NPO Part III HB4400 4410

Question 1

What are the two accounting methods that and NPO may select from and when would each normally be used?

Answer 1

HB 4400
* An NPO has the option to use either of the following methods to present its financial statements (the method chosen must be used consistently from year to year):

‒ Deferral method – usually used when not a lot of restrictions on the entity’s programs or projects

‒ Restricted fund method – usually used when there are significant restricted funds for programs/projects because it provides more information to users about the assets, liabilities, revenues and expenses related to specific projects or programs.

Question 2

What are the basics of how each NPO
accounting method works?

Answer 2

HB 4410

• Deferral method
  ‒ The format of the FS is relatively the same as for-profit entities except certain terms that are different (e.g., retained earnings are referred to as “net assets”) and deferred contributions.
  ‒ Generally a one-column presentation for the FS
  ‒ Fund accounting is not used
• Restricted Fund Method
  ‒ A multi-columnar format usually used
  ‒ Generally one column for the general fund, the capital assets fund, the endowment fund and then one or more columns that show the restricted funds
• There may be a single column called “Restricted Funds” or it can be broken down into one or more specific columns (e.g., “Research Projects” and then all other restricted funds under “Restricted
  Funds”

Question 3

When are contributions (revenue) recognized when
using the deferral method?

Answer 3

HB 4410
* Unrestricted contributions – recognize as revenue in the current year

• Contribution restricted for purchase of capital assets – defer and recognize revenue on same basis as amortization or as direct increase in net asset if asset is not amortized
• Endowment contribution – recognize as direct increase in net assets
• Contribution restricted for current year expense – recognize as revenue in current year
• Contribution restricted for future year expense – defer and recognize revenue in year expense is incurred
• Overall principal is matching of revenue to corresponding expenses
• Note that in all cases in order for revenue to be recognized the amount has to be reasonable assurance in regards to collectability i.e., whether the
  funds will actually be received

Question 4

When are contributions (revenue) recognized when
using the restricted fund method?

Answer 4

HB 4410
* Unrestricted contributions (donor has not placed any restrictions on the funds) – recognize as revenue in the general fund in the current year

• Contribution restricted for purchase of capital assets – recognize as revenue in capital asset fund
• Endowment contribution – recognize as revenue in the endowment fund
• Restricted contribution for which there is a fund – recognize as revenue in the applicable restricted fund
• Restricted contribution for which there is no restricted fund that applies: Recognize as revenue in general fund (in current year if expenditure has been incurred or deferred if expenditure relates to future
  years)
• Note that in all cases in order for revenue to be recognized the amount has to be reasonable assurance in regards to collectability i.e., whether the
  funds will actually be received

Question 5

At what value should contributions (including
non-cash contributions) be recorded?

Answer 5

HB 4410
* All contributions should be recognized at their fair value or cash equivalent

• Contributions in-kind of capital assets, marketable
  securities, or other non-cash items should be recorded at their fair value as of the date of contribution using whatever information best assesses that value.

Question 6

How are contributed materials and services
accounted for?

Answer 6

HB 4410
* Can choose to recognize contributions of materials and services, but should do so only when a fair value can be reasonably estimated and when used in the normal course of operations and would otherwise have been purchased.

• Most NPOs don’t recognize the value of volunteer services or contributed materials (supplies, low-value goods, etc.) but instead disclose the activities because it is:
  ‒ Too difficult to establish a fair value
  ‒ Too impractical to actually keep track