Title Details

About the Authors xv

CHAPTER 1 Responsibilities for Fiscal Management 1

1.4 Safeguarding Financial Assets and Providing Effective Internal Controls 1

1.5 Complying with Federal and State Reporting and Regulatory Requirements 1

1.7 Ten Key Points to Consider in Not-for-Profit Fiscal Management 2

(b) Financial Reporting 2

(iii) Audited Financial Reports Are Prepared by Management 2

(c) Budgeting and Resources 2

(vii) A Not-for-Profit Organization May Be Required to Consolidate Reporting with Related Organizations 2

PART I KEY FINANCIAL CONCEPTS 3

CHAPTER 2 Accounting Distinctions between Not-for-Profit and Commercial Organizations 5

2.2 Principal Areas of Accounting Differences 5

(a) Cash versus Accrual Accounting 5

(d) Treatment of Fixed Assets 5

(g) Net Assets (New) 6

CHAPTER 3 Cash- versus Accrual-Basis Accounting 7

3.1 Cash and Accrual Statements Illustrated 7

CHAPTER 4 Fund Accounting and Internal Financial Reporting 9

4.1 Fund Accounting Defined 9

(a) Current Unrestricted Fund 9

(i) Board-Designated Funds 9

(c) Restricted Endowment Fund 9

4.4 Typical “Fund” Financial Statements 9

4.5 Transfers between Funds 10

*CHAPTER 5 Fixed Assets and Depreciation 11

5.1 General Principles—Working Definitions 11

5.5 Fair Value Measurement 11

5.6 Contributions Restricted for Purchase of Fixed Assets 11

5.8 Conclusions and Recommendations 12

*CHAPTER 6 Investment Income, Gains and Losses, and Endowment Funds 13

6.1 Accounting Principles 13

(f) Underwater Endowment Funds 13

(h) Display of Investment Income When a “Spending Formula” is Used 13

(i) Expanded Disclosure Requirements for All Endowments 14

(j) Presentation of Gains or Losses in the Financial Statements 14

(ii) Restricted Realized Gains or Losses 14

(iv) Embedded Derivatives in Split-Interest Agreements 14

6.2 Total Return Concept 14

CHAPTER 7 Affiliated Organizations, Pass-Through Transactions, and Mergers 15

7.1 Types of Relationships Often Found 15

(a) The Fundraising Affiliate of a Parent Organization 15

7.2 Definition of the Reporting Entity 16

(a) Pass-Through Gifts and Assets Held for the Benefit of Another Organization 16

(b) Combined Financial Statements 16

(i) Reporting of Related Entities by Not-for-Profit Organizations 16

(ii) Omnibus Changes to Consolidation and Equity Method Guidance for Not-for-Profit Organizations 17

(iii) Consolidation of Variable Interest Entities 18

7.3 Mergers of Not-for-Profit Organizations 18

(b) Not-for-Profit Entities: Mergers and Acquisitions 18

CHAPTER 8 Contributions, Pledges, and Noncash Contributions 19

8.1 Expendable Current Support 19

(a) Unrestricted Contributions 19

(iii) Presentation in the Statement of Activities 19

(b) Temporarily Restricted Contributions 20

(ii) Distinguishing Grants from Gifts 20

(c) Investment Securities 20

8.2 Gifts-in-Kind 20

(a) Fixed Assets (Land, Buildings, and Equipment) and Supplies 20

(b) Museum Collections 20

(ii) Basis on Which to Value Services 20

(e) Use of Facilities 21

(f) Services Provided by Other Organizations 21

8.3 Support Not Currently Expendable 21

(a) Endowment Gifts 21

(b) Pledges (Promises to Give) 21

(iii) Recording at Fair Value 21

(iv) Allowance for Uncollectible Pledges 22

(c) Bequests 22

(d) Split-Interest Gifts 22

(ii) Accounting for Split-Interest Gifts 22

CHAPTER 9 Accounting Issues Relating to Fundraising 23

9.1 Accounting for Gifts 23

(a) Pledges 23

(b) Revenue and Restricted Gifts 23

(e) Pass-Through Gifts 24

PART II FINANCIAL STATEMENT PRESENTATION 25

CHAPTER 10 Cash-Basis Financial Statements 27

10.1 Simple Cash-Basis Statement 27

(a) Characteristics 27

(b) Budget Comparison 27

10.2 Simple Statement with Last Year’s Figures and Budget 27

10.3 Combined Cash-Basis Income Statement and Balance Sheet 28

(a) Characteristics 28

10.4 Separate Statement of Receipts and Disbursements and Statement of Net Assets 28

(a) Cash Basis Emphasized 28

10.5 Statement of Income with Certain Cash Transactions Omitted 28

(a) Characteristics 28

10.6 Modified Cash-Basis Statements 28

CHAPTER 11 Accrual-Basis Financial Statements 29

11.1 Simple Accrual-Basis Statements 29

(a) Income 29

(c) Net Assets 29

11.2 Accrual-Basis Statements—Fundraising Organization 30

(c) Income Statement Format 30

11.3 Accrual-Basis Statements—International Organization 30

CHAPTER 12 Multiclass Financial Statement 31

12.2 Preparation of Statement of Cash Flows 31

(a) Explanation of Cash Flow Statement Worksheets 31

(b) Explanation of “Reconciliation” Worksheet 31

12.3 “Class” Financial Statements Explained 31

(d) Statement of Activities 31

12.4 Columnar Format Presentation 32

(b) Reclassification and Net Assets Section 32

12.5 A Complicated Set of Class Financial Statements 32

(a) Overall Impression of Complexity 32

* (g) Balance Sheet 32

(i) Restricted Income from Endowments 32

PART III ACCOUNTING AND REPORTING GUIDELINES 33

CHAPTER 13 Voluntary Health and Welfare Entities 35

13.1 Accounting Principles 35

(a) Accrual Basis 35

13.2 Accounting for Contributions 35

(c) Donated Services 35

(e) Donated Securities 36

* (f) Donated Equipment and Fixed Assets 36

(g) Timing of Reporting of Gifts 36

(ii) Pledges 36

*13.3 Accounting for Other Income 36

(a) Investment Income 36

13.5 Accounting for Assets 36

(a) Carrying Value of Investments 36

13.7 Financial Statements 36

(a) Balance Sheet 36

(iii) Supporting Services 39

Advertising Expenses 39

CHAPTER 14 Colleges and Universities 41

14.1 Authoritative Pronouncements 41

(a) AICPA Audit Guide 41

14.2 The Principal Financial Statements 41

(a) Balance Sheet 41

14.3 Accounting Principles 41

(f) Investment Income, Gains, or Losses on Investments 41

(h) Carrying Value of Investments 42

* (i) Total Return Concept 42

CHAPTER 15 The External Financial Statement Reporting Model forOrganizations Reporting under GASB Standards 43

15.3 Generally Accepted Accounting Principles 44

15.4 External Financial Reporting Model 44

15.5 Basic Financial Statements 44

(a) Statement of Net Assets (Balance Sheet) 44

(b) Statement of Revenues, Expenses, and Changes in Net Assets 46

(c) Statement of Cash Flows 47

15.6 The Reporting Entity 47

15.7 Assets, Liabilities, and Deferred Inflows/Outflows 47

(a) Investments 47

(b) Capital Assets 47

(ii) Works of Art and Historical Treasures 47

(c) Intangible Assets 47

(d) Derivatives 48

(f) Deferred Inflows and Outflows of Resources 48

15.8 Revenues and Expenses 48

(b) Nonexchange Transactions 48

(i) Eligibility Requirements 48

(ii) Purpose Restrictions 48

(iii) Financial Statement Display 49

(c) Labor Costs and Employee Benefits 49

(ii) Pensions and Other Postemployment Benefits 49

(iii) Termination Benefits 49

(d) Government Combinations (New) 50

15.9 Other Reporting Matters 50

(b) Required Supplementary Information (RSI) 50

CHAPTER 16 Health Care Organizations 51

16.2 Accounting Guidance 52

(b) AICPA Audit Guide 52

(c) Securities and Exchange Commission (SEC) 52

(d) HFMA Principles and Practices Board 52

16.3 Financial Statements 52

(a) Financial Reporting Model 52

(b) Balance Sheet 52

(c) Statement of Operations 52

(i) Performance Indicator 52

(e) Statement of Cash Flows 52

16.4 Accounting Principles 53

(b) Revenue Recognition 53

(i) Fee-for-Service Transactions 53

(iv) CCRC Entrance Fees 53

(d) Settlements with Third-Party Payers 53

(g) Investments 53

(i) Equity Investments 53

(iii) Investment Pools Sponsored by Other Nonprofits 53

(i) Contributions 53

(ii) Contributions Received by Affiliated Fundraising Foundations 53

(j) Malpractice and Similar Contingencies 53

(k) Reporting Entity Considerations 53

(i) Consolidation of Other Not-for-Profit Entities 54

(ii) Special-Purpose Entities 54

* (iii) Noncontrolling Interests 54

(v) Joint Operating Agreements 54

* (l) Accounting for Loss Contracts 54

(ii) CCRCS 54

CHAPTER 17 Accounting Standards for Other Not-for-Profit Organizations 55

17.1 Accounting Principles 55

(a) Accrual Basis of Reporting 55

(g) Donated Facilities 56

(h) Membership and Subscription Income 56

(i) Life Membership and Initiation Fees 56

(j) Grants to Others 56

(k) Membership Development Costs 56

17.2 Financial Statements 56

(a) Statement of Cash Flows 56

17.3 Combined Financial Statements 56

CHAPTER 18 Special Accounting Issues for Specific Organizations 57

18.4 Libraries 57

CHAPTER 19 The Financial Accounting Standards Board and Future Trends in Not-for-Profit Accounting 59

19.1 Financial Accounting Standards Board 60

 (a) Establishment of Accounting Rules 60

(b) Interaction with AcSEC (New) 60

(c) FASB’s Conceptual Framework (New) 61

(d) FASB Not-for-Profit Standards 61

(e) AICPA Projects 62

19.2 The FASB Accounting Standards CodificationTM (ASC) (New) 62

(a) Using the Codification (New) 62

Appendix 19-A New FASB Statements of Financial Accounting

Standards That Affect Not-for-Profits (New) 63

PART IV CONTROLLING THE NOT-FOR-PROFIT ORGANIZATION 65

CHAPTER 20 The Importance of Budgeting 67

20.3 Timely Interim Statements 67

(b) Restaurant Operation 67

20.4 A Five-Year Master Plan 67

(a) Suggested Procedures 67

(iii) Plan for Income 67

CHAPTER 21 Small Organizations—Obtaining the Right Accountant 69

21.1 Level of Accounting Services Needed 69

(a) Secretary as Accountant 69

CHAPTER 22 Small Organizations—Providing Internal Control 71

22.3 Some Basic Controls 71

(b) Control over Disbursements 71

(c) Other Areas of Control 71

22.4 Fidelity Insurance 71

CHAPTER 23 Effective Internal Accounting Control for Not-for-Profit Organizations 73

23.1 Introduction to Internal Accounting Control 73

(b) Internal Control—Integrated Framework Definition 73

(f) New Thresholds for Internal Control Weaknesses 73

(g) SAS 114 Communications 74

23.2 Elements of an Effective Internal Accounting Control System 74

(a) Control Environment 74

(d) Organization Structure and Management Controls 74

(g) Recordkeeping and Information Systems 74

(ii) Service Bureaus 74

(j) Periodic Review of the Control System 74

23.3 Basic Internal Accounting Control System 74

(i) Compensation and Expenses 74

CHAPTER 24 Independent Audits 75

24.1 Functions and Limitations 75

(a) Auditor’s Opinion Explained 75

* (i) Identification of Statements 76

(ii) Responsibility for Statements and the Audit Thereof 77

(iv) Expanded Procedures 77

* (v) Essential Tests 77

* (vi) Accounting Principles Followed 77

*(b) Adequacy of Internal Control over Contributions 77

* (c) Qualified Opinions 77

* (ii) Disclaimer 78

24.2 Benefits of an Independent Audit 78

(e) Open Communications between the Auditors and Those Charged with Governance 78

24.4 Public Accountants 78

24.5 Audit Committees 78

24.6 Conclusion 78

CHAPTER 25 Investments 79

25.1 Types of Investments 79

(a) Directly Owned Positions 79

(b) Indirectly Owned Positions through Net Asset Value Ownership 79

* (c) Derivatives 80

*25.2 Valuation of Investments 80

(c) Disclosures 80

25.3 Key Considerations When Investing in Alternative Investment Funds 80

(a) Fiscal Year-Ends and Management’s Response 80

*(b) Key Due Diligence Procedures 80

PART V PRINCIPAL FEDERAL TAX AND COMPLIANCE REQUIREMENTS 81

CHAPTER 26 E-Business for Not-for-Profit Organizations 83

26.1 Whether You Call It E-Business or Technology-Enabled Business, It Still Matters 83

26.2 Ask Yourself These Questions 84

26.7 How Are Not-for-Profit Organizations Using E-Business Today? 84

(b) Using Dot.coms 84

CHAPTER 27 Principal Tax Requirements 85

27.3 Tax Status of Charitable Organizations: Public Charity or Private Foundation 85

(b) Private Foundations 85

27.4 Other Concerns for Charities 86

(a) Unrelated Business Income 86

(iii) Advertising Income 86

(viii) Tax Rates on Unrelated Business Income 86

(d) Charitable Contributions 86

(v) Tax Consequences of Gifts of Securities to a Private Foundation 86

27.5 Private Foundations 86

(a) Excise Tax on Investment Income 86

(b) Distribution of Income 86

27.8 Recognition of Exemption and Annual Reporting to IRS 86

(a) Initial Recognition of Exemption 86

27.9 Federal Information and Tax Return Filing Requirements 87

(a) Overview of Annual Information Reporting and Failure to File Annual Return (Form 990, 990-EZ, 990-N, 990-PF) 87

(ii) Penalties for Failure to File Annual Return

(Form 990, 990-EZ, 990-N, 990-PF) 87

(iii) Automatic Revocation of Tax-Exempt Status 87

27.12 Restrictions on Supporting Organizations 87

(c) Restrictions Applicable Only to Type III Supporting Organizations 87

27.14 IRS Audits and Compliance Programs (New) 87

CHAPTER 28 Audits of Federally Funded Programs 89

28.4 What to Expect from the Audit 89

(a) How Is It Different from a Financial Statement Audit? 89

28.6 Sweeping Changes Proposed (New) 90

* (a) OMB 90

(b) Congress 90

* (c) Data Collection Form 91

28.7 Conclusion 91

PART VI SETTING UP AND KEEPING THE BOOKS 93

CHAPTER 29 Cash-Basis Bookkeeping 95

29.2 Checkbook System 95

(d) Financial Statements 95

29.3 Cash-Basis System 95

(e) Trial Balance 95

(f) Closing the Books at the End of the Year 95

CHAPTER 30 Simplified Accrual-Basis Bookkeeping 97

30.1 Books and Records 97

30.3 Monthly Accrual Entries 97

(b) Reversal of Accrual 97

30.4 Payroll Taxes 97

(a) Illustrative Treatment 97

CHAPTER 33 Automating the Accounting Records 99

33.2 What to Automate 99

(b) Typical Accounting Software Modules for Not-for-Profits 99

(i) General Accounting Modules 99

33.3 Selecting the Right Software 99

(b) Steps to Selecting the Right Accounting Software 99

33.4 Implementing the New System 100

CHAPTER 34 Tax-Exempt Debt 101

34.3 The SEC’s Role and Authority 101

(b) Disclosure Requirements for Municipal Issuers 101

(i) SEC Rule 15C2-12 101

34.4 Proposed Municipal Market Reforms 101

APPENDIX B The Future of the Academic Medical Center (New) Strategies to Avoid a Margin Meltdown 103

APPENDIX E Perspectives in Higher Education 2012 (New) 131

Index 163