Academic journal article Journal of Accountancy

Coping with NPO Standards - It's Not Difficult

Academic journal article Journal of Accountancy

Coping with NPO Standards - It's Not Difficult

Article excerpt

One small organization's experience.

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.

FASB 116

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. …

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