Accounting for Contributions and Endowment Funds-part Ii
| Publication year | 1996 |
| Pages | 59 |
| Citation | Vol. 25 No. 11 Pg. 59 |
1996, November, Pg. 59. Accounting for Contributions and Endowment Funds-Part II
Part I, entitled "Understanding Nonprofit Financial Statements," appeared in the August 1996 issue at page 41. It focused on the format of the new financial statements. This Part II focuses on the accounting for contributions, pledges, and endowment funds, hi this article, the term "nonprofit" is used in a general sense; the term "not-for-profit" indicates a more precise terminology used by the accounting standard setting organizations.
In June 1993, the FASB issued Standard No. 116, Accounting for Contributions Received and Contributions Made. The Standard applies to contributions of cash and other assets, including "promises to give" (pledges). In general, the Standard requires nonprofit organizations to recognize contributions received (including pledges) as revenues in the period received. The Standard must be followed for external financial statements that purport to be in accordance with generally accepted accounting principles, for fiscal years beginning after December 15, 1994, except for organizations with less than $5 million in total assets and less than $1 million in annual expenses. For those smaller organizations, the effective date is for fiscal years beginning after December 15, 1995.
Most nonprofit organizations in Colorado have fiscal years of December 31 or June 30. Accordingly, the new Standard will affect the financial statements of larger nonprofit organizations for the first time for the years ending December 31, 1995, or June 30, 1996. Nonprofit organizations have had the option of implementing the Standards earlier than the effective dates, but relatively few nonprofit organizations have done so.
Prior to the issuance of Standard No. 116, nonprofit organizations accounted for contributions and pledges in a variety of ways. Many organizations did not record any pledges in their financial statements. Other organizations recorded pledges as both assets and liabilities on the balance sheet, effectively deferring the recognition of revenue until the cash was received. Cash contributions that were restricted by the donor were recorded as revenue by some organizations. Other non-profits recorded restricted cash contributions as liabilities until the restrictions were met.
Standard No. 116 creates uniformity in the accounting for contributions by requiring all not-for-profit organizations to record contributions, including pledges, as revenue when received. This is a very controversial requirement because not-for-profit organizations will be recording as assets and revenue amounts that are (1) restricted for specific purposes, (2) receivable in the future, or (3) both. In the view of some, this may lead some users of financial statements to draw erroneous conclusions about the financial health of a nonprofit organization.
The Standard applies to "contributions," and the definition is therefore important. Paragraph 5 of the Standard states:
A contribution is an unconditional transfer of cash or other assets to an entity or a settlement or cancellation of its liabilities in a voluntary nonreciprocal transfer by another entity acting other than as an owner. Other assets include securities, land, building, use of facilities or utilities, materials and supplies, intangible assets, services, and...
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