Contributions are obviously a major source of support for many private not-for-profits. FASB SFAS 116 defines contributions as unconditional transfers of cash or other resources to an entity in a voluntary nonreciprocal transaction. According to SFAS 116, contributions are recognized as revenue in the period received at their fair value.
Conditional promises to give are not recognized as revenue until the conditions are met. Conditions, however, differ from restrictions. Conditional promises require some future action on the part of the not-for-profit organization before the asset will be transferred. Restricted contributions specify how the contributions must be used and are recognized as increases in either temporarily restricted net assets or permanently restricted net assets when the promise is received.
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Thus, a $1,000 pledge to be paid in eight months that is restricted for the purchase of library books is recorded immediately as follows because it is not conditional. However, a $9,000 pledge to be made if a famous biology professor is hired is not recorded until that action is taken.
Because contribution revenue is recognized at fair value, the estimated uncollectible portion of pledged amounts should be deducted and an allowance account established to present the receivable at its expected net realizable value.
Furthermore, promises that are not expected to be collected within one year are discounted to present value using an appropriate interest rate, such as the organization’s incremental borrowing rate or the rate of return on its investment portfolio. The receivable is subsequently adjusted toward face value of the pledge, and the amortization is classified as contribution revenue rather than interest revenue.
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For example, as of June 30, 2006, Georgetown University reported gross contributions receivable of $164.3 million, approximately $45 million of which was not expected to be received for more than one year. The balance being reported was reduced by- (1) $7.1 million to arrive at the present value of the expected cash flows and (2) an allowance for doubtful accounts of $31.3 million.
Thus, this school reported a net receivable balance of $125.9 million as a result of its unconditional pledges. A note to the financial statements indicated that the discount rate for determining present value ranged from 2.46% to 8.65% as of June 30, 2006.
Cash is not the only type of support for not-for-profits. Many organizations receive donations of materials intended either to be used by the charity itself (such as vehicles, office furniture, and computers) or to be distributed to needy groups or individuals (food, clothing, and toys). Organizations such as the Salvation Army and Goodwill Industries use these types of donations to provide a central resource essential to the charity’s ongoing operations.
Because donated supplies and other materials provide resources for the organization, it should report these contributions as support unless the organization cannot use or sell them. Although a value is sometimes apparent (for example, if a new vehicle is given), donations such as used clothing, furniture, and toys can be difficult to assess. In such cases, the use of estimates and averages is allowed provided that they reasonably approximate the results of detailed measurements.
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Assume as an illustration that a local voluntary health and welfare organization begins a drive to gather furniture and clothing for needy families living in the area.
It receives the following items:
In addition, one patron donates $32,000 in marketable securities to the charity with the stipulation that it hold the investments in perpetuity and use all income to support local needy families.
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Assuming that the charity distributed the furniture and clothing almost immediately, upon receiving them, the not-for-profit organization records the following journal entries:
In connection with the donation of marketable securities recorded here, the organization will record income, when it is eventually earned, as an increase in temporarily restricted net assets. That particular money must be used for the purpose designated by the donor. It is temporarily restricted until the purpose is met; then, it will be released from restriction and reclassified as unrestricted net assets.
Donations of Works of Art and Historical Treasures:
In 1990, the FASB issued an exposure draft that would have required a recipient to record all contributions, including works of art and museum pieces, as assets with a corresponding increase in revenues. Rarely has an accounting proposal created such adverse public reaction. The FASB was deluged with more than 1,000 letters, virtually all in opposition to the exposure draft.
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The argument against recognizing additions to such collections is that works of art and the like do not provide the same types of benefits as contributions of cash or investments. Items held for research or public exhibit create little or no direct increase in cash flows. In fact, most such items actually require continual outflows of cash for insurance, maintenance, and other preservation expenses. Thus, they are not assets in the traditional sense. Opponents of the exposure draft argued that recognizing donations as revenues would mislead potential donors into overrating the organization’s financial strength.
The opposition apparently influenced the FASB because SFAS 116 (when issued in 1993) exempted gifts of works of art, historical treasures, and similar assets. Recognition of these contributions is not required if they are- (1) added to a collection for public exhibition, education, or research; (2) protected and preserved; and (3) sold, at which time any proceeds generated will be used to acquire other collection items.
For this reason, a note to Georgetown University’s 2006 financial statements explains that the school has elected not to capitalize the cost or value of its collection of works of art, historical treasures, and similar assets. However, a note to Princeton University’s financial statements for the year ended June 30, 2006, shows a different approach- “Art objects acquired subsequent to June 30, 1973, are recorded at cost or fair value at the date of gift.”
A very subtle difference between private not-for-profit accounting and that utilized for state and local government units is evident here. The criteria for qualifying as a work of art or historical treasure are basically the same. However, the choice for private not-for-profits is between recording the revenue and the asset versus no reporting. Governments do not have the same option. Under governmental accounting, the contributed revenue must still be recorded. The reporting entity then has the choice of recording either an asset or an expense when the item in question is a work of art or historical treasure.
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If a private not-for-profit organization records art works or historical treasures as assets, the question of recording depreciation is again raised. Private not-for-profit organizations are not required to record depreciation on such assets if the lives are viewed as extraordinarily long. The assumption must be that the organization has the technological and financial ability to preserve an item and that the value is such that the organization has committed to preserve it.
Holding Contributions for Others:
Some not-for-profit organizations, such as the United Way, raise donations that will be distributed to other designated charities, or they accept gifts that must be conveyed to other specified beneficiaries. A community group might solicit donations by allowing the donor to identify the charity to be benefited. Such conveyances raise questions as to the appropriate recording to be made by the donor, the initial recipient, and the specified beneficiary. For example, assume that Donor A gives $10,000 in cash to Charity M that must then be conveyed to Beneficiary Z.
This contribution raises several reporting questions:
i. Does Donor A record an expense when it conveys the cash to the charity, or must there be an actual transfer to the eventual beneficiary before Donor A records an expense?
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ii. Does Charity M report a contribution revenue of $10,000 or only a liability to Z?
iii. At what point should Beneficiary Z recognize a contribution revenue in connection with this gift?
For a conveyance of this type, the donor normally records an expense when it conveys the property to the not-for-profit organization (Charity M) because it has relinquished control over the asset.
In this case, Donor A makes the following entry:
However, if the donor retains the right to redirect the use of the gift (has a variance power) or if the donation can be revoked, Donor A continues to hold power over the asset and should not record an expense until it relinquishes control. Until that time.
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Donor A makes the following entry instead of the previous one:
The not-for-profit organization usually records a liability to the beneficiary for such gifts (rather than a contribution revenue). The money is simply passing through the not-for-profit organization and is not creating any direct benefit.
Thus, for this example, Charity M will most likely make the following journal entry for the money received:
However, if the donor retains the right to revoke or redirect the gift. Charity M will not be certain as to whether the money will actually go to the named beneficiary.
Thus, if the donor retains such rights, the charity’s preceding entry must be changed to the following:
In this type of arrangement, Charity M records a contribution revenue and a contribution expense in only one situation. If the donor has not retained the right to revoke or redirect the gift and has given the charity the variance powers that allow it to change the beneficiary, Charity M controls the asset. In that case, Charity M should record the following entry rather than either of the previous two. Subsequently, it records an expense when the $10,000 goes to the beneficiary.
The beneficiary of such a gift eventually must record its own contribution revenue. If the donor has retained the right to revoke or redirect the gift or if the charitable organization is given variance powers to change the beneficiary, the named beneficiary makes no entry until it receives the gift. Too much uncertainty exists until then. The beneficiary really has no power to control the property’s movement until it possesses the property.
However, if the donor has not kept the right to revoke or redirect the gift and the charity has not received variance powers, the beneficiary should record the donation as soon as the donor makes the gift to the not- for-profit organization:
If Beneficiary Z is a not-for-profit organization, this final entry also needs to indicate whether the donation was unrestricted, temporarily restricted, or permanently restricted.
Contributed Services:
Donated services are an especially significant means of support for many not-for-profits. The number of volunteers working in some organizations can reach into the thousands. Charities rely heavily on these individuals to fill administrative positions and to serve in fund-raising and program activities. For example, for the year ended June 30, 2006, the American Heart Association recognized more than $87.4 million in contributed services. The notes to its financial statements indicate that nearly 89 percent of this amount related to public health education.
Not-for profits recognize contributed services as revenue but only if the service takes one of two actions:
1. Creates or enhances a nonfinancial asset.
2. Requires a specialized skill possessed by the contributor that would typically need to be purchased if not donated.
Examples of the first type include donated labor by carpenters, electricians, and masons. If these services enhance nonfinancial assets, the organization recognizes the fair value of the services as an increase in both fixed assets and contribution revenue. Examples of the second type of donation include legal or accounting services that are recognized as both an expense and a revenue when contributed. It is a common practice for professionals to bill a not-for- profit entity for the fair value of services rendered and then to deduct an amount from the balance as a contribution to the organization.
Contributed services (such as volunteer servers at a soup kitchen) are not recognized as revenue if they fail to meet either of these criteria. This is not because the services have no value but because of the difficulty in measuring that value. For example, the American Heart Association’s financial statements explain.
The Association receives services from a large number of volunteers who give significant amounts of their time to the Association’s programs, fund-raising campaigns, and management. No amounts have been reflected for these types of donated services, as they do not meet the criteria outlined.
To illustrate, assume that a certified public accountant provides accounting services that would have cost a local charity $2,000 if not donated. Assume also that a carpenter donated materials ($4,000) and labor ($3,500) to construct an addition to the charity’s facilities.
The not-for-profit organization records the following journal entries:
Donated services do not have to be limited to work done by individuals.
The 2005 financial statements for the Girl Scouts of the USA contained the following note:
The Organization receives considerable in-kind contributions primarily in the form of donated advertising on television, radio stations, and in print. The value of such in-kind contributions, based upon information provided by a third-party advertising service, approximated $51,600,000 and $45,443,000 for the years ended September 30, 2005 and 2004, respectively, and is reflected in the accompanying consolidated financial statements as contributed airtime revenue and communications expense.
As with the services referred to previously that were provided by the certified public accountant, this donation is recognized as both a contributed service revenue and an appropriate expense. Many charities receive considerable value through such donations.
Exchange Transactions:
Exchange transactions are reciprocal transfers when both parties give and receive something of value. Many not-for-profit organizations have regular charges. The local YMCA might have monthly membership dues for exercise classes and locker fees, and Christian Children’s Fund has monthly sponsorship fees.
The reminders that arrive in the mail each month look very similar, but should the accounting for both be the same? Dues and fees are frequently considered reciprocal transfers; the member typically receives benefits in the form of newsletters, journals, and use of organization facilities and services.
Because these transactions do not meet the definition of a contribution, they follow normal accrual basis accounting and are recognized as revenue when earned. However, if the paying person derives little or no benefit from the monthly charges, the conveyance is viewed (at least in part) as a contribution. Logically, the not-for-profit organization should report the excess amount as a contribution.
Recording membership dues as either earned revenue or contributed revenue causes no net effect on the financial statements but does shift the way in which the organization appears to gain support. For example, assume that a not-for-profit organization receives $5,000 in dues from its membership. These members receive a journal and several other benefits valued at $3,600.
The organization reports the receipt of this money as follows:
