AFAR – NOT FOR PROFIT ORGANIZATIONS

LECTURE NOTES
FINANCIAL STATEMENTS REQUIRED FOR PRIVATE NOT
Private Sector NPOs are governed currently by FASB
FOR PROFIT ORGANIZATIONS.
Sfases and by AICPA Audit Guides. The FASB standards
1. Statement of financial position
are SFAS 116, 117, 124, and 136. IASB is yet silent on
2. Statement of activities
this area.
3. Statement of cash flows
4. Specific for Voluntary Health and Welfare The following items summarize further some important
Organizations – Statement of Functional Expenses aspects of not-for-profit organizations from the general
viewpoint:
Statement of Financial position – shows assets and
1. Contributions are reported as revenue in the year
liabilities similar to commercial accounting. Net assets
received even though there are donor-imposed use
are classified into:
or time restrictions on the contributions. Donor-
1. Unrestricted – no donor imposed restrictions
restricted contributions are revenues in the year it is
2. Temporarily restricted – with donor imposed
received, not in the year it is spent.
stipulations ( expiration of time and fulfillment of use
2. All expenses are reported as unrestricted on the
restrictions)
Statement of Activities. This means that expenses
3. Permanently restricted – with donor imposed
are deducted only from unrestricted revenues.
restrictions that do not expire nor can be removed by
3. A reclassification to unrestricted net assets is
NPO activity.
necessary whenever net assets temporarily restricted
Statement of Activities – shows revenues, expenses, as to use and/or time is expended and/or has
gains and losses as well as reclassification among the expired. A Private nonprofit may show in its
different types of net assets. The change in net assets Statement of Activities temporarily restricted
for each type is required. Expenses are required revenues as unrestricted if received and spent in the
(reported) only in unrestricted net assets. same period.
4. A multi-year pledge should be reported at its present
Statement of Cash Flows – similar to the Cash Flows
value. If there is a time restriction on the pledge, the
prepared in commercial accounting.
pledge should be reported as a temporarily restricted
Specific funds used by not for profit organizations: revenue in the year the pledge is given.
1. Unrestricted fund – include all the resources that are 5. Net assets under the control of the governing board
available for use by authority of the Board of are reported as unrestricted net assets.
Directors (even though designated for specific 6. Contributed services which would be purchased if not
purposes) and are not restricted by donors. donated, and which require (1) performance by a
2. Restricted fund – accounts for assets available for specialist, and (2) enhancement of a non-financial
current use but are not derived from the operations asset, will be recorded as an increase in both
of the NPO’s. These assets are transferred to expenses and contributions.
unrestricted funds at the time the designated 7. Generally, private nonprofits use fund accounting.
expenditure is made. The financial statements, however, focus on the
3. Endowment fund organization as a whole so as to enhance the
a. Permanent – principal is to be maintained relevance, understandability, and comparability of
indefinitely in revenue providing investments these statements to external users.
b. Term – principal may be expended after passage 8. GAAP require classification of nonprofit organization’s
of a period of time net assets and revenues, expenses, gains and losses
c. Quasi – established by Board of Directors under based on the existence or absence of donor-imposed
its control restrictions. They require that the amount of each of
4. Agency fund – used to account for assets held by three classes of net assets be displayed in a
NPO as a custodian. statement of financial position and that the amounts
5. Others; like annuity funds, loss funds (for colleges) of change in each such type of net assets be
and plant funds. displayed in the statement of activities.
9. A liability (not revenue) is recorded when the
Other important considerations:
reporting entity acts as an agent or trustee. A
1. Revenues and gains come from own principal and
recipient of assets who is an agent or trustee has
auxiliary activities or from donors. Revenues are
little or no discretion in determining how the assets
accrued at full rates even though some of it perhaps
transferred will be used. It means the recipient NPO
may be waived.
will not have variance power as to how the net assets
2. Contributions – contributions of cash and other
received will be disposed, and is therefore treated as
assets are recognized when received and credited to
an agency transaction.
contributions revenue (Restricted or Unrestricted).
10. An entity need not recognize the contributions of
Contributed services and facilities are recognized
works of art and historical artifacts if the collection is
both as expense and contributions revenues, net of
held for public exhibition rather than financial profit,
any cost paid related thereto.
cared for and preserved, and, if sold, the proceeds
3. Pledges - unconditional pledges are recognized as
are used to acquire other items for collection.
receivables and contributions (restricted or
11. Quasi-endowment funds are established by the
unrestricted). Appropriate provisions for doubtful
governing board using unrestricted net assets.
pledges are also set up.
Therefore, the assets in the quasi-endowment would
4. Expenses and losses – all expenses of the NPO are
be included in the unrestricted net assets category,
recognized in the unrestricted fund. Expenses can be
even if the governing board would have imposed use
classified into.
or time restrictions over it.
a. Program – activities that result in the distribution
12. A transfer of assets with a conditional promise to
of goods and services to beneficiaries.
contribute them shall be accounted for as a
b. Supporting – all other activities other than
refundable advance (a liability) until the conditions
program, fund raising and membership
have been substantially met. The conditions have
development.

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EXCEL PROFESSIONAL SERVICES, INC.

been substantially met when the possibility that they interrelated, the recipient entity should record an
will not be met is remote. increase in assets and liabilities as a result of the
13. Expiration of donor-imposed restrictions that donation.
simultaneously increase one type of net assets and 17. Contributions from a resource provider is reported as
decrease another should be reported as revenue if (1) the recipient entity is granted variance
reclassifications in the statement of activities. power by the resource provider or (2) the recipient
Reclassifications are reported as “net assets released entity and the beneficiary are financially interrelated
from restrictions.” organizations. Variance power means the ability of
14. All investments in debt securities should be measured the recipient organization to redirect the resources
at fair value in the statement of financial position. transferred to it by the resource provider to other
15. Investments in equity securities that is neither beneficiaries.
classified as Investment in Associate or as 18. Gifts of long-lived assets, in the absence of donor-
Investment in Subsidiary shall be reported at fair imposed restrictions, may adopt a policy of either (1)
value in the statement of financial position. treating the donation as restricted support over the
16. When a resource provider transfers assets to a remaining estimated useful life of the asset, or (2)
nonprofit entity and (1) does not grant the recipient treating the donated asset as unrestricted support by
organization variance power and (2) the recipient adopting an accounting policy which does not imply a
organization and the beneficiaries are not financially time restriction on such gifts.

NOT FOR PROFIT ORGANIZATION

STATEMENT OF FINANCIAL POSITION
DECEMBER 31, 2015 AND 2016
December 31, 2016 December 31, 2015
Assets P 292,220 P 278,480
Liabilities and net assets
Liabilities P 10,630 12,340
Net assets
Unrestricted 115,228 103,670
Temporarily restricted 24,342 25,470
Permanently restricted 142,020 137,000
Total net assets 281,590 266,140
Total liabilities and net assets P 292,220 P 278,480

NOT FOR PROFIT ORGANIZATION

STATEMENT OF ACTIVITIES
YEAR ENDED DECEMBER 31, 2016
UNRESTRICTED TEMP. REST. PERM. REST. TOTAL
Revenue, Gains, Other Support and
Reclassification
Contributions P 8,640 P 8,110 P 280 P 17,030
Fees 5,400 5,400
Income on Long Term Investments 5,600 2,580 120 8,300
Other investment income 850 850
Net realized and unrealized gain on LTI 8,228 2,952 4,620 15,800
Other 150 150
Net assets released from restrictions
Satisfaction of program requirement 11,990 (11,990) -
Satisfaction of equipment acquisition 1,500 ( 1,500) -
Expiration of time restriction 1,250 ( 1,250) ______ ______
Total revenues, gains, other support and P 43,608 ( 1,098) 5,020 P 47,530
Reclassification
Expenses and losses
Program A 13,100 13,100
B 8,540 8,540
C 5,760 5,760
General & Management 2,420 2,420
Fund Raising 2,150 ______ ______ 2,150
Total expenses 31,970 - - 31,970
Fire loss 80 80
Actuarial loss _____ 30 ______ 30
Total expenses and losses 32,050 30 ______ 32,080
Changes in net assets 11,558 ( 1,128) 5,020 15.450
Net assets, January 1, 2016 103,670 25,470 137,000 266,140
Net assets, December 31, 2016 115,228 24,342 142,020 281,590

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EXCEL PROFESSIONAL SERVICES, INC.
TRUE OR FALSE

1. A statement of financial position shows assets and 14. A pledge represents income derived from other
liabilities similar to commercial accounting. Net related activities, other than service revenues of
assets are classified into unrestricted, temporarily nonprofit organizations.
restricted and permanently restricted. 15. Unrestricted fund includes all assets of a nonprofit
2. Temporarily restricted funds include resources that organization that are available for use as authorized
are available for use by authority of the Board of by the board of directors
Directors but designated for specified purposes 16. The statement of cash flows for a private not-for-
3. Under a pure endowment fund a principal may be profit hospital should report cash flows according to
expended on the basis of passage of time. operating, investing and financing activities.
4. Contributed services are always recognized both as 17. Philippine Museum, a private nonprofit organization,
expenses and contributions revenues. has both regular and term endowments. On the
5. In quasi-endowment fund the principal is to be museum’s statement of financial position, they are
maintained indefinitely in revenue providing classified as temporarily restricted and permanently
investments and are therefore permanently restricted respectively.
restricted. 18. A storm broke glass windows in the building of New
6. On the statement of activities for a private not for Life Meditators, a not-for-profit religious organization.
profit performing arts center, expenses should be A member of the congregation, a professional glazier,
deducted from restricted revenue only. replaced the windows at no charge. In New Life
7. On the statement of financial position for a private Meditators’ statement of activities, the breakage and
not for profit performing arts center, expenses should replacement of the windows should be reported as an
be deducted from unrestricted revenue only increase in expenses and decrease in contributions
8. A nonprofit organization is organized for the benefit revenue.
of the public as well as for the benefit of an individual 19. On November 30, 2014, Ms X, an alumnus of ABC
proprietor, or a group of partners or stockholders. School, a private, not-for-profit high school,
9. The concept of net income can be a primary objective contributed P30,000, with the stipulation that the
of organizing a nonprofit organization in certain donation be used for faculty travel expenses during
circumstances. 2015. During 2015, ABC spent all of the donation in
10. Program activities are goods and services provided to accordance with Mrs. X’s wishes. For the year ended
beneficiaries or customers that fulfill the purpose of December 31, 2015. Unrestricted net assets will
the organization. decrease.
11. An endowment fund is used to account for assets 20. United Hope a private not-for-profit voluntary health
held by a nonprofit organization as a custodian. The and welfare organization, received the following
assets are disbursed only as instructed by their contributions in 2014:P50,000 form donors who
owner. stipulated that the money not be spent until 2015
12. In the statement of financial position, the balances of and P10,000 from donors who stipulated that the
the Contractual Adjustments account and the contributions be used for the acquisition of
Expenditures – Student Aid account are to be equipment, none of which was acquired in 2014. Both
deducted from the total service revenues to compute contributions increased unrestricted net assets for
the net service revenue for the month. the year ending December 31, 2014.
13. Contributed services and facilities are debited to an
unrestricted fund as Salary Expense for contributed
services and Rent Expense for contributed facilities

MULTIPLE CHOICE

1. A statement of functional expenses is required for b. Permanently restricted Permanently restricted

which one of the following private nonprofit c. Unrestricted Temporarily restricted
organizations? d. Temporarily restricted Temporarily restricted
a. Colleges.
b. Hospitals. 4. Kerry College, a private not-for-profit college, received
c. Voluntary health and welfare organizations. P25,000 from Ms. Mary Smith on April 30, 2015. Ms.
d. Performing arts organizations. Smith stipulated that her contribution be used to
support faculty research during the fiscal year
2. The statement of financial position (balance sheet) for beginning on July 1, 2016 On July 15, 2016,
Founders Library, a private nonprofit organization, administrators of Kerry awarded research grants
should report separate peso amounts for the library’s totaling P25,000 to several faculty in accordance with
net assets according to which of the following the wishes of Ms. Smith. For the year ended June 30,
classifications? 2016, Kerry College should report the P25,000
a. Unrestricted and permanently restricted. contribution as
b. Temporarily restricted and permanently restricted. a. Temporarily restricted revenues on the statement
c. Unrestricted and temporarily restricted. of activities.
d. Unrestricted, temporarily restricted, and b. Unrestricted revenue on the statement of
permanently restricted. activities.
c. Temporarily restricted deferred revenue on the
3. Chicago Museum, a private nonprofit organization, has statement of activities.
both regular and term endowments. On the museum’s d. An increase in fund balance on the statement of
statement of financial position (balance sheet), how financial position.
should the net assets of each type of endowment be 5. Child Care Center, a nonprofit private entity, receives
reported? contributions from various sources during the current
Term endowments Regular endowments year. The following cash amounts were received in
a. Temporarily restricted Permanently restricted 2016:
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 P2,000 restricted by the donor to be used for Gift shop revenue 25,000
meals for the children; Interest revenue restricted by
P1,500 received for subscriptions to a monthly donor for acquisition of equipment 50,000
child-care magazine with a fair value to
subscribers of P1,000. The hospital’s statement of cash flows for 2016 would
P10,000 to be used only upon completion of a report an increase in operating activities of:
new Playroom that was only 50% a. P325,000 c. P350,000
complete as of the end of 2016. b. P375,000 d. P300,000

What amount should be recorded as contributions 9. A private NPO receives P300 from a donor. The donor
revenue for 2016: receives 2 tickets to a theater show and an
a. P2,000 c. P10,000 acknowledgment in the theater program. The tickets
b. P2,500 d. P11,000 have a fair value of P200. What amount is recorded as
contributions revenue?
6. Albert University, a private not-for-profit university, a. P0 c. P200
had the following cash inflows during the year ended b. b. P100 d. P300
June 30, 2016:
I. P500,000 from students for tuition. 10. Rose Smith made a cash donation for a specific
II. P300,000 from a donor who stipulated that the purpose in December 2016 to United Ways, a private
money be invested indefinitely. nonprofit organization that raises contribution for
III. P100,000 from a donor who stipulated that the others. Assume United Ways was (1) not granted
money be spent in accordance with the wishes of variance power by Ms Smith over her donation and (2)
Albert’s governing board. the beneficiaries of the donation are not financially
related to United Ways. How would United
On Albert University’s statement of cash flows for the Ways account for the donation?
year ended June 30, 2016, what amount of these cash a. As an increase in contributions revenue
flows should be reported as operating activities? b. As an increase in liabilities
a. P900,000 c. P800,000 c. As either an increase in contributions revenue or
b. P400,000 d. P600,000 liabilities
d. As neither an increase in contributions revenue
7. Worldwide Foundation, an nonprofit private entity, nor liabilities
received a cash donation for a specific purpose in
December, 2015 from Herold Smith. World-wide 11. Sea Lion Park, a private nonprofit zoological society,
Foundation is controlled by Worldwide Helpers, a received contributions restricted for research totaling
nonprofit entity that raises resources for others. The P50,000 in 2015. None of the contributions were spent
resources of Worldwide Foundation are used for the in 2014. In 2016, P35,000 of the contributions were
benefit of Worldwide Helpers. How should Worldwide used to support the research activities of the society.
Foundation account for the cash donation? The net effect on the statement of activities for the
a. As an increase in contributions revenue year ended December 31, 2016, for Sea Lion Park
b. As an increase in liabilities would be.
c. As either an increase in contributions revenues or a. P15,000 increase in temporarily restricted net
liabilities assets
d. As neither an increase in contributions revenue b. P35,000 increase in temporarily restricted net
nor liabilities assets
c. P35,000 increase in unrestricted net assets
d. P35,000 decrease in temporarily restricted net
8. Darlin Hospital, a private NPO had the following cash assets.
receipts for the year ended December 31, 2016:
Patients service revenue P300,000

SUGGESTED SOLUTION NOT FOR PROFIT

I. TRUE OR FALSE
1. True
2. False. All funds under the control of the Board of Directors are unrestricted.
3. False. Only the action of the donor can release it from permanent restrictions.
4. False. There are requisites: (1) must be performed by professionals; and (2) must enhance the value of a non-
monetary asset.
5. False. Unrestricted net assets, under the control of the NPO’s board of directors.
6. False. All expenses are deducted from unrestricted revenues only.
7. False. This type of information is shown in the Statement of Activities/Operations.
8. False. It is established only for the benefit of the public or for a class of society but never for an individual
proprietor, or a group of partners, nor for a group of stockholders because it is never intended for profit.
9. False. Same explanations already mentioned.
10. True
11. False. As a custodian (i.e. received for other beneficiaries), then recipient NPO shall use the Agency Fund.
12. False. This information is shown in the Statement of Operations rather than in the Statement of Financial
Position.
13. True. It is assumed it meets the requirements.
14. False. Neither; it is a pledged contribution revenue.
15. True.

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 16. True.
17. False. Regular endowments are for permanently restricted, while term endowments are for temporarily restricted.
18. False. It will be recognized as both an increase in expense and in contributions revenue
19. False. It will have no effect on unrestricted net assets because the release from restriction will be offset by the
rule that all expenses will be recognized as a decrease in unrestricted revenues only. It will decrease temporarily
restricted because of the release from restriction.
20. False. Both are temporarily restricted contributions.

II. MULTIPLE CHOICE

1. C
2. D
3. A
4. A
5. B
6. D
7. A
8. A
9. B
10. B
11. D

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