CPA Exam: FAR Not-for-Profit Entities Summary

Not-for-profit entities report two classes of net assets: without donor restrictions and with donor restrictions. Board-designated amounts are still net assets without donor restrictions, because only donors can impose restrictions.

Wrong choices

• Unrestricted, temporarily restricted, and permanently restricted net assets: These three classes were replaced by two classes for NFPs.
• Operating net assets and capital net assets: These are not the required net asset classes.
• Current net assets and noncurrent net assets: Net assets are classified by donor restrictions, not by current or noncurrent.

An unconditional promise to give is recognized as a receivable and contribution revenue when the promise is received. Cash due in a future period is treated as time-restricted, so it increases net assets with donor restrictions until the time arrives.

Wrong choices

• As contribution revenue that increases net assets without donor restrictions: Because the cash is not due until a later year, the promise carries an implied time restriction.
• No revenue until the cash is received in Year 2: Unconditional promises to give are recognized when received, not when collected.
• Disclosure in the notes only, with no amount recognized: Only conditional promises are left unrecognized; this promise is unconditional.

A promise is conditional when it has a barrier that must be overcome and a right of return or release. The matching requirement is a barrier, and the donor is released if it is not met. The museum recognizes revenue only when it substantially meets the condition.

Wrong choices

• Recognize $50,000 contribution revenue with donor restrictions: A conditional promise (with a barrier and a right to walk away) is not revenue until the barrier is overcome.
• Recognize $20,000 contribution revenue in proportion to funds raised: The promise is all-or-nothing; partial progress does not create revenue.
• Recognize $50,000 contribution revenue without donor restrictions: The condition has not been met, so no revenue is recognized.

Contributed services are recognized only if they (a) create or enhance a nonfinancial asset, or (b) require specialized skills, are provided by people with those skills, and would normally have to be purchased if not donated. A CPA doing accounting work meets the second test.

Wrong choices

• Volunteers answer phones during a fundraising drive: This work does not need specialized skills and does not create a nonfinancial asset.
• Volunteers serve meals at the entity's shelter: Serving meals does not require specialized skills, so it is not recognized.
• Board members attend monthly board meetings: Board service is not a specialized skill the entity would normally buy.

Restricted gifts increase net assets with donor restrictions. When the money is spent for the stated purpose, the restriction is met and the amount is reclassified (released) to net assets without donor restrictions, where the expense is reported.

1. Restricted gifts: +100,000
2. Released when spent: −60,000
3. Net change = +40,000

Check: 40,000 is still waiting to be spent on literacy.

Wrong choices

• $100,000 increase: This ignores the release of $60,000 when the restriction was met.
• $60,000 decrease: This counts the release but leaves out the $100,000 of new restricted gifts.
• $60,000 increase: This treats the spending as the restricted increase; restricted gifts were $100,000 and $60,000 was released.

Net assets without donor restrictions increase from unrestricted contributions and from releases, and decrease by all expenses.

1. Increases: 300,000 + 70,000 = $370,000
2. Expenses: 250,000 + 40,000 + 30,000 = $320,000
3. Change = 370,000 − 320,000 = $50,000 increase

Check: the $90,000 restricted gifts are reported only in net assets with donor restrictions.

Wrong choices

• $20,000 decrease: This ignores the $70,000 released from restrictions, which adds to unrestricted net assets.
• $80,000 increase: This leaves out fundraising expenses, which are part of total expenses.
• $140,000 increase: This also counts the $90,000 of restricted contributions, which belong to the other class.

A functional classification shows why money was spent. Program services carry out the mission. Supporting services include management and general and fundraising. NFPs must also show the relationship between functional and natural expenses in one place (on the face, a separate statement, or the notes).

Wrong choices

• Salaries, rent, and supplies: These are natural classifications (expenses by type), not functional ones.
• Operating and nonoperating expenses: These are not the required functional categories.
• Restricted and unrestricted expenses: All expenses reduce net assets without donor restrictions; they are not classified by restriction.

Expenses are always reported as decreases in net assets without donor restrictions. If restricted resources pay for the expense, the amount is first released from net assets with donor restrictions, and then the expense is reported in the unrestricted column.

Wrong choices

• In whichever class provided the resources used: Spending restricted money first releases it to the unrestricted class; the expense itself is unrestricted.
• Always as decreases in net assets with donor restrictions: Expenses are never reported in the restricted class.
• Split between classes in proportion to revenue: There is no proportional split; expenses are reported in one class.

Unconditional promises to give that are due in more than one year are recognized at present value. The $42,000 is contribution revenue with donor restrictions (time restriction). In later years, the discount of $8,000 is recognized over time as additional contribution revenue, not as interest income.

Check: 42,000 + 8,000 of later accretion = 50,000 face.

Wrong choices

• $50,000: Long-term promises are measured at present value, not the face amount.
• $0: Unconditional promises are recognized when received, even if paid later.
• $8,000: This is the discount, which is recognized over time, not the revenue at the start.

For NFPs, cash contributions that donors restrict for long-term purposes (such as buying or building long-lived assets, or adding to endowments) are financing inflows. When the entity later pays to build the center, that payment is an investing outflow.

Wrong choices

• As an operating activity: Contributions restricted to long-term purposes, such as buildings, are not operating cash flows.
• As an investing activity: Investing covers the later purchase or construction of the building, not the receipt of the gift.
• Only as a noncash disclosure: Cash was received, so it is reported in the body of the statement.