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Issues Not-for-Profit CPAs Are Managing [PODCAST]

The not-for-profit accounting and auditing landscape has undergone significant change in recent years. In this podcast, CPA not-for-profit experts Chris Cole, Jennifer Hoffman, Frank Jakosz and Andrew Prather discuss current NFP issues that face CPA preparers and auditors and describe how the AICPA’s newly updated Not-for-Profit Entities Audit and Accounting Guide can be a resource for NFPs. Discussion topics include recent Financial Accounting Standards Board updates, changes in the NFP investment arena, revenue recognition, gifts-in-kind valuation, and taxes and regulatory considerations. Ken Tysiac, senior editor for news with the Journal of Accountancy, moderates. [Email subscribers: Visit AICPA Insights to listen to the podcast.]


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KEN TYSIAC:  Welcome to this Journal of Accountancy podcast, focusing on accounting and auditing guidance for not-for-profit entities. The AICPA recently published its first comprehensive revision of its Not-for-Profit Entities Audit and Accounting Guide since 1996. Relevant AICPA literature has been incorporated into the guide and the Authoritative Auditing content of the guide has been fully conformed to changes resulting from the Auditing Standards Board's Clarity Project. 

The guide is available at CPA2Biz.com and we're here to discuss some of the main topics that CPAs and auditors who work with not-for-profits need to be clued in on and can learn more from in the guide. 

I'm Ken Tysiac, Senior Editor for News at the Journal of Accountancy and I'm accompanied by four CPAs who have considerable experience with not-for-profit accounting and auditing.

  • Andrew Prather is a shareholder with a CPA and consulting firm, Clark Nuber, in Bellevue, Washington, with an emphasis on serving not-for-profit organizations. He is a member of the AICPA's Not-for-Profit Expert Panel, which helped produce the guide. 
  • Jennifer Hoffman, a partner in the Northeast Higher Education and Not-for-Profit Practice for Grant Thornton in Melville, New York, also is a member of the Not-for-Profit Expert Panel.
  • Frank Jakosz is Director of Not-for-Profit and Social Enterprise Services for Frost, Ruttenberg and Rothblatt in Chicago, and also a member of the Not-for-Profit Expert Panel.
  • Chris Cole is Technical Manager in the Accounting and Auditing Publications Group for the AICPA in Durham, and is the staff liaison for the Not-for-Profit Expert Panel. 

Thank you all for being with us. Let's get right to the subject matter without delay. Chris, not-for-profit accounting and auditing has changed a lot since the Guide was last updated in '96. Can you give me kind of a high-level summary of the developments in this sector in recent years, and also tell me where all the changes in the Guide came from?

CHRIS COLE:  Sure, Ken. In the past 20 years, not-for-profits have gone through many changes. The most notable are an increase in the number of not-for-profits registered with the IRS, from 1.2 million up to 1.5 million. And total not-for-profit revenues had increased from about $1.1 trillion to just over $2 trillion annually. 

Some changes, as a result of changes in technology, improvements in medicine, communications, food production, transportation and other areas now allow people that were not able to be helped to receive services, information and assistance on a scale that can impact their lives in a meaningful way and, at the same time, allow the not-for-profit to monitor the effectiveness of its programs and to tell its story to donors and others on an ongoing basis.

Still more changes result from creating new business models and partnerships to increase the scope of the not-for-profit's mission, to help more people or to assist others to invest in the community. This would involve opportunities in providing low-cost or no-interest loans, cause-related marketing, sponsorships, endowments, joint ventures and so on.

Also, the concept of globalization, resulting from technological advances in communication, transportation and medicine has created opportunities for international not-for-profits to have an impact around the world. Partnering with an organization in Africa to deliver services on behalf of a not-for-profit and having resources drop-shipped to them by a third-party donor may be a good operational model, but sometimes doesn’t fit clearly in the current accounting model. 

The process to revise the guide was begun in 2005 by the Not-for-Profit Entities Expert Panel and Not-for-Profit Guide Task Force. The primary reason for beginning this project was in response to more than 100 questions that had been asked by members who called the AICPA technical hotline. Additional topics that the Expert Panel identified during the update process as being troublesome for not-for-profits were also incorporated into the update project.

Some of the questions and topics that were addressed by the Guide revisions are related to reporting relationships or their other entities, reporting and measuring non-cash gifts, program-related investments and microfinance loans, and reporting the expiration of donor-imposed restrictions, just to name a few. To make the content useful to readers, the basis for the accounting content is the Authoritative Guidance from the FASB Accounting Standards Codification, which has been supplemented with plain English explanations, examples and non-authoritative guidance and recommendations based on FinREC conclusions. 

Additionally, the new Guide incorporated relevant, non-authoritative AICPA literature, including not-for-profit-focused questions and answers, alternative investment questions and answers, and the White Paper, "Measurement of Fair Value for Certain Transactions of Not-for-Profit Entities.” November of 2012, after receiving public input on the accounting content changes, the Financial Reporting Executive Committee and the Auditing Standards Board of the AICPA had completed their final review and approved the issuance.

KEN TYSIAC:  Thanks, Chris. We're here on the Journal of Accountancy's Not-for-Profit Auditing and Accounting podcast. We'll go now to Jennifer Hoffman of Grant Thornton. Can you talk about the Auditing Standards Board's Clarity Project, as it relates to not-for-profits? What was the purpose of the project and what effect does it have on auditing not-for-profits?

JENNIFER HOFFMAN:  Sure, Ken. While it seems really silly to say, the ASB redrafted the standards for clarity. The standards now more clearly state the objectives of the auditor and the requirements with which the auditor must comply when conducting an audit in accordance with GAAP. Essentially, plain English was the objective.

The clarified standards are effective for audits and financial statements for periods ending on or after December 15, 2012. So, for you calendar-year entities out there, that, of course, means now. 

Some of the new requirements may involve planning discussions with your clients, if you're a practitioner. Some of them may affect the audit interim testing and others, field work. And certainly some of the requirements also impact changes to the audit report. If you were to ask me to pick out a topic that I think, certainly in my opinion, has had -- experienced significant changes as a result of the clarified standards, I would have to say group audits. 

This comes into play when you have group financial statements and it impacts the audit from planning right on through the audit report. It really revamped how we think about working with affiliates and their auditors. 

To help auditors and industry professionals in making the transition to the new clarified standards, the Not-for-Profit Audit Guide includes an Appendix. It's Appendix B, and it's referred to as "Mapping and Summarization of Changes, Clarified Auditing Standards.” It really provides a cross-reference of the sections in the superseded auditing standards to the applicable sections in the new clarified auditing standards, and it identifies the changes, either substantive or primarily clarifying in nature and that -- those that which may affect the auditor's practice or methodology relative to the new standards. It really provides a great summary of all the changes resulting from these new requirements. 

KEN TYSIAC:  Great. Thanks, Jennifer. We'll go now to Andrew Prather of Clark Nuber. Andrew, what's new in the area of not-for-profit financial statements and financial statement reporting? I know there have been plenty of changes in accounting principles recently, including new guidelines for financial assets that are sold immediately. 

ANDREW PRATHER:  Yes, Ken. The FASB has recently issues a new Accounting Standards Update, or ASU, that specifically addresses the not-for-profit specific issue. ASU 2012-05 is titled "Classification of the Sale of Donated Securities in the Statement of Cash Flows," so this ASU is primarily focused on presenting items in the statement of cash flows.

And many not-for-profits receive contributions from donors in the form of marketable securities, such as stocks and bonds. Current practice is for non-profits to have a policy that these donations should be sold immediately and converted to cash. In this situation, and with this policy, the not-for-profit typically has very little risk of gain or loss in the value during the short time the securities are held.

Well, when it came to accounting for these donations and the subsequent sale of securities on the Statement of Cash Flows, some non-profits see the cash receipt as an investing cash flow, since it's the sale of a security, while others tie the cash receipt to the donation and report it as an operating cash flow. So, as a result, there's been diversity in practice and a bit of a lack of comparability from organization to organization.

So, the FASB took up this issue and looked at it, and reached a conclusion that if a nonprofit has a policy of liquidating the securities immediately, then the cash receipt from that, from those sales should be reported as an operating cash flow. But also keep in mind that if a contribution is restricted to investment in a long-term purpose, like funding a building project or an endowment, then the contribution should be reported as a financing cash flow on the Statement of Cash Flows. So, that's not a new requirement, but something to keep in mind when reviewing this new ASU from the FASB.

So, if you have a donor restriction, then the cash receipt is a financing cash flow. But otherwise, if a nonprofit has that policy of liquidating immediately, it can be treated as an operating cash flow.

This new standard is effective for years beginning after June 15, 2013, but can be adopted early. And I suspect a lot of non-profits will, just to go ahead and get this one implemented. 

One of the things I appreciate about the new Guide is that Chapter 3 includes a table that provides additional guidance on not-for-profit specific transactions and where they should be classified in the Statement of Cash Flows. So, it's a real helpful resource, as you try to determine some of these not-for-profit specific transactions and issues and how to present them on the Statement of Cash Flows. That table in the Guide's a good resource and a good starting point to do your research. 

KEN TYSIAC:  Great, great. Thanks, Andrew. Let me stay with you for a minute, if that's all right. Interest in related parties is an area of increased interest for not-for-profits. Why is this an important area and what do financial statement preparers need to know?

ANDREW PRATHER:  Well, sure, Ken. When we talk about interest in related parties in the Guide, what we're referring to is a wide range of relationships and transactions that a not-for-profit could have with another entity. If that other entity is a nonprofit, then the reporting not-for-profit could have control over that other entity and may need to consolidate that not-for-profit in its financials.

If the other entity is a for-profit commercial entity, the not-for-profit could have a full or maybe partial ownership interest in that commercial entity. And accordingly, the not-for-profit may need to consolidate that other entity or maybe report the ownership interest following the equity method of accounting or maybe the cost method of accounting, or even possibly report the ownership interest as an asset at fair value.

Additionally, not-for-profits sometimes enter into a joint venture or collaborative activities with other entities. And so, when we talk about interest in other entities, it kind of encompasses all these different relationships and transactions a nonprofit can have with another entity. And so, when a nonprofit has one of these relationships or has transactions with another entity, wading through the accounting guidance on how to report a non-profit's interest in another entity or how to report those transactions, can be a bit of a challenge. 

However, these transactions and relationships can have a -- can be very significant to a nonprofit, both financially and programmatically, so it's important to get it right, to know what the codification, the FASB codification says, and apply that correctly. 

One of the most exciting things in the new Guide, I think, relates to this area of financial reporting. It's the expanded coverage of interest in other entities. There's an excellent table that walks through almost every imaginable scenario a not-for-profit could have with another entity, including non-profits, for-profit entities, and even special leasing entities. Then the table points to the specific paragraphs in the Guide, where you can go to find more practical guidance on how to account for those relationships, and also points to the applicable authoritative FASB codification sections, so you can go and see the authoritative GAAP yourself. 

The table in the expanded guidance is very helpful in determining the proper accounting for those interests in other entities. And any time I run into one of these situations in practice, now my first stop is this table in the Guide.

KEN TYSIAC:  Great, great. Thanks, Andrew. You're listening to the Journal of Accountancy's podcast on not-for-profit auditing and accounting. We'll go now to Frank Jakosz of Frost, Ruttenberg and Rothblatt. Frank, in terms of investments, not-for-profits face a myriad of rules on fair value, alternative investments, NAB, etc. How does a not-for-profit negotiate these rules and handle and report its investments appropriately?

FRANK JAKOSZ:  Sure, Ken. As Chris Cole mentioned earlier, not-for-profits have gone through many changes. One area of dramatic change since the initial Guide is the investment arena, entirely new concepts and definitions, things like fair value based on exit price, active markets, fair value option, not to mention the complexity of the investment vehicles themselves. These issues are now commonplace and continue to be challenges for NFPs.

In fact, in the NFP world, just using the word "investments" immediately raises all kinds of questions, possibilities and challenges for me.  Initially, one may think of debt and equity securities, bonds and stocks.  But there's so much more, like considering the nature and type, objective and purpose. 

For example, is the investment in the form of an ownership interest of another entity?  Is the objective to achieve investment return, that is, current income, capital appreciation, or both?  Or is the investment and interest in another entity that provides goods or services that accomplish the purpose or mission for which the investing NFP exists or that serves the NFP administrative purposes? 

Are the investments held under a split interest arrangement by the NFP?  Is the investment in common stock of a for-profit that could be reported under the equity method under certain circumstances?  Is the investment in a limited partnership, for which the accounting depends on the type of activities conducted by the limited partnership, for example, real estate activities?  Are the investments part of an investment pool managed by a third party?  And what are the considerations when the investments are part of an endowment fund? 

These are just a few questions and challenges and there are many more that come to mind when I think of investments of a not-for-profit.  So many issues and questions that I could not possibly keep them straight in my mind, let alone, as you say, Ken, negotiate the rules.  All of these questions, and many more, are addressed in the New Investments chapter of the Guide. 

Chapter 4, Investments, is an area that the Guide Task Force spent a lot of effort in providing a great deal of expanded coverage and information discussing the types of investments, the accounting and reporting for both the initial recognition and measurement, as well as valuation of investments subsequent to acquisition and the disclosure requirements. 

The Investments chapter is over 60 pages long.  That's a lot of guidance.  But probably the most exciting and new item in this chapter is Exhibit 4-1, "Investments of a Not-for-Profit Reporting Entity," which provides guidance in situations in which the objective of the investment in an entity is for investment return, that is, current income, capital appreciation or both.

As Andrew mentioned, there is a similar table in Chapter 3, Exhibit 3-2, for NFP relationships with entities that provide goods or services that accomplish the mission or purpose for which the NFP exists, or that serve the NFP's administrative purposes. 

But getting back to Exhibit 4-1, "Investments of an NFP Reporting Entity," I like to think of it as a summary for practically every possible investment type situation, all in one place.  Exhibit 4-1 provides comprehensive information on the appropriate codification guidance, as well as numerous additional discussion and explanation paragraphs in the Guide, providing you with the proper accounting, financial reporting and disclosure requirements for a variety of investment situations. 

The table provides thirteen different types of NFP relationship scenarios.  Additionally, the Investment chapter has expanded guidance on other items, such as investment pools, declines in fair value after year end, investment income and expenses, endowment accounting and disclosure, and suggested audit procedures in these areas.

As Chris mentioned, the Guide even includes the AICPA Technical Practice Aid, "Determining Fair Value of Alternative Investments."  When the Expert Panel was polled as to what they believed was the most significant change or addition in the new Guide, it was unanimous.  Exhibit 4-1 was at the top of their list.

KEN TYSIAC:  Well, great.  Well, that sounds like it's something that will be very useful and much turned to as a resource, Frank.  And thanks again for being with us.  We'll turn now to Chris Cole of the AICPA.  Chris, can you talk about contribution and grant revenue recognition, with respect to not-for-profits?

CHRIS COLE:  Generally, when a not-for-profit receives cash, other assets and services from individuals, for-profit entities, other not-for-profits or governments, that revenue would be recognized as a contribution or an exchange transaction.  Contribution is defined as an unconditional transfer of cash or other assets to an entity or a settlement or a cancellation of its liabilities in a voluntary, non-reciprocal transfer by another entity acting other than as an owner.  Simply put, an entity or an individual gave the not-for-profit something or paid off its debt and doesn’t expect anything in return.  It's more complicated than it sounds, but we'll look at that in a minute. 

An exchange transaction is a reciprocal transfer between two entities that results in one of the entities acquiring assets or services or satisfying liabilities by surrendering other assets or services, or incurring other obligations.  You could think of these as a purchase of goods or services from an NFP by an entity or an individual.  One of the more complicated aspects of not-for-profit accounting, determining what is a contribution and what is not.  The new Guide includes a flow chart that can walk you through the decision process on whether a transfer is a contribution or not. 

Some of the factors affecting the determination are what type of item is being given.  And for purposes of this discussion, we'll focus on cash.  Whether the not-for-profit is acting as an agent for another party; this is important because if a not-for-profit is an agent, the money doesn’t belong to them and cannot be considered a contribution to that not-for-profit. 

There are some key indicators of an agency relationship, such as whether the not-for-profit has a discretionary authority to redirect the funds to a different recipient, known as variance power.  That concept is discussed in the Guide as well, with some examples. 

Whether the not-for-profit receives anything of value in exchange for the transfer and whether that value is nominal, more than nominal or approximately equal in value is another factor that affects the determination about whether something is considered a contribution.  When the not-for-profit gives up something of more than nominal value in exchange for transfer of assets or extinguishing of liabilities, you generally have, at least in part, an exchange transaction. 

The nominal value concept comes into play in a situation, for example, where your local public radio station gives away coffee mugs or tote bags in exchange for donations.  In this circumstance, where the items are of nominal value, the not-for-profit will record the contribution received and the expense for the item given away. 

In the situation where the value given up by the not-for-profit is more than nominal value but less than equal to the value received, you have a transfer that is, in part, a contribution and, in part, an exchange transaction, also referred to as bargain purchases, and they include an inherent contribution. 

As an example, an individual has a home with a fair value of $150,000.  If the individual sells the home to a not-for-profit for $50,000, a contribution of $100,000 is inherent in the transaction.  These are relatively simple examples.  In the real world, the situations are often far more complicated and the value of the asset given up or received might not be that easily determined. 

One of the most common and potentially difficult revenue areas to account for is grants, awards and scholarships.  These transactions can also be entirely a contribution, entirely an exchange transaction, or a combination of the two, and may also have the characteristics of an agency relationship.  Examples in this category are government grants, naming rights and donor recognition status leveling. 

Another transaction area that can contain elements of both contribution and exchange transactions is that of member dues.  Members generally join to support the organization and, in exchange for their membership, are awarded some level of member benefits.  The amount of the contribution generally depends on the value of the member benefits given.  That value can be difficult to determine.  The new Guide has tools, tables and examples that provide some structure to the decision-making process about whether a transaction is a contribution, an exchange or both. 

KEN TYSIAC:  Thanks, Chris.  That's really good stuff.  You're listening to the Journal of Accountancy's not-for-profit auditing and accounting webcast.  We'll ask Grant Thornton's Jennifer Hoffmann to answer the next question.  Jennifer, not-for-profits encounter unique measurement challenges with respect to gifts in kind.  What are some of the challenges and how can not-for-profits meet them?

JENNIFER HOFFMAN:  Sure, Ken.  A variety of approaches available for not-for-profits to value gifts in kind can result in large disparities between handlings by different not-for-profits and questions about the application of generally accepted accounting practices to gifts in kind.  So, essentially, we end up with a large diversity in practice.

So, not-for-profits have to scrutinize their gift in kind practices to ensure that GAAP is being applied properly on such issues as identifying the applicable principal markets and the effect of nominal fees, if any, on the gifts in kind.  Not-for-profits must measure all non-cash contributions.  That includes items auctioned off for charity, excess or obsolete goods given to the charity to help fulfill its mission, preprint or Web advertising space, and even radio advertisement air time. 

But measuring these items can be challenging, as not-for-profits who receive these gifts would oftentimes not otherwise purchase or sell them and not-for-profit administrators simply may not know the fair market value of these gifts or have access to the valuation information. 

CPAs need to remember that the donor's intent ultimately rules the restriction classification.  And it's important for CPAs to focus on the discretion a not-for-profit has in determining the intended beneficiary and the expense or variance power the not-for-profit holds, similar to what Chris said moments ago.

CPAs have to remember to take a hard look at who bears the risks and rewards of ownership over the gifts in kind and understand that it's really important to develop a reasonable and consistent process for valuing gifts in kind, keeping in mind that fair value is now based, of course, on exit price.  Understanding the differences between asset restrictions, which of course, would have an impact on valuation, and organizational restrictions, which do not, is critical.  And remember, judgment will be required in applying indicators and determining the appropriate treatment for any gift in kind.

The new Guide is extremely useful in gaining an understanding in this area, which is complicated, of course, because there is never one-size-fit-all.  The Guide expands the guidance on non-cash contributions and includes updated information on how to determine whether a not-for-profit is, in fact, acting as a recipient or an agent, which, of course, is an integral component of determining how to consider gift in kind donations.

The Guide also includes new sections about reporting and measuring non-cash gifts, which includes gifts in kind, contributions of fundraising materials, informational materials, advertising and media time or space.  Also included are below-market interest rate loans and bargain purchases. 

KEN TYSIAC:  Great, great.  Thanks, Jennifer.  I appreciate it.  This question is for Frank Jakosz of Frost, Ruttenberg and Rothblatt.  Frank, split interest arrangements can be a thorny area of accounting for not-for-profits.  Can you talk about what's new in this area?

FRANK JAKOSZ:  Ken, many donors enter to trusts or other arrangements that not only benefit the NFP, but also may benefit other beneficiaries.  Like any contractor agreement, these instruments can contain numerous details and may be complex and, as you say, thorny.  And like any agreement or contract, the devil is in the detail.  Understanding the recognition and measurement principles for those arrangements is critical to getting it right the first time.  Close enough is not good enough.

Some of these complexities include what type of agreement is it?  Should the fair value option be used for liabilities?  Is the agreement revocable or irrevocable?  Is the NFP the trustee or fiscal agent, or is there an unrelated third party as the trustee or fiscal agent?  And what happens upon termination of the agreement?

Every NFP organization and their auditor that is involved with split interest arrangements refers to this chapter many, many times.  The Guide's chapter provides a level of detail as a resource that is unmatched.  I always thought that the prior Guide's chapter on split interest arrangements was one of the best aspects of the Guide.  Who doesn’t appreciate being given example journal entries to record these arrangements?  And those journal entries are still there, and more. 

The recognition and measurement principles are comprehensively addressed for six widely used type of agreements.  And a new one was added in the new Guide.  They are charitable lead trusts, perpetual trusts held by third parties.  Although technically this is not a split interest agreement because the NFP is the sole beneficiary, they present some of the same issues as a split interest agreement.  Continuing on, charitable remainder trusts, charitable gift annuities, pooled income funds and a new one for this Guide, a gift of real estate with a retained life interest. 

Other areas where there is new or expanded implementation guidance include distinguishing revocable rights from irrevocable rights, determining whether the NFP is the trustee, the purchase of an annuity contract to make payments to the beneficiary and addressing the accounting and reporting when that happens, discussion of FinREC's recommendation to use fair value for assets and liabilities, if the NFP is the trustee of the split interest agreement, and what if the NFP is unable to obtain information to measure the beneficial interest in a trust held by another entity. 

There's discussion of FinREC's recommendation disclosures.  And when eventually recognized, is it a prior period error?  And there is discussion on whether the use of IRS guidelines and actuarial tables or commercially available software that determines tax deductibility may or may not be appropriate for determining fair value.  All of these items are discussed in the new Guide.

KEN TYSIAC:  Great, great.  Thanks, Frank.  We're here on the Journal of Accountancy's podcast on not-for-profit auditing and accounting.  Our next expert to speak will be Andrew Prather of Clark Nuber.  Andrew, can you tell us about programmatic investments?  This is an emerging area of interest for not-for-profits, isn't it?

ANDREW PRATHER:  Yes, it certainly is, Ken.  As the Expert Panelists were drafting the new Guide, it quickly became apparent that we definitely needed to devote a whole new chapter to a category of transactions that we're calling "programmatic investments."  We're seeing these types of transactions much more frequently in practice, and so we felt it was -- we felt specific, practical guidance certainly was needed in the Guide.

But just to step back a moment, programmatic investments are what we're categorizing as investments that are made by non-profits for a program purpose.  More specifically, programmatic investments are any type of investment by a not-for-profit that meets two criteria.  The first criteria is that the primary focus of the investment, the primary purpose is to further the tax exempt objectives of a not-for-profit. 

The second criteria is that the production of income or the depreciation of the related asset is not a significant purpose.  In other words, an investor seeking a market return would not enter into this type of investment.  So, those types of investments that meet those two criteria are what we're calling programmatic investments.

Programmatic investments would also include what are called program-related investments made by private foundations.  So, those of you that work with private foundations are probably familiar with that term, as it's been around for awhile. 

The typical programmatic investments we usually see are, first of all, loans. These might be loans that have no or maybe a low interest rate, certainly much lower than maybe at market or going interest rate, or they are loans that might be forgivable at some future date, perhaps upon meeting certain conditions by the borrower of the loan. 

A second type of programmatic investment we often see are guarantees, and these guarantees are usually provided by one organization to another, without commensurate return provided in return.  So, a common example would be a foundation perhaps providing a guarantee on a loan for an operating non-profit, so that operating non-profit could go get a loan, either at a lower interest rate or maybe even get the loan to begin with, due to the benefit of having that guarantee.

And then the third type of programmatic investment we have seen would be an equity investment made by an organization.  So, those three types of investments loans, guarantees and equity investments are the typical ones we see, and we cover each of those in the Guide. 

Generally speaking, a not-for-profit that makes a programmatic investment should account for that investment following the applicable GAAP, except, of course, for any contribution element, which would be accounted for separately as a contribution expense. 

So, for example, if a not-for-profit has made a loan, it should report the loan liability on the balance sheet, just as it would any other loan.  However, if there's a contribution element to the loan, such as if it carries no interest or maybe a very low interest rate, then there's specific accounting that should be applied to record the related contribution expense for the donation of that interest that's not received, if the loan were made at a market rate of interest.

So, we have an entire new chapter in the Guide devoted to programmatic investments.  This chapter goes about defining the criteria for programmatic investments and addresses the core considerations for accounting and financial reporting, as well as critical information dealing with the contribution aspect of a programmatic investment. 

Also, I think just as important, there's other chapters in the Guide that also provide specific guidance on how recipients of these programmatic investments should account for the receipt of the investment.  Of course, the receipt of these programmatic investments are just as common as organizations making them.  So, there's plenty of guidance in other chapters on how to report the contribution as a recipient of these type of investments.

For example, Chapter 5 in the Guide has guidance for a not-for-profit that's a borrower of a loan that has no or a below market rate of interest.  So, an organization that has that type of loan, Chapter 5 provides great guidance on how to account for that.

KEN TYSIAC:  Great, great.  Thanks, Andrew.  Appreciate it.  Jennifer Hoffman of Grant Thornton, I'd like to ask you.  One of the unique areas of concern for not-for-profits is the equity section, or an NFP's net assets, as well as the restriction considerations.  Jennifer, can you talk about some of the challenges in this area?

JENNIFER HOFFMAN:  Sure, Ken.  One area related to this that I think can be challenging is the consideration of restrictions on gifts of long-lived assets or of gifts of cash with the restrictions purchase long-lived assets.  If a donor specifies a time period over which the donated long-lived asset must be used, temporarily restricted net assets should, over time, be reclassified as unrestricted net assets in the P&L, as those restrictions expire. 

The amount released may or may not be equal to the amount of related depreciation.  The amount to be released is based on the length of time indicated by the donor-imposed restrictions, while, of course, the amount of depreciation is based on the useful life of the asset.

If the donor does not specify a time period over which a donated long-lived asset must be used, the not-for-profit may elect a policy to apply a time restriction that expires over the useful life of the donated long-lived asset.  So, in that case, of course, the time periods would match up. 

But remember, a not-for-profit that adopts a policy of implying those time restrictions also should imply a time restriction on long-lived assets acquired with gifts of cash or other assets restricted for those acquisitions.  So, it's sort of an all or nothing. 

Another challenging area involves the expiration of restrictions on promises to give.  A time restriction is implied on unconditional promises to give that are due in future periods, unless explicit donor stipulations or circumstances surrounding the receipt of that promise make it clear that the donor intended it to be used to support activities of the current period. 

The guidance supports that it's reasonable to assume that by specifying future payment dates, donors indicate that their gift is to support activities in each period in which a payment is scheduled to be received.  An important element of this, however, is to remember that time restrictions on contributions receivable lapse when the receivable is due, not necessarily received. 

Now, in some cases, the due date may be explicitly stated.  In other cases, circumstances surrounding the receipt of the contribution may make clear the implicit due date.  And yet, in other cases, the due date may be very unclear.  It's important that not-for-profits consider all the facts and circumstances surrounding the promise to determine the due date, if any.  Once it is determined, remember that at the due date, the time restriction expires and then that assets become available or unrestricted for the purpose specified by the donor. 

If the gift was not purpose-restricted, the temporarily restricted net assets are reclassified to unrestricted net assets, again at that due date.  However, if the donor restricts a contribution to purchase a particular long-lived asset and those assets are acquired, placed in service, and the purpose restrictions are met even prior to the due date, then the purpose restrictions sort of trump that time restriction and the net assets are reclassified to unrestricted.  So, it's always important to remember that donor intent sort of trumps that time restriction.

The new Audit and Accounting Guide has added information on these topics, as well as many, many others.  If you turn to Chapter 11, you'll have a one-stop-spot for all of these type of net asset questions and the applicable guidance that applies.

KEN TYSIAC:  Thanks, Jennifer.  We really appreciate you helping us out here.  For our last question on this Journal of Accountancy podcast on not-for-profit auditing and accounting, we'll turn to Frank Jakosz of Frost, Ruttenberg and Rothblatt.  Frank, taxes and regulatory considerations are always top of mind when you talk about not-for-profits.  What's new on this?

FRANK JAKOSZ:  Ken, you are correct.  Taxes and regulatory considerations should be at the top of mind for NFPs.  Some laws and regulations can have a direct and significant effect on the determination of financial statement amounts.  Other laws and regulations, when violated, can have an effect on financial amounts because of the resulting financial penalties.  And as you can imagine, the not-for-profit's failure to maintain its tax exempt status could have serious tax and financial consequences and affect both its financial statements and possibly require the modification of the auditor's report. 

And if that wasn’t enough to be concerned about, failure to comply with tax laws and regulations could be an illegal act, that could have either a direct and material effect on financial statement amounts, or a material indirect effect that would require appropriate disclosure. 

The new Guide's chapter discusses certain tax and regulatory considerations relevant to NFPs.  It has a new and expanded discussion about the legal and regulatory environment in such areas as basis for exemption, unrelated business income, alternative investments, tax shelters, income tax position, state charitable solicitation laws, state and local gambling regulations, UPMIFA, securities regulations, Sarbanes-Oxley and governance and anti-terrorist financing guidelines.  It's a must-read for all NFPs.

KEN TYSIAC:  Great, great.  Thank you, Frank, and thanks to Andrew Prather, Jennifer Hoffman and Chris Cole, also, for their contributions to this Journal of Accountancy roundtable on not-for-profit accounting and auditing.  We really appreciate the wealth of excellent information you guys passed on during this discussion.  It's been great and I really appreciate it. 

The AICPA's newly updated Auditing and Accounting Guide for Not-for-Profit Entities is available at CPA2biz.com.  I'm Ken Tysiac, Senior Editor for News of the Journal of Accountancy.  I would like also to thank our listeners for tuning into this podcast.  I'd like also to remind you that you can visit JournalofAccountancy.com for all the latest auditing and accounting news and features.  Have a great day.

MALE SPEAKER:  This podcast is designed to provide illustrative information with respect to the subject matter covered and does not represent an official opinion or position of the AICPA.  It is provided with the understanding that the AICPA is not engaged in rendering legal, accounting or other professional services.  If such advice or expert assistance is required, the services of a competent professional person should be sought. 

The AICPA makes no representations, warranties or guaranties as to, and assumes no responsibility for the content or application of the material contained herein, and expressly disclaims all liability for such damages arising out of the use of, reference to or reliance on such material.


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