Chapter 14 – Accounting for Not-for-Profit Organizations
14-1
CHAPTER 14: ACCOUNTING FOR NOT-FOR-PROFIT
ORGANIZATIONS
OUTLINE
Number
Type/Task
Status
(re: 18/e)
Questions:
14-1
Standard setting bodies of not-for-
profits
Identify
Same
14-2
Operating statement differences
Compare
Same
14-4
Expense reporting
Explain
Revised
14-5
Conditional and unconditional pledges
Compare
Revised
14-6
Program services and supporting
services
Explain
Same
14-7
Donated services
Explain
Same
14-8
Special collections
Explain
New
14-9
Joint costs
Define and explain
Same
14-10
NFP mergers and acquisitions
Distinguish and
explain
Same
14-11
Conditional donations
Explain
New
Cases:
14-12
Net assets with donor restrictions
Analyze and report
Revised
14-13
Research Case—Not-for-profit standard
setting
Analyze
New
14-14
Not-for-profit or government entity
Analyze and explain
Same
Exercises/Problems:
14-15
Various
Multiple choice
Items 1-2, 7-8,
12-13 revised.
Items 14-15
new.
14-17
Donated services
Classify
Same (14-16)
14-18
Gross vs. net reporting
Analyze
Same (14-17)
14-19
Joint costs with a fund-raising appeal
Analyze
Same (14-18)
14-20
Identify departures from GAAP
Evaluate and discuss
Revised (14-
19)
14-21
Condition or restriction
Classify
New
14-22
Statement of activities
Evaluate
Same (14-20)
Chapter 14 – Accounting for Not-for-Profit Organizations
14-2
14-25
Recording and reporting transactions
Apply
Revised (14-
23)
14-26
Identify departures from GAAP
Evaluate
Revised (14-
24)
14-27
Prepare all four financial statements
Apply
Same (14-25)
CHAPTER 14: ACCOUNTING FOR NOT-FOR-PROFIT
ORGANIZATIONS
Answers to Questions
14-1 The Financial Accounting Standards Board (FASB) has primary responsibility for
providing guidance on generally accepted accounting principles for nongovernmental
not-for-profit entities. The Governmental Accounting Standards Board (GASB) is
responsible for government organizations including governmental not-for-profit
organizations. These lines of responsibility are outlined in FASB Accounting Standards
Codification (ASC) 105.
General Problem Information: Standard setting bodies of not-for-profits
Learning Objective: 14-1
Topic: Standard setting bodies for NFPs
Bloom’s Taxonomy: Remember
Accreditation Skills tag: AACSB: Knowledge Application, AICPA: BB: Industry
Level of Difficulty: Easy
14-2 The operating statements for nongovernmental NFPs and governmental NFPs reporting
Chapter 14 – Accounting for Not-for-Profit Organizations
14-3
Ch. 14, Answers, Question 14-2 (Cont’d)
For example:
Nongovernmental not-for-profits
Governmental not-for-profits
Generally titles the statement the
statement of activities
Titles the statement the statement of
revenues, expenses, and changes in net
position
Considerable flexibility in formatting the
statement
Must provide a format that identifies
operating and nonoperating activities
Reports changes in the two net asset
categories for the reporting period
Reports the changes in total net position
for the reporting period
General Problem Information: Operating statement differences
Learning Objective: 14-2
Topic: Financial Reporting
Bloom’s Taxonomy: Understand
Accreditation Skills tag: AACSB: Knowledge Application, AICPA: FN: Reporting
Level of Difficulty: Medium
14-3. FASB ASC 958-205-45 requires not-for-profit organizations to separate net assets into
two categories: net assets without donor restrictions and net assets with donor
restrictions.
Contributions received without restrictions on their use by donors are classified as
without donor restrictions. Contributions or unconditional promises to give for which the
donor has imposed restrictions as to the period of use or purpose for which the resources
can be used are classified as with donor restrictions. When donor-imposed restrictions
Chapter 14 – Accounting for Not-for-Profit Organizations
14-4
Ch. 14, Answers, Question 14-3 (Cont’d)
Board designated net assets is a subset of net assets without donor restrictions. Dollars
are moved from the net assets without donor restrictions category to board-designated net
assets when the board takes action. Action to set aside a portion of net assets for a future
purpose is usually reflected in the minutes to a board meeting. Examples might include
Topic: Financial Reporting
Bloom’s Taxonomy: Understand
Accreditation Skills tag: AACSB: Knowledge Application, AICPA: FN: Reporting
Level of Difficulty: Medium
14-4. The FASB requires all not-for-profit organizations to report expenses by function and
nature either on the face of the statement of activities, as a separate financial statement, or
in the notes to the financial statements. Reporting expenses by function and nature
provides an analysis of the costs associated with each of the program services and
supporting services. It allows the ratio of program expenses to total expenses and support
expenses to total expenses to be computed and compared to other entities. In addition,
readers of the financial statements can see the natural line-item, or object of expense;
such as salaries, supplies, rent or occupancy costs, and depreciation. Illustration 14-4 in
the text provides a reporting of expenses by function and nature that illustrates the
relationship between functional expenses and natural classifications of expenses.
General Problem Information: Expense reporting
Learning Objective: 14-2
Topic: Financial Reporting
14-5. Pledges are promises to give assets to an organization. Pledges may be conditional or
unconditional. An unconditional pledge requires only the passage of time or performance
on the part of the not-for-profit entity. As a result, unconditional pledges are generally
recognized in the year the pledge is made. A conditional pledge, however, depends on the
Chapter 14 – Accounting for Not-for-Profit Organizations
14-5
pledge will be recognized when substantially all of the conditions imposed by the donor
are met.
General Problem Information: Conditional and unconditional pledges
Learning Objective: 14-3
Topic: Accounting for NFP Organizations
Level of Difficulty: Medium
14-6. Expenses in a not-for-profit organization are divided into functional categories: (1)
program services, and (2) supporting services expenses. Program service expenses are
those that relate to the programs the NFP offers to the public; for example, the
Community Family Service Agency (see Illustration 14-6) reports adoption, counseling,
foster home care, and special outreach project as its programs.
Functional reporting of expenses in this manner is important since oversight bodies and
donors place importance on the ratio of program services expenses to total expenses. In
other words, they ask, “For every dollar the organization spends, how many cents go to
the organization’s programs, rather than to management and general and fund–raising?”
General Problem Information: Program services and supporting services
Learning Objective: 14-2
Topic: Financial Reporting
Bloom’s Taxonomy: Understand
14-7. To be recorded as contribution revenue and either an expense or asset, a donated service
must (1) create or enhance nonfinancial assets, or (2) require specialized skills that are
provided by individuals possessing those skills, and typically would have to be purchased
if not provided by donation. A good example of a donated service that meets the first
Chapter 14 – Accounting for Not-for-Profit Organizations
14-6
Ch. 14, Answers, Question 14-7 (Cont’d)
criteria would be an electrician contributing services for the new wing of a not-for-profit
elementary school. In such a case the NFP would record a debit to the building account
and a credit to a contributions account without donor restrictions for the fair value of the
donated services. An example of the second criteria would be medical doctors and nurses
14-8. Yes, the museum most likely is following GAAP. FASB standards provide an option for
reporting collections which include historical treasures and works of art. Assuming the
museum has met the criteria for recognizing its oil painting collection as an asset, the
museum has the option of recognizing the collection or reporting the collection in the
notes. This option is only available for assets that meet the definition of a collection. To
meet the definition of a collection under FASB ASC 958-360-20, the museum must:
1. Hold the collection for public exhibition, education, or research in furtherance of
public service rather than financial gain.
Therefore, it is probable the reason the collection is not recognized is because the
museum has simply opted not to recognize the collection.
General Problem Information: Special collections
Learning Objective: 14-3
Topic: Accounting for NFP Organizations
Bloom’s Taxonomy: Understand
14-9. Joint costs are the expenses incurred when the activities of a not-for-profit organization
include a fund-raising appeal with either a program or a management and general
function. If it is determined that a bona fide program or management and general function
Ch. 14, Answers, Question 14-9 (Cont’d)
Chapter 14 – Accounting for Not-for-Profit Organizations
14-7
has occurred in conjunction with the fund-raising appeal, the joint costs would be
allocated in a rational and systematic method with a reasonable amount recorded as a
fund-raising expense and the remaining amount recorded as an expense to the appropriate
program function or to management and general expenses. FASB standards indicate that
for a bona fide program function to exist, the activity must meet the criteria of purpose,
audience, and content. If the criteria are not met, all of the joint activity costs must be
recorded as fund-raising.
General Problem Information: Joint costs
Learning Objective: 14-3
14-10. A merger occurs when two or more NFPs combine to create a new NFP. At the date of
the merger, the new NFP recognizes the assets and liabilities of the merging NFP
organizations at the amounts reported on the GAAP prepared financial statements of the
merging NFPs. An acquisition occurs when an NFP obtains control of one or more NFP
activities or businesses. The assets and liabilities of the acquired activities or businesses
General Problem Information: NFP Mergers and Acquisitions
Learning Objective: 14-4
Topic: Consolidations and Combinations
Bloom’s Taxonomy: Understand
Accreditation Skills tag: AACSB: Knowledge Application, AICPA: FN: Reporting
Level of Difficulty: Medium
14-11. A donor-imposed condition exists if a right of return or release exists, and the agreement
with the donor includes a barrier that must be overcome by the NFP. NFPs should review
the agreement with the donor to determine if there are any indicators that would suggest a
barrier exists. Examples of indicators include stipulations limiting the discretion a
recipient has to conduct an activity (e.g., requirement to follow specific guidelines about
Ch. 14, Answers, Question 14-11 (Cont’d)
Chapter 14 – Accounting for Not-for-Profit Organizations
14-8
General Problem Information: Conditional donations
Learning Objective: 14-3
Topic: Accounting for NFP Organizations
Chapter 14 – Accounting for Not-for-Profit Organizations
14-9
Solutions to Cases
14-12. a. An example of an evaluation memo would be as follows.
Date:
To: Chair, Baytown Area United Way Allocation Panel
From: [Your Name], Financial Advisor
Re: Analysis of Baytown Rehabilitative Camp for Disabled Children’s financial
condition and recommendations for FY 2024 funding
The full panel subsequently decided to send the organization a message about our
concerns and reduced the agency’s budget request by $5,000 to $25,000, the amount
the United Way Board ultimately approved. During last year’s meeting, the camp’s
director and chairman of its board promised to take immediate action to improve the
camp’s financial condition, including such actions as more fund-raising activity and,
if necessary, cutting support staff at the camp.
When I first looked at the FY 2024 budget request and FY 2023 financial statements
for the Baytown Rehabilitative Camp, I was very surprised and pleased by the evident
improvement the organization had made since last year in its financial situation. After
closer inspection, however, I noted a reduction of $31,934 in the amount of the
When I noted the apparent funds transfer, I contacted the camp’s director who
informed me that the original donor, who had contributed $100,000 several years ago
for future building expansion, was no longer living. Further, after an exhaustive
search she was unable to locate a written agreement regarding the contribution. Upon
reporting these facts to the board of directors, a resolution was passed authorizing the
Chapter 14 – Accounting for Not-for-Profit Organizations
14-10
Ch. 14, Solutions, Case 14-12, a. (Cont’d)
So that you and the other members of the panel can see the impact this $37,500
transfer has on the camp’s financial position, I have calculated the following key
measures both including and excluding the $37,500 amount. Normally, a current ratio
over 2.0 and quick ratio over 1.0 are considered reasonable. Three months or more of
FY 2023
$37,500 Included $37,500 Excluded FY 2022
Current Ratio: $75,681 / $29,141 = $38,181 / $29,141 = $46,368 / $40,786 =
(current assets/ 2.60 1.31 1.14
current liabilities)
FY 2023
$37,500 Included $37,500 Excluded FY 2022
Days of expenses (($75,681 − $29,141) / (($38,181 − $29,141) / 12 days, provided
covered by $238,932) × 365 = $238,932) × 365 = in case.
financial reserves 71.1 days 13.8 days
(((current assets −
current liabilities) /
total expenses) ×
365 days in a year)
Respectfully submitted,
[Your signature]
Chapter 14 – Accounting for Not-for-Profit Organizations
14-11
Ch. 14, Solutions, Case 14-12 (Cont’d)
b. The answer to part b will depend on the individual students. Students should be
concerned with funding given the camp’s use of donor-restricted funds. Students
might raise concerns about ethics and “earnings management.” The following is
provided for use in discussion.
c. Again, this will depend on the students’ reaction to the activities undertaken by the
camp with regard to the use of funds with donor-imposed restrictions. Clearly,
performance has the appearance of improving as a result of the use of the restricted
assets.
General Problem Information: Net assets with donor restrictions
Learning Objective: 14-2
Topic: Financial Reporting
Bloom’s Taxonomy: Analyze
Level of Difficulty: Hard
14-13. Answers to 14-13 are based on a review of the FASB website on January 27th, 2020.
a. Currently there is one project specific to not-for-profit entities on the technical agenda.
Not-for-profit reporting of gifts-in-kind is in the exposure draft stage. The objective
of the project is to enhance the presentation and disclosure of gifts-in-kind.
b. The answer to this question will depend in part on the list of recently completed
projects related to not-for-profit entities. Comment letters can be found under the
“Projects” tab on the FASB website. An example of a project a student could choose
would be the project titled “Presentation of Financial Statements of Not-for-Profit
Chapter 14 – Accounting for Not-for-Profit Organizations
14-12
Ch. 14, Solutions, Case 14-13 (Cont’d)
c. Students can access information on the Not-for-Profit Advisory Committee (NAC)
from the FASB website. The NAC consists of 15 to 20 members from industry,
public accounting, and academia. The principal responsibilities of the NAC are to
help the FASB to prioritize projects, provide feedback on practical and conceptual
implications for active projects, and to provide feedback on issues important to the
NFP sector.
14-14. Issue: Is the Native American Heritage Center and Museum a governmental
not-for-profit entity or nongovernmental not-for-profit entity? This is an essential
determination because if the museum is governmental, the auditor will need to examine
whether the museum’s financial statements are in conformity with GASB standards. If it
is nongovernmental, its financial statements must conform to FASB standards.
General Problem Information: Not-for-profit or government entity
Learning Objective: 14-1
Topic: Identify the accounting standard-setting bodies for NFPs
Bloom’s Taxonomy: Analyze
Accreditation Skills tag: AACSB: Analytical Thinking, AICPA: FN: Decision Making
Level of Difficulty: Hard
Chapter 14 – Accounting for Not-for-Profit Organizations
14-13
Solutions to Exercises and Problems
14-15. 1. c. 6. d. 11. c.
3. b. 8. b. 13. b.
5. c. 10. a. 15. d.
General Problem Information: Various
Learning Objective: 14-1
Learning Objective: 14-2
Learning Objective: 14-3
Topic: Various Chapter Topics
14-16.
1. a 5. d (no indication contributions
were received at the fund-
raising event)
2. d (conditional
promises are 6. c (endowment and earnings
3. b 7. b
4. c 8. b
General Problem Information: Classification of revenues and contributions
Learning Objective: 14-3
Topic: Accounting for NFP Organizations
Chapter 14 – Accounting for Not-for-Profit Organizations
14-14
14-17.
1. N 5. Y
3. N 7. N
4. N 8. Y
General Problem Information: Donated services
Learning Objective: 14-3
14-18.
1. The facts suggest the Center for Nonprofit Excellence should report the gross
revenues and expenses of the quarterly lunches. The gross revenues from the
2. Based on the information provided, it appears that direct benefit expenses of the
flower sale can be netted against the gross revenues. The gross sales of the
flower sale represent 2.2% of the total revenue for the year. While it may be
organization.
3. The special event revenue should be reported gross of the direct benefit costs.
For net reporting to be applicable, the events would need to be peripheral or
incidental, or Philanthropy First would have to have variance power. The eight
events in total represent 20% of We Care’s revenue, suggesting the events are
major ongoing activity. In addition, We Care is the owner of “Life Works” and
has a contractual right to 20% of the net proceeds, suggesting Philanthropy First
does not have variance power.
4. The music concert revenues should be presented gross along with the direct
expenses. The fact that 50% of the total revenue for the year comes from the
Chapter 14 – Accounting for Not-for-Profit Organizations
14-15
Ch. 14, Solutions, Exercise 14–18 (Cont’d)
addition, the music concert is carried on annually, suggesting Youth Literacy
counts on this event as part of its ongoing funding strategy.
General Problem Information: Gross vs. Net Reporting of Revenues and Expenses
Learning Objective: 14-3
Topic: Accounting for NFP Organizations
Level of Difficulty: Hard
14-19.
1. Based on the information provided, it appears that the purpose, audience, and
content criteria are met for this activity to be considered a bona fide activity. The
joint costs should be allocated between the functional program expenses and support
2. This activity fails all three criteria to be considered a bona fide activity under FASB
ASC 958-720-45. All the costs of the activity should therefore be allocated to fund-
raising expenses. The purpose of the solicitation campaign is primarily to raise
3. Based on the information provided, it appears that the purpose, audience, and
content criteria are met for this activity to be considered a bona fide activity. The
joint costs should be allocated between the functional program expenses and support
expenses, including fund-raising.
The purpose of the lecture is to help accomplish the NFP’s mission—to educate
the public about the Ridley turtle and to help save it from extinction by
increasing the successful hatching of eggs. The audience is targeted because it
Chapter 14 – Accounting for Not-for-Profit Organizations
14-16
Ch. 14, Solutions, Exercise 14–19 (Cont’d)
4. This activity would seemingly pass the three criteria; however, it must be
classified as a fund-raising event. It would appear that the purpose of the
campaign aligns with the NFP’s mission, which is to support the city’s
firefighters. An objective of all firefighters is to prevent fires. The targeted
audience is appropriate in that it is composed of homeowners who are being
provided with information on how they can reduce the probability of fires in
their homes. The audience is not primarily targeted for its high likelihood to
contribute. The content of the campaign motivates people to action,
General Problem Information: Joint costs with a fund-raising appeal
Learning Objective: 14-3
Topic: Accounting for NFP Organizations
Bloom’s Taxonomy: Analyze
Accreditation Skills tag: AACSB: Analytical Thinking, AICPA: FN: Decision Making
Level of Difficulty: Hard
14-20.
a. It appears there are several modifications that should be made to the Life Academy statement
of activities. Some problems and recommendations to bring the statement into conformance
with FASB standards include:
• Special event revenue must be reported at the gross amount, which it appears has
been done. However, the FASB also requires that the direct expenses of the special
event be separately disclosed (see Illustration 14-2 for an example of how to report).
It is not apparent from the statement presentation just what the direct expenses related
to the special event were.
• The statement incorrectly includes the label “net position” instead of the appropriate NFP
title “net assets.”
• Expenses are reported in the with donor restrictions column. Expenses can only be
reported in the without donor restrictions column. If the purpose for which net assets
Chapter 14 – Accounting for Not-for-Profit Organizations
14-17
Ch. 14, Solutions, Exercise 14-20, a. (Cont’d)
• The statement correctly reports the program function expenses separate from the support
function expenses. However, the support function expenses should be separated into
management and general, and fund-raising.
• Depreciation should be allocated to the functional areas.
General Problem Information: Identify departures from GAAP
Learning Objective: 14-5
Topic: Preparing Journal Entries and Financial Statements
Bloom’s Taxonomy: Evaluate
Accreditation Skills tag: AACSB: Analytical Thinking, AICPA: FN: Reporting
Level of Difficulty: Hard
14-21.
1. a. Conditional (right of return
and a measurable barrier) 5. a. Conditional (right of return
and limited discretion on the
conduct of the activity)
4. c. Without Donor Restriction 8. c. Without Donor Restriction
General Problem Information: Distinguishing condition from restriction
Learning Objective: 14-3
Topic: Financial Reporting
Chapter 14 – Accounting for Not-for-Profit Organizations
14-22.
a. No. The presented statement is not in proper form for a statement of activities. A statement
of activities should show changes in net assets without donor restrictions and net assets
with donor restrictions. Additionally, the statement should either display the expenses by
function in addition to nature or note that expenses by function are disclosed in the notes to
the financial statements.
b. Some questions for the controller:
1. Were there no fund-raising expenses related to the solicitation of $111,400 in
c. The directors should apply for grants or solicit contributions of at least $46,000, the total
cost of operating a similar program. Too often not-for-profit organizations request only the
direct or variable costs of a program and do not ask for indirect cost recovery. Note,
however, that if the contributions or grants are restricted for this purpose, then any excess
funds would be expected to be returned if not spent on the program, unless the donor
agrees to release the restriction.
General Problem Information: Statement of activities
Learning Objective: 14-3
Topic: Accounting for NFP Organizations
Bloom’s Taxonomy: Evaluate
Accreditation Skills tag: AACSB: Analytical Thinking, AICPA: FN: Decision Making
Level of Difficulty: Hard
Chapter 14 – Accounting for Not-for-Profit Organizations
14-19
14-23. THE SHANNON COMMUNITY KITCHEN
GENERAL JOURNAL
Debits Credits
1. CASH 28,000
CONTRIBUTIONS—
WITHOUT DONOR RESTRICTIONS 25,000
2. PROGRAM EXPENSES 100
CONTRIBUTIONS—
WITHOUT DONOR RESTRICTIONS 100
3. NO TRANSACTION IS RECORDED – MEAL SERVICE AND PREPARATION
DOES NOT REQUIRE A SPECIALIZED SKILL
4. CASH 5,000
5. CASH 6,000
REFUNDABLE ADVANCE 6,000
Chapter 14 – Accounting for Not-for-Profit Organizations
14-20
Ch. 14, Solutions, Exercise 14-23 (Cont’d)
THE SHANNON COMMUNITY KITCHEN
GENERAL JOURNAL
Debits Credits
6. PROGRAM EXPENSES 4,100
CASH 4,100
NET ASSETS RELEASED—SATISFACTION OF
PURPOSE RESTRICTION—WITH DONOR
RESTRICTIONS 3,000
General Problem Information: Recording revenue and expense transactions
Learning Objective: 14-3
Topic: Accounting for NFP Organizations
Bloom’s Taxonomy: Apply
Accreditation Skills tag: AACSB: Knowledge Application, AICPA: FN: Reporting
Level of Difficulty: Hard
14-24.
a. INVOLVE
GENERAL JOURNAL
Debits Credits
1. RENT EXPENSE 35,000