Chapter 22
ACCOUNTING FOR NOT-FOR-PROFIT ORGANIZATIONS
Questions
1 The not-for-profit (NFP) organization has several characteristics:
a. Receives contributions from significant amount of resources who do not expect any sort
of monetary returns.
b. Operates without generating profit as its purpose.
c. Does not possess any ownership interests.
2 There are four categories of NFP: (1) voluntary health and welfare organizations (VHMO), (2) health
care entities, (3) colleges and universities, and (4) other NFP, such as museum and or religious
organizations. The accounting and financial reporting methods for each of each type vary; however,
first they have to determine whether the NFP is governmental or non-governmental. The governmental
NFP should follow the GASB or any other governmental accounting standards or principles while the
non-governmental NFP should follow the FASB or IFRS.
3 Net assets, revenues, expenses, gains, and losses are classified based on the existence or absence of
donor restrictions. There are three classes of net assets:
a. Permanently restricted net assets, which is a portion of net assets that never expire and cannot be
removed by the NFP entity due to donor imposed restriction of usage.
b. Temporarily restricted net assets, which is a portion of net assets that can be expire and removed
by the NFP entity if the purpose has been reached.
c. Unrestricted net assets, which is a portion of net assets that do not have any donor imposed
restriction of usage.
Revenues, gains, and losses are reported in each class of the net assets above, but expenses is only reported
at the unrestricted net assets class.
4 A conditional promise to give depends on the occurrence of a specified future and uncertain event to bind
the promisor. An unconditional promise to give depends only on the passage of time or demand by the
promisee for performance.
Organizations recognize conditional promises to give as contribution revenue and receivables when the
conditions are substantially met (in other words, when the conditional promise to give becomes
unconditional); however, they account for a conditional gift of cash or other asset that may have to be
returned to the donor if the condition is not met as a refundable advance (liability). Organizations
recognize unconditional promises to give as restricted or unrestricted contribution revenue and receivables
in the period in which the promise is received.
5 A donor-imposed condition provides that the donor will have his resources returned (or will be released
from the promise to give) if the condition is not met. A donor-imposed restriction only limits the purpose or
timing of use of the contributed assets.
6 Unconditional promises to give with payments due in the next period are reported as restricted support (net
of an appropriate allowance for uncollectible accounts) that increase temporarily restricted net assets, even
if the resources are not restricted for specific purposes.
7 When a time restriction is met, temporarily restricted net assets are reclassified as unrestricted net assets.
The entry includes a debit to temporarily restricted net assets—reclassifications out and a credit to
Copyright © 2015 Pearson Education Limited
, 22-2 Accounting for Not-for-Profit Organizations
unrestricted net assets—reclassifications in. (Different account titles, such as amounts released from
restrictions, are permitted as well.)
Copyright © 2015 Pearson Education Limited
ACCOUNTING FOR NOT-FOR-PROFIT ORGANIZATIONS
Questions
1 The not-for-profit (NFP) organization has several characteristics:
a. Receives contributions from significant amount of resources who do not expect any sort
of monetary returns.
b. Operates without generating profit as its purpose.
c. Does not possess any ownership interests.
2 There are four categories of NFP: (1) voluntary health and welfare organizations (VHMO), (2) health
care entities, (3) colleges and universities, and (4) other NFP, such as museum and or religious
organizations. The accounting and financial reporting methods for each of each type vary; however,
first they have to determine whether the NFP is governmental or non-governmental. The governmental
NFP should follow the GASB or any other governmental accounting standards or principles while the
non-governmental NFP should follow the FASB or IFRS.
3 Net assets, revenues, expenses, gains, and losses are classified based on the existence or absence of
donor restrictions. There are three classes of net assets:
a. Permanently restricted net assets, which is a portion of net assets that never expire and cannot be
removed by the NFP entity due to donor imposed restriction of usage.
b. Temporarily restricted net assets, which is a portion of net assets that can be expire and removed
by the NFP entity if the purpose has been reached.
c. Unrestricted net assets, which is a portion of net assets that do not have any donor imposed
restriction of usage.
Revenues, gains, and losses are reported in each class of the net assets above, but expenses is only reported
at the unrestricted net assets class.
4 A conditional promise to give depends on the occurrence of a specified future and uncertain event to bind
the promisor. An unconditional promise to give depends only on the passage of time or demand by the
promisee for performance.
Organizations recognize conditional promises to give as contribution revenue and receivables when the
conditions are substantially met (in other words, when the conditional promise to give becomes
unconditional); however, they account for a conditional gift of cash or other asset that may have to be
returned to the donor if the condition is not met as a refundable advance (liability). Organizations
recognize unconditional promises to give as restricted or unrestricted contribution revenue and receivables
in the period in which the promise is received.
5 A donor-imposed condition provides that the donor will have his resources returned (or will be released
from the promise to give) if the condition is not met. A donor-imposed restriction only limits the purpose or
timing of use of the contributed assets.
6 Unconditional promises to give with payments due in the next period are reported as restricted support (net
of an appropriate allowance for uncollectible accounts) that increase temporarily restricted net assets, even
if the resources are not restricted for specific purposes.
7 When a time restriction is met, temporarily restricted net assets are reclassified as unrestricted net assets.
The entry includes a debit to temporarily restricted net assets—reclassifications out and a credit to
Copyright © 2015 Pearson Education Limited
, 22-2 Accounting for Not-for-Profit Organizations
unrestricted net assets—reclassifications in. (Different account titles, such as amounts released from
restrictions, are permitted as well.)
Copyright © 2015 Pearson Education Limited
