Financial and accounting guide for not-for-profit organizations

755 Pages·2005·3.637 MB·English

by  Malvern J Gross, John H McCarthy, Nancy E Shelmon

Financial and Accounting
Guide for Not-for-Profit
Organizations
Seventh Edition
Malvern J. Gross, Jr., CPA
Retired Partner, PricewaterhouseCoopers LLP
John H. McCarthy, CPA
Partner, PricewaterhouseCoopers LLP
Nancy E. Shelmon, CPA
Partner, PricewaterhouseCoopers LLP
John Wiley & Sons, Inc.
This book is printed on acid-free paper.
Copyright © 2005 by PricewaterhouseCoopers. All rights reserved.
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Library of Congress Cataloging-in-Publication Data:
Financial and accounting guide for not-for-profit organizations /
Malvern J. Gross, Jr., ... [et al.].— 7th ed.
p. cm.
Malvern J. Gross’s name appears as main author entry in earlier ed.
Includes index.
ISBN-13 978-0-471-72445-2 (cloth)
ISBN-10 0-471-72445-9 (cloth)
1. Nonprofit organizations—Accounting. I. Gross, Malvern J.
HF5686.N56G76 2005
657'.98--dc22
2005000045
Printed in the United States of America
10 9 8 7 6 5 4 3 2 1
Contents
Chapter 1 Responsibilities for Fiscal Management 1
1.1 Keeping Financial Records for the Organization 2
1.2 Preparing Accurate and Meaningful Financial Statements 3
1.3 Implementing a Budget and Anticipating Financial Problems 4
1.4 Safeguarding Financial Assets and Providing Effective
Internal Controls 5
1.5 Complying with Federal and State Reporting and Regulatory
Requirements 6
1.6 Communicating Fiscal Information to the Board of Directors
and the Audit Committee 6
1.7 Ten Key Points to Consider in Not-for-Profit Fiscal Management 8
1.8 Conclusion 12
PART ONE KEY FINANCIAL CONCEPTS 13
Chapter 2 Accounting Distinctions between Not-for-Profit and
Commercial Organizations 15
2.1 Stewardship versus Profitability 15
2.2 Principal Areas of Accounting Differences 16
2.3 Conclusion 21
Chapter 3 Cash- versus Accrual-Basis Accounting 23
3.1 Cash and Accrual Statements Illustrated 23
3.2 Combination Cash Accounting and Accrual Statements 27
3.3 Modified Cash Basis 29
3.4 Legal Requirements 31
3.5 Conclusion 31
Chapter 4 Fund Accounting and Internal Financial Reporting 33
4.1 Fund Accounting Defined 35
4.2 Categories of Funds 37
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CONTENTS
4.3 Alternative Fund Groupings 40
4.4 Typical “Fund” Financial Statements 41
4.5 Transfers between Funds 44
4.6 Elimination of Funds for Reporting Purposes 45
4.7 Conclusion 47
Chapter 5 Fixed Assets and Depreciation 49
5.1 General Principles—Working Definitions 49
5.2 Property and Equipment—Classes and Kinds of Assets 51
5.3 Fixed Assets Where Title May Revert to Grantors 53
5.4 Collections 53
5.5 Fair Value Measurement 54
5.6 Contributions Restricted for Purchase of Fixed Assets 55
5.7 Impairment or Disposal of Long-Lived Assets 56
5.8 Conclusion and Recommendations 59
Chapter 6 Investment Income, Gains and Losses,
and Endowment Funds 61
6.1 Accounting Principles 62
6.2 Total Return Concept 72
Chapter 7 Affiliated Organizations, Pass-Through Transactions,
and Mergers 79
7.1 Types of Relationships Often Found 80
7.2 Definition of the Reporting Entity 83
7.3 Mergers of Not-for-Profit Organizations 87
Appendix 7–A Factors to be Considered in Deciding Whether
a Pass-Through Gift is Truly Revenue and Expense
to a Pass-Through Entity 92
Appendix 7–B SFAS 136—Transfers of Assets to a Not-for-Profit
Organization or Charitable Trust that Raises or Holds
Contributions of Others 95
Appendix 7–C Factors Related to Control that May Indicate that
an Affiliated Organization (A) Should Be Combined
with the Reporting Organization (R), if Other Criteria for
Combination Are Met (Per AICPA SOP 94-3) 99
Chapter 8 Contributions, Pledges, and Noncash Contributions 101
8.1 Expendable Current Support 103
8.2 Gifts-in-Kind 108
8.3 Support Not Currently Expendable 113
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CONTENTS
Appendix 8–A Checklist: Factors to Be Considered in Deciding
Whether a Particular Gift (for Operating Purposes) Should Be
Classified as Purpose-Restricted or Not 126
Appendix 8–B Checklist: Factors to Be Considered in Distinguishing
Contracts for the Purchase of Goods or Services from Restricted
Grants 128
Appendix 8–C Checklist: Factors to Be Considered in Assessing
Whether Contributed Services Are Considered to Require
Specialized Skills (per Paragraph 9 of SFAS 116, “Accounting
for Contributions Received …”) 130
Appendix 8–D Checklist: Factors to Be Considered in Determining
Whether or Not an Organization Would Typically Need
to Purchase Services if Not Provided by Donation 132
Appendix 8–E Checklist: Factors to Be Considered in Assessing
Whether a Donor Has Made a Bona Fide Pledge to a Donee 134
Appendix 8–F Checklist: Factors to Be Considered in Deciding
Whether a Gift or Pledge Subject to Donor Stipulations
Is Conditional or Restricted (as Discussed in SFAS 116,
Paragraphs 7, 22–23, 57–71, and 75–81) 136
Chapter 9 Accounting Issues Relating to Fundraising 139
9.1 Accounting for Gifts 140
9.2 Accounting for Fundraising Expenses 149
9.3 Other Tax Considerations 153
PART TWO FINANCIAL STATEMENT PRESENTATION 155
Chapter 10 Cash-Basis Financial Statements 157
10.1 Simple Cash-Basis Statement 158
10.2 Simple Statement with Last Year’s Figures and Budget 159
10.3 Combined Cash-Basis Income Statement and Balance Sheet 161
10.4 Separate Statement of Receipts and Disbursements
and Statement of Net Assets 163
10.5 Statement of Income with Certain Cash Transactions Omitted 165
10.6 Modified Cash-Basis Statements 166
10.7 Conclusion 167
Chapter 11 Accrual-Basis Financial Statements 169
11.1 Simple Accrual-Basis Statements 170
11.2 Accrual-Basis Statements—Fundraising Organization 173
11.3 Accrual-Basis Statements—International Organization 175
11.4 Conclusion 179
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CONTENTS
Chapter 12 Multiclass Financial Statements 181
12.1 FASB Statement of Financial Accounting Standards No. 117,
Financial Statements of Not-for-Profit Organizations 182
12.2 Preparation of Statement of Cash Flows 185
12.3 “Class” Financial Statements Explained 203
12.4 Columnar Format Presentation 208
12.5 A Complicated Set of Class Financial Statements 210
12.6 Summary or Condensed Statements 220
12.7 Conclusion 222
Appendix 12–A Financial Statements of Not-for-Profit
Organizations—Review Points 224
PART THREE ACCOUNTING AND REPORTING GUIDELINES 229
Chapter 13 Voluntary Health and Welfare Organizations 231
13.1 Accounting Principles 233
13.2 Accounting for Contributions 233
13.3 Accounting for Other Income 236
13.4 Accounting for Expenses 237
13.5 Accounting for Assets 237
13.6 Net Assets 238
13.7 Financial Statements 239
Appendix 13–A Checklist: Factors to Be Considered in Deciding
Whether Allocation of Joint Costs of Multipurpose Activities
(under AICPA SOP 98-2) Is Appropriate 258
Appendix 13–B Checklist: Consideration of Whether Items Might
Be Reported as Operating or Nonoperating (within the Context
of Paragraph 23 of SFAS 117) 261
Chapter 14 Colleges and Universities 263
14.1 Authoritative Pronouncements 263
14.2 The Principal Financial Statements 264
14.3 Accounting Principles 268
Chapter 15 The External Financial Statement Reporting Model
for Public Colleges and Universities and Other
Not-for-Profit Organizations Reporting under the GASB 273
15.1 Introduction 274
15.2 Background 274
15.3 Accounting and Financial Reporting
for Nonexchange Transactions 276
15.4 External Financial Reporting for Public Colleges and Universities 279
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CONTENTS
15.5 An Overview of GASB Statement No. 35: The External Reporting
Model for Public Colleges and Universities 280
15.6 Basic Financial Statements 281
15.7 Footnote Disclosures 291
15.8 Management’s Discussion and Analysis 297
15.9 Other Not-for-Profit Organizations Reporting under the GASB 298
Chapter 16 Health Care Providers 301
16.1 Introduction 302
16.2 Authoritative Pronouncements 302
16.3 Financial Statements 304
16.4 Accounting Principles 309
16.5 Additional Considerations for Tax-Exempt Debt Issuers 337
Chapter 17 Accounting Standards for Other Not-for-Profit
Organizations 343
17.1 Accounting Principles 344
17.2 Financial Statements 349
17.3 Combined Financial Statements 349
Appendix 17–A Checklist: Factors to Be Considered in Deciding
Whether a Payment Described as Membership Dues Is
Properly Recorded by the Recipient as Dues or as a Contribution 351
Chapter 18 Special Accounting Issues for Specific Organizations 355
18.1 Associations and Professional Societies 356
18.2 Churches 359
18.3 Clubs 360
18.4 Libraries 362
18.5 Museums 362
18.6 Performing Arts Organizations 364
18.7 Private Foundations 365
18.8 Religious Organizations Other Than Churches 368
18.9 Research and Scientific Organizations 369
18.10 Private Elementary and Secondary Schools 371
18.11 Public Broadcasting Stations 371
Chapter 19 The Financial Accounting Standards Board
and Future Trends in Not-for-Profit Accounting 373
19.1 Financial Accounting Standards Board 374
19.2 Trends in Not-for-Profit Accounting 380
19.3 New FASB Statements of Financial Accounting Standards
that Affect Not-for-Profit Organizations 385
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CONTENTS
19.4 Other FASB Pronouncements and Projects 388
19.5 Conclusion 391
PART FOUR CONTROLLING THE NOT-FOR-PROFIT
ORGANIZATION 393
Chapter 20 The Importance of Budgeting 395
20.1 The Budget: A Plan of Action 395
20.2 Monthly and Quarterly Budgets 401
20.3 Timely Interim Statements 404
20.4 A Five-Year Master Plan 413
20.5 Conclusion 415
Chapter 21 Avoiding Bankruptcy 419
21.1 Early Recognition of Problems 419
21.2 Remedial Action 426
21.3 Confronting Bankruptcy 431
21.4 Conclusion 432
Chapter 22 Small Organizations—Obtaining the Right Accountant 435
22.1 Level of Accounting Services Needed 436
22.2 Personality Characteristics 438
22.3 Alternatives to Accountants 439
22.4 Timing in Hiring a Replacement 441
22.5 Conclusion 441
Chapter 23 Small Organizations—Providing Internal Control 443
23.1 Reasons for Internal Control 444
23.2 Fundamentals of Internal Control 446
23.3 Some Basic Controls 446
23.4 Fidelity Insurance 452
23.5 Conclusion 453
Chapter 24 Effective Internal Accounting Control for Not-for-Profit
Organizations 455
24.1 Introduction to Internal Accounting Control 456
24.2 Elements of an Effective Internal Accounting Control System 458
24.3 Basic Internal Accounting Control System 465
24.4 Specific Nonprofit Internal Accounting Controls 473
Chapter 25 Independent Audits 483
25.1 Functions and Limitations 484
25.2 Benefits of an Independent Audit 489
25.3 Selecting a Certified Public Accountant 490
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CONTENTS
25.4 Public Accountants 492
25.5 Audit Committees 492
25.6 Conclusion 494
Appendix 25–A Checklist: Criteria for Selection of a CPA 496
Appendix 25–B Changing Role for the Audit Committee 499
Appendix 25-C Basic Template for an Audit Committee Charter 502
Chapter 26 Investments 511
26.1 Valuing Investments 511
26.2 Pooling versus Individual Investments 513
26.3 Calculating Share Values in Pooled Investments 516
26.4 Allocation of Pooled Income 520
26.5 Professional Investment Advice 521
26.6 Safeguarding Investment Securities 523
26.7 Conclusion 525
PART FIVE PRINCIPAL FEDERAL TAX AND COMPLIANCE
REQUIREMENTS 527
Chapter 27 E-Business for Not-for-Profit Organizations:
How Can Not-for-Profits Manage the Risks
to Maximize E-Business Opportunities? 529
27.1 Whether You Call It E-Business or Technology-Enabled
Business, It Still Matters 530
27.2 Ask Yourself These Questions 531
27.3 Objectives 533
27.4 How Did We Get to the Internet Economy? 534
27.5 Where Are We Today? 536
27.6 What Is Risk Management? 537
27.7 How Are Not-for-Profit Organizations Using E-Business Today? 552
27.8 How Are Academic Institutions Using E-Business? 555
27.9 What Is the Path to E-Business Success? 558
Appendix 27–A What E-Business Models Exist? 560
Chapter 28 Principal Tax Requirements 565
28.1 Organizations Exempt from Tax 566
28.2 Charitable Organizations 568
28.3 Tax Status of Charitable Organizations: Public Charity
or Private Foundation 570
28.4 Other Concerns for Charities 573
28.5 Private Foundations 585
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CONTENTS
28.6 Private Operating Foundations 589
28.7 Noncharitable Exempt Organizations 590
28.8 Registration and Reporting 595
28.9 Federal Information and Tax Return Filing Requirements 598
28.10 State Information and Tax Reporting Issues 615
Chapter 29 Audits of Federally Funded Programs 617
29.1 Basic Requirements 617
29.2 Requirements and Definitions 619
29.3 Responsibilities of the Receiving Organization 623
29.4 What to Expect from the Audit 627
29.5 Conclusion 630
PART SIX SETTING UP AND KEEPING THE BOOKS 631
Chapter 30 Cash-Basis Bookkeeping 633
30.1 Three Steps in a Bookkeeping System 633
30.2 Checkbook System 634
30.3 Cash-Basis System 639
30.4 Conclusion 650
Chapter 31 Simplified Accrual-Basis Bookkeeping 651
31.1 Books and Records 652
31.2 Chart of Accounts 653
31.3 Monthly Accrual Entries 655
31.4 Payroll Taxes 661
31.5 Fixed-Asset Register and Depreciation Schedule 663
31.6 Investment Ledger 669
31.7 Conclusion 669
Chapter 32 Full Accrual-Basis Bookkeeping 671
32.1 Books and Records 671
32.2 Chart of Accounts 674
32.3 Sales Register 674
32.4 Accounts Receivable Subsidiary Ledger 677
32.5 Cash Receipts Book 681
32.6 Accounts Payable Register 681
32.7 Cash Disbursements Book 683
32.8 Monthly Accrual Entries 685
32.9 Conclusion 687
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