statements. They believe that in current usage, the term funds commonly refers to groups of assets, liabilities and net assets. The standard does not require reporting by fund, though it is not precluded.

Instead, the presentation should include all activity by three categories: unrestricted, temporarily restricted and permanently restricted assets. The restrictions are those placed by the donor. Temporarily restricted contributions are those for which either the passage of time or a specified use will release the restrictions. Permanent restrictions include endowment funds, for which the contributions must be invested to provide a permanent source of income. Assets such as land or works of art which are donated with stipulations that they be used for a specific purpose, be preserved, and not be sold are also permanently restricted.

Be sure to see your own Certified Public Accountant for details on how these rules will affect your organization. To receive copies of the new FASB rules, write to the Order Department, Financial Accounting Standards Board, P.O. Box 5116, Norwalk, CT 06856-5116.

A PUZZLE

Camp A and Camp B are both not-for-profit camps that rely heavily on donations from the public. Last year:

* Camp A received $6,500 in cash

contributions.

* Camp B received $10,000 in

pledges towards a major fund-raising

campaign, but only $2,000

was received in cash.

Which camp received more financial support during the year?

The new answer is Camp B. Do you know why?

COPYRIGHT 1994 American Camping Association
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