|MARTHA L. BENSON, CPA, is
vice-president, treasurer and CFO of the Meadows Foundation in
ALAN S. GLAZER, CPA, PhD, is professor of business administration at Franklin and Marshall College, Lancaster, Pennsylvania.
HENRY R. JAENICKE, CPA, PhD, is C. D. Clarkson Professor of Accounting at Drexel University in Philadelphia.
Drs. Glazer and Jaenicke served as consultants to the AICPA not-for-profit organizations committee.
The new age for not-for-profit organizations requires those entities to find different ways to capture and account for transactions and to make new financial statement displays and disclosures. Perhaps no other time has challenged NPOs with as many accounting standards to absorb, integrate and implement.
While much of the focus has been on the dramatic changes required by FASB Statement no. 116, Accounting for Contributions Received and Contributions Made , and Statement no. 117, Financial Statements of Not-for-Profit Organizations , several other recent pronouncements significantly affect NPOs. How each pronouncement may affect NPO accounting systems and financial statements can be explained by examining the effect of each one on a hypothetical organization—the Museum of Undersea Exploration (MUSE). This is not intended to be a comprehensive discussion of all the requirements those standards impose nor does it discuss many of the pronouncements not directed primarily at NPOs but that may apply to particular NPO transactions or events.
Statement no. 116 focuses on accounting for contributions, including promises to give and collections. Its issuance led to changes in how MUSE identifies, documents, communicates and recognizes contributions and to when and how it reports that it has met restrictions on those contributions. (See "Implementing FASB 116 and 117," JofA, Sept.95, page 41, for additional discussion.) Statement no. 116 changed how MUSE captures and accounts for certain transactions, as described below.
MUSE's accounting policy had been to recognize only legally enforceable promises to give. Under Statement no. 116, a promise to give does not have to be legally enforceable to be recognized as revenue and as a receivable when the promise is made. In the current fiscal year, MUSE received a clearly communicated and documented unconditional promise from a wealthy local philanthropist to give $1 million. The documentation was in the form of a newspaper article where the donor announced the gift to MUSE, as well as gifts to several other organizations. The donor followed up with a telephone call to the MUSE executive director, repeating the promise and making it clear the gift was unconditional and restricted to the expansion of MUSE's facilities. Although MUSE's legal counsel says the promise is not legally enforceable because of limitations on verbal agreements, MUSE, in conformity with Statement no. 116, recognized the promise as temporarily restricted contribution revenue in its statement of activities and as a contribution receivable on its statement of financial position.
Based on MUSE's past experience with the donor, it expects the donor to fulfill her promise within a year. As a result, MUSE recorded the full undiscounted amount of the promise—one of the two options available under Statement no. 116. If receipt of the full amount was questionable, MUSE would have recorded only the amount expected to be realized. If the promise was expected to be fulfilled more than a year after the financial statement date, MUSE would have discounted the estimated realizable amount to present value.
Before it implemented Statement no. 116, MUSE did not capitalize its collections, although it documented the purchase price or fair value in the curatorial records at the time each item was acquired. After considering the options available under Statement no. 116, MUSE's trustees believe capitalizing the collections will provide useful information to potential donors by giving them a better sense in the upcoming capital campaign of the museum's total net assets. Accordingly, MUSE decided to capitalize its collections retroactively, as permitted under Statement no. 116. Alternatively, MUSE could have continued its policy of not capitalizing collection items or could have begun capitalizing items prospectively.
Statement no. 116 requires NPOs to recognize any contributions of services if the services (1) create or enhance nonfinancial assets or (2) require specialized skills, are provided by individuals having those skills and would typically need to be purchased by the NPO if not donated. MUSE frequently receives contributed services that meet those criteria. For example, volunteers repair used underwater diving equipment that MUSE then sells to members and others. Before Statement no. 116, the museum did not recognize the value of these volunteer services. Because they enhance a nonfinancial asset and thus meet the recognition requirements under Statement no. 116, MUSE now records their fair value as contribution revenue. The museum includes that value as a component of inventory and as cost of sales when the equipment is sold.
Statement no. 117 requires NPOs to present financial statement information on an entitywide basis and to report on net assets classified according to donor restrictions. In addition to disclosing the totals of and changes to the unrestricted and permanently restricted net asset classes, MUSE had to make several other changes to its financial statements, including presenting a statement of cash flows. In its statement of activities, MUSE had presented the revenues from certain activities net of related expenses. For example, the museum presented sales of educational materials net of the related cost of sales, and presented the proceeds from fundraising events net of the direct costs of the events. Statement no. 117 requires that revenues and expenses of activities (except those relating to investments) be presented gross in most circumstances.
FASB Statement no. 121, Accounting for the Impairment of Long-lived Assets and for Long-lived Assets to Be Disposed Of , requires that entities review long-lived assets for possible impairment if events or circumstances indicate their carrying amounts might not be recoverable. Impairment is recorded if the carrying amount of a long-lived asset exceeds its undiscounted estimated future cash flows. In considering the implications of Statement no. 121, MUSE analyzed its long-lived assets to determine how to group them when estimating identifiable cash flows. MUSE's revenues consist primarily of contributions, membership dues and the proceeds from sales of educational materials. MUSE found no assets or groups of assets to have cash flows largely independent of the other assets MUSE holds. As a result, impairment tests focused on the museum's total assets. In order to identify events or circumstances that might indicate nonrecoverability of the carrying value of its assets, management developed systems to compare the museum's undiscounted estimated future cash flows with the total carrying values of its assets. While management did not identify any such events or circumstances, it included procedures to identify and properly account for them in MUSE's accounting policies and procedures documentation.
Before FASB Statement no. 124, Accounting for Certain Investments Held by Not-for-Profit Organizations, MUSE measured its investments at the lower of cost or fair value. Statement no. 124 requires that NPOs report equity securities with readily determinable fair values (except those accounted for under the equity method and investments in consolidated subsidiaries) and all debt securities at fair value and that the entities include realized and unrealized gains and losses in the statement of activities. Therefore, MUSE increased the recorded value of its investments by the difference between their carrying and fair values and reported that amount in its statement of activities as a cumulative effect of a change in accounting principle.
For numerous reasons, including cost savings, MUSE pools its investments; that is, it groups them together and holds them in a limited number of managed accounts rather than segregating each donor-restricted gift or separating investments of each net asset class into separate accounts. Accordingly, it developed procedures to record and track fair value as well as cost on an unrestricted, temporarily restricted and permanently restricted net asset basis. Those procedures permit MUSE to track increases and decreases in the fair value of investments representing each net asset class in the pool and to allocate unrealized gains and losses.
Because Statement no. 124 does not address the measurement of investments other than equity securities with readily determinable fair values and debt securities, MUSE was uncertain how to account for certain "other investments." For instance, MUSE holds a royalty interest in an offshore oil well as well as investment real estate. The AICPA Audit and Accounting Guide Not-for-Profit Organizations, discussed below, requires NPOs to follow earlier AICPA industry-specific guides in measuring other investments. In MUSE's case, because it fell under the Audit and Accounting Guide Audits of Certain Nonprofit Organizations and SOP 78-10, Accounting Principles and Reporting Practices for Certain Nonprofit Organizations, it continued to report other investments at the lower of cost or fair value. Alternatively, it could have reported them at fair value.
AICPA AUDIT AND ACCOUNTING GUIDE
The 1996 guide helps NPOs implement Statement nos. 116 and 117 by discussing recognition, measurement and reporting principles and by giving them examples of how they can meet these requirements. It also provides additional guidance and establishes new requirements in some areas. (See "New AICPA Audit and Accounting Guide for NPOs," JofA, Nov.96, page 63, for additional discussion.) The guide explains the applicability to NPOs of SOP 93-7, Reporting on Advertising Costs, incorporates SOP 94-3, Reporting of Related Entities by Not-for-Profit Organizations, and incorporates and supersedes SOP 94-2, The Application of the Requirements of Accounting Research Bulletins, Opinions of the Accounting Principles Board, and Statements and Interpretations of the Financial Accounting Standards Board to Not-for-Profit Organizations.
In reviewing the 1996 guide, MUSE's management discovered several
areas that required changes in recording transactions. For example:
- The guide expands on Statement no. 116's requirement that
promises to give be measured at fair value. Initial recognition of
unconditional promises should reflect management's assessment of
their collectibility as well as the fair value of the assets to be
received. If the amount of promises expected to be collected
decreases after their initial recognition because of a reassessment
of their collectibility, the organization should record the
reduction as an expense for unrestricted promises to give and as a
loss for restricted promises to give. Subsequent recoveries should
be recorded to the extent the organization recorded an expense or
loss in prior periods. If the amount of promises expected to be
collected decreases after initial recognition because of a decline
in the fair value of the assets promised, the organization should
record the decline as a reduction in contribution revenue in the net
asset class in which it recorded the promises. If the assets
promised are marketable equity securities with readily determinable
fair values or debt securities (as defined in Statement no. 124),
the organization should record increases in fair value as additional
contribution revenue in the net asset class in which it recorded the
promises. Increases in the fair value of other assets promised (such
as land and collection items) should not be recognized.
- NPOs need to (a) establish procedures that include a
mechanism to reconcile donor-promised amounts to amounts recognized
and (b) set up guidelines for periodic review of both the
collectibility of promises to give and the fair value of the
underlying assets. MUSE now records expenses, losses, and changes in
its restricted and unrestricted contribution revenue when changes in
the collectibility or fair value of promises to give occur.
- The guide requires that an entity classify the cost
of soliciting revenues in exchange transactions as management and
general expense or, if the exchange is a component of membership
dues, as membership development expense. If MUSE had not presented
membership development expense as a separate supporting function on
its statement of activities, it would have classified those costs as
management and general expense.
- The guide allows alternative presentations for costs
of special fundraising events an organization incurs in the exchange
transaction phase of these events, such as when MUSE sells tickets
to special events that include dinner and entertainment, and the
ticket price exceeds the fair value of what the ticketholder
receives. In those cases, the event proceeds are part revenue from
and exchange transaction (the fair value of the dinner and
entertainment) and part contribution revenue (the excess of the
ticket price over value of the goods and services provided). Under
one alternative treatment, the organization may identify and display
the cost of providing the exchange element (meal costs, facility
rental and entertainment costs) as deductions from the exchange
revenue. Alternatively, MUSE may display the cost of direct benefits
to participants of special fundraising events in a separate
functional classification. Capturing and recording the exchange and
contribution components of special fundraising events require MUSE
to carefully analyze each event and determine which expense is a
direct cost of providing the benefits received and which is a cost
of soliciting this or future contributions.
- Another change in special events accounting for
special fundraising events discussed in the guide deals with
contributions of goods received from a donor that are
"sold" or auctioned to someone else at a fundraising
event. For example, MUSE solicits and receives contributions of
objects related to deep-sea exploration, such as items recovered
from sunken vessels or old maps. It auctions the objects it receives
to the highest bidder at the annual Under the Seas Ball.
Historically, MUSE recorded the auction proceeds as contribution
revenue and did not recognize receipt of the items to be auctioned.
The guide requires entities to recognize inventory and contribution
revenue at fair value when the item to be auctioned is received or
promised. When the item is sold, contribution revenue is adjusted to
reflect the actual amount received. As a result of this guidance,
MUSE must develop a system to value and recognize items it receives
for its auction.
- SOP 93-7 provides guidance on accounting for
advertising costs and requires all entities to make certain
disclosures, including total costs for the period for which they
present financial statements. The SOP defines advertising as
"the promotion of an industry, an entity, a brand, a product
name or specific products or services so as to create or stimulate a
desire to buy the entity's products or services." According to
the guide, an NPO's activities that create or stimulate a desire to
use its goods or services—even though those goods or services are
provided without charge—should be classified as advertising. For
example, MUSE prints rack cards for hotels and convention centers
that describe its exhibits and programs. In addition, MUSE pays to
publicize its programs and it exhibits in newspapers and on
billboards. In implementing SOP 93-7 and the 1996 audit guide, MUSE
had to develop systems to capture costs the SOP defines as
advertising, determine the appropriate functional classification of
those costs and provide the required disclosures. Since MUSE's
accounting recognition and measurement policies for advertising
costs already were consistent with the SOP, no change was necessary.
- SOP 94-2 requires NPOs to follow the guidance in
accounting research bulletins, APB opinions and FASB statements and
interpretations, unless a pronouncement explicitly exempts them.
MUSE's management reviewed the list of applicable standards provided
in SOP 94-2 for authoritative guidance it had not been following
because of historic precedent or other reasons. In prior years, MUSE
had had an informal policy allowing certain exempt employees to take
an hour of paid leave for every hour of overtime worked. In the
current year, MUSE formalized a policy allowing full-time employees
who are exempt from overtime pay to accumulate time worked in
addition to their normal working hours in an "overtime
bank." Employees can take time from the bank, with pay, after
they have used up vacation accruals. On leaving the museum,
employees are paid for up to 40 hours of unused vacation or banked
time. As these costs now meet the requirements of FASB Statement no.
43, Accounting for Compensated Absences, MUSE recorded an
accrued liability for compensated absences.
- SOP 94-3 provides reporting guidance to related for-profit and not-for-profit entities. In reviewing the SOP's requirements, MUSE discovered that a related NPO (Undersea Exploration and Development [USED]) had not been consolidated with MUSE. It was created by MUSE's board of trustees to receive contributions and make expenditures for high-risk ventures such as exploring sunken vessels. USED transfers all artifacts retrieved from the vessels to MUSE to become part of its collections. Under its bylaws, the four-member USED board consists of the MUSE officers. By electing those officers, the MUSE board thus controls the USED board. Because MUSE has an economic interest in and control of USED through a majority voting interest in its board, SOP 94-3 requires USED to be consolidated with MUSE. (On October 15, 1995, FASB issued an Exposure Draft, Consolidated Financial Statements: Policies and Procedures. When the FASB completes this component of its consolidations project, the AICPA will reconsider the conclusions in the SOP.)
FASB INTERPRETATION 42
FASB Interpretation no. 42, Accounting for Transfers of Assets in Which a Not-for-Profit Organization Is Granted Variance Power, issued in September 1996, clarifies Statement no. 116. When resources are transferred to an NPO from a resource provider that directs the organization (acting as the resource provider's agent, trustee or intermediary) to distribute to another beneficiary, Interpretation no. 42 provides that the NPO account for the transfer as a contribution only if it is granted variance power—the explicitly granted unilateral power to redirect the assets to a beneficiary other than the one specified by the resource provider. If the NPO is not granted variance power and thus has no discretion to distribute those assets to another beneficiary, it should account for the transaction as an agency transaction. In assessing the impact of this interpretation, MUSE reviewed documentation on contributions of this type received in the current and prior years to determine whether any were, in fact, agency transactions. In all cases, MUSE found the resources it had received were for its own use; however, management added a discussion of this issue to its accounting policies documentation and discussed its implications with the development department.
Issued in March 1998, SOP 98-2, Accounting for Costs of Activities of Not-for-Profit Organizations and State and Local Governmental Entities That Include Fundraising, amends the guidance in the 1996 guide that was based on (and superseded) SOP 87-2, Accounting for Joint Costs of Informational Materials and Activities of Not-for-Profit Organizations That Include a Fund-Raising Appeal. SOP 98-2 is effective for financial statements for years beginning on or after December 15, 1998; earlier application is encouraged. If an NPO presents comparative financial statements, the SOP permits, but does not require, retroactive application.
The new SOP provides NPOs with criteria for determining whether the joint costs it incurs in activities that involve fundraising should be reported entirely as fundraising costs or allocated among fundraising and other functions, such as program and management and general. MUSE plans to mail a brochure to its members in November 1998 explaining the organization's programs and requesting the members' ongoing financial support. If MUSE decides to "early adopt" the SOP in the year ending June 30, 1999, it will need to apply the SOP's criteria to determine the appropriate functional categories in which to report the cost of producing and mailing the brochure.