Both Statements were issued in June 1993. They were effective for fiscal years beginning after December 15, 1994 (e.g., for a June 30 year-end entity, for the fiscal year ending June 30, 1996). Adoption of No. 117 must be made retroactively; adoption of No. 116 can be made either retroactively or prospectively. Copies are available from the FASB Order Department: P.O. Box 5116, Norwalk, CT 06856.

Statement No. 117 requires organizations to present aggregated financial data: total assets, liabilities, net assets (fund balances), and change in net assets. Some not-for-profits already do, but many have not done this in the past. Organizations are free to present data disaggregated by classes of net assets (corresponding to funds), but, except for donor-restricted revenue, net assets, and change in net assets, no detail by class is explicitly required.

Three classes of net assets are defined: unrestricted, temporarily restricted, and permanently restricted. Net assets of the two restricted classes are created only by donor-imposed restrictions on their use. All other net assets, including board-designated or appropriated amounts, are legally unrestricted, and must be reported as part of the unrestricted class, although they may be separately identified within that class as designated if the organization wishes.

Permanently restricted net assets will consist mainly of amounts restricted by donors as permanent endowment. Some organizations may also have certain capital assets on which donors have placed perpetual restrictions. Temporarily restricted net assets will often contain a number of different types of donor-restricted amounts: unspent purpose-restricted expendable gifts for operating purposes, pledges payable in future periods, unspent explicitly time-restricted gifts, unspent amounts restricted for the acquisition of capital assets, certain capital assets, unmatured annuity and life income funds, and term endowments.

One requirement that is a significant change for many organizations is the reporting of all expenses in the unrestricted class, regardless of the source of the financing of the expenses. As expendable restricted revenue will be reported in the temporarily restricted class, when these amounts are spent, a reclassification (transfer) will be made to match the restricted revenue with the unrestricted expenses.

A second requirement is that all capital gains or losses on investments and other assets or liabilities will be reported in the unrestricted class, no matter which class holds the underlying assets/liabilities, unless there are explicit donor restrictions, or applicable law, which require the reporting of some or all of the capital gains/losses in a restricted class. This practice will often have the effect of increasing the reported unrestricted net asset balance (and decreasing the other net asset balances), compared with previous reporting principles.

All organizations must report expenses by functional categories (program, management, fund-raising). Voluntary health and welfare organizations must also report expenses by natural categories (salaries, rent, travel, etc.) in a matrix format; other organizations are encouraged to do so. Reporting in functional categories is new for some organizations, mainly those that do not raise significant amounts of contributions from the general public, such as trade associations, country clubs, and many local churches.

A new financial statement for many organizations is a statement of cash flows, showing where the organization received and spent its cash. Cash flows will be reported in three categories: operating flows, financing flows (including receipt of nonexpendable contributions), and investing flows. This statement has been required for businesses for several years by SFAS No. 95, which should be consulted for further information.

Statement No. 95 permits either of two basic methods for preparing the statement of cash flows: the "direct" or the "indirect" method. Briefly, the indirect method starts with the excess of revenues over expenses and reconciles this number to operating cash flows. The direct method reports operating cash receipts and cash disbursements, directly adding these to arrive at operating cash flows. The authors believe the direct method is much more easily understood by readers of financial statements, and thus recommends its use.

Much of the information used to prepare a statement of cash flows is derived from data in the other two primary financial statements, some of it from the preceding year's statements. Thus, when planning to prepare this statement for the first time, it is helpful to start a year in advance so that the necessary prior-year data is available when needed.

Sample financial statements, illustrating formats that contain the disclosures required by Statement No. 117, are shown in Appendix C to the Statement.

This document establishes one set of standards for all recipients of contributions, replacing the four different standards in the four AICPA audit guides. It also sets standards for donors of gifts; no explicit standards have heretofore existed, except for private foundations. For-profit organizations are also covered by this part of the document.

Certain types of transactions are not considered contributions: transactions that are in substance purchases of goods or services (even though they may be called grants) and transactions in which a recipient of a "gift" is merely acting as an agent or intermediary for, and passes the gift on to, another organization. Unfortunately, there is not much specific guidance for how to distinguish these two situations from real contributions; organizations will have to use judgment on a case-by-case basis.

SFAS No. 116 explicitly introduces a new concept into accounting for contributions: the conditional promise to give (pledge). This concept has implicitly existed for a long time, but has never before been articulated so clearly. A conditional pledge is one that depends on the occurrence of some specified uncertain future event to become binding on the pledgor. Examples of such events are the meeting of a matching requirement by the pledgee, or natural or man-made disasters such as a flood or fire. The mere passage of time is not a condition. Note that the concept of a condition is completely separate from that of a restriction. Conditions relate to events that must occur prior to a pledge becoming binding on the pledgor; restrictions relate to limits on the use of a gift after receipt.

Unconditional pledges are recorded at the time verifiable evidence of the pledge is received. Conditional pledges are not recorded until the condition is met, at which time they become unconditional. Pledges payable in future periods are considered implicitly time-restricted and are reported in the temporarily restricted class of net assets until they are due. Long-term pledges are also discounted to their present value to reflect the time value of money (in accordance with Accounting Principles Board Opinion No. 21); this is a new practice for most organizations. Accretion of the discount to par value will be reported as contribution income.

All contributions are reported as revenue, in the class of net assets (unrestricted, temporarily restricted, or permanently restricted) appropriate to any donor restrictions on the gift, at the time of receipt of the gift. This applies to unconditional pledges as well as cash gifts. The presence or absence of explicit or implicit donor-imposed time or purpose restrictions on the use of a gift do not affect the timing of revenue recognition, only the class in which they are reported. This principle is a significant change in practice for many organizations, which have heretofore deferred donor-restricted gifts and all pledges until a later period when the restriction was met or the pledge collected. The effect is to report higher net asset amounts, mainly in the temporarily restricted class, than under previous principles. This principle has generated a lot of controversy between those who favor retaining the previous deferral method and advocates of the new standard.

Accounting by donors for pledges and other contributions will follow the same principles with respect to recognition and timing as the donees, though of course all the accounting entries are reversed: expense instead of revenue, pledges payable instead of pledges receivable. Also, for-profit donors do not categorize their financial reports into classes because this concept only applies to not-for-profits.

The reporting of the value of donated services of volunteers has changed for many organizations under SFAS No. 116. The new standard requires reporting such a value if either of two criteria is met: (1) the services create or enhance nonfinancial assets, or (2) the services require specialized skills, are provided by persons possessing those skills, and would typically otherwise have to be purchased by the recipient if volunteers were not available. If neither criterion is met, the services may not be recorded. Organizations need to consider which of their volunteer services meet either of the two criteria.

Another matter that was controversial during the process of developing SFAS No. 116 was the question of accounting for museum collections. An early FASB proposal was to require capitalization of such assets. After much discussion of the subject, FASB agreed to allow noncapitalization of these items, if certain conditions relating to the items were met and certain footnote disclosures made.

The AICPA issues technical practice aids to address questions it receives from practitioners. Preparers of not-for-profit organization financial statements should be familiar with these Technical Practice Aids (TPAs) that are included in the AICPA publication Technical Practice Aids at Section 6140.

Important aids that relate to the implementation of SFAS Nos. and 117 include the following:

The FASB issued Statement No. 141, "Business Combinations," and specifically excluded not-for-profit organizations. SFAS No. 142, "Goodwill and Intangible Assets," delays implementation for not-for-profit organizations until the FASB issues a statement on the combination of not-for-profit organizations.

The FASB tentatively determined that not-for-profit organizations should follow SFAS Nos. 141 and 142 except for circumstances in which a different approach is appropriate because of circumstances unique to not-for-profit organizations. Currently, not-for-profit organizations are required to account for business combinations and acquired intangible assets following the guidance in APB Opinion No. 16, "Business Combinations," and APB Opinion No. 17, "Tangible Assets." However, practice varies considerably and this results principally from combinations where there is no exchange of consideration. Many combinations of not-for-profit organizations have been accounted for using the pooling-of-interest method. The elimination of that method in SFAS No. 141 requires the development of clear guidance for not-for-profit organizations.

The FASB has tentatively concluded that a standard when issued will require identification of the acquiring organization in all combinations. The standard will include criteria to help identify the acquiring organization.

The assets and liabilities, including intangible assets, of the acquired organization will then need to be valued in accordance with the criteria applicable to business organizations in SFAS Nos. 141 and 142.

For combinations with no exchange of consideration, the acquiring organization will record the acquisition as receipt of a contribution in accordance with SFAS No. 116 at fair value.

In situations in which the fair value of the liabilities exceeds the fair value of the assets, the FASB has tentatively concluded that the difference should be accounted for as goodwill. However, the FASB is expected to reconsider this conclusion prior to the issuance of an exposure draft. Alternative approaches would appear to be to reduce the value of acquired assets so as not to exceed the value of the liabilities or to record the excess as an expense at the time of the combination.

For combinations in which there is an exchange of consideration, the FASB would require that SFAS No. 141 be followed. However, if the consideration is only part payment, the fair value of all assets and liabilities would need to be computed and the difference reported as a contribution.

A major difference for most combinations of not-for-profit organizations is the adjustment of values of assets and liabilities of the acquired organizations to fair value and the requirement to record the value of acquired intangible assets, including the value of trademarks and donor lists.

The FASB has not completed its deliberations, and an exposure draft is not expected until the first quarter of 2003.

The FASB has been considering a proposed Statement that would require business enterprises and not-for-profit organizations that control other entities to include those subsidiaries in their consolidated financial statements. "Control" would be defined as the nonshared decision-making ability of one entity to direct the policies and management that guide the ongoing activities of another entity so as to increase its benefits and limit its losses from that other entity's activities.

During 2001, the FASB determined that it had insufficient support to complete this project. FASB members had difficulty agreeing on the definition of "control." Accordingly, the FASB has suspended its work in this area. Not-for-profit organizations cannot expect new guidance in the near future, so the current rules on SOP 94-3 remain applicable (see Section 35.2(k), "Related Organizations.")

This section discusses simple unrestricted cash gifts. Unrestricted gifts in other forms, such as pledges, gifts of securities, and gifts of equipment and supplies, are discussed in later sections. The general principles discussed here apply to all unrestricted gifts, in whatever form received.

Historical Practices. All unrestricted contributions should be recorded in the current unrestricted fund. This principle is fairly well accepted and followed by most not-for-profit organizations. What was not uniformly followed is a single method of reporting such unrestricted contributions. Some organizations followed the practice of adding unrestricted contributions directly to the fund balance either in a separate Statement of Changes in Fund Balances or in the fund balance section where a combined Statement of Income, Expenses, and Changes in Fund Balances was used. Others reported some or all of their contributions directly in an unrestricted investment fund, and worse still, some reported unrestricted contributions directly in the endowment fund as though such amounts were restricted. The result of all these practices was to make it difficult for the readers of the financial statements to recognize the amount and nature of contributions received. Sometimes this was done deliberately in an attempt to convince the readers that the organization badly needed more contributions.

Accounting for Unrestricted Contributions. All unrestricted contributions should be reported in the unrestricted class of net assets in a Statement of Income and Expenses or, if a combined Statement of Income, Expenses, and Changes in Net Assets is used, such unrestricted contributions should be shown before arriving at the "Excess of income over expenses" caption. It is not acceptable to report unrestricted contributions in a separate Statement of Changes in Net Assets or to report such gifts in a restricted class of net assets.

Bargain Purchases. Organizations are sometimes permitted to purchase goods or services at a reduced price that is granted by the seller in recognition of the organization's charitable or educational status. In such cases, the seller has effectively made a gift to the buyer. This gift should be recorded as such if the amount is significant. For example, if a charity buys a widget for $50 that normally sells for $80, the purchase should be recorded at $80, with the $30 difference being reported as a contribution.

It is important to record only true gifts in this way. If a lower price is really a normal discount available to any buyer who requests it, then there is no contribution. Such discounts include quantity discounts, normal trade discounts, promotional discounts, special offers, or lower rates (say, for professional services) to reflect the seller's desire to utilize underused staff or sale prices to move slow-moving items off the shelves.

Current restricted contributions are contributions that can be used to meet the current expenses of the organization, although restricted to use for some specific purpose or during or after some specified time. An example of the former would be a gift "for cancer research" (a "purpose restriction") and, of the latter, a gift "for your 20XX activities" (a "time restriction"). In practice, the distinction between restricted gifts and unrestricted gifts is not always clear. In many cases, the language used by the donor leaves doubt as to whether there really is a restriction on the gift.

Current restricted contributions cause reporting problems, in part because the accounting profession took a long time to resolve the appropriate accounting and reporting treatment for these types of gifts. The resolution arrived at is controversial because many believe it is not the most desirable method of accounting for such gifts.

The principal accounting problem relates to the question of what constitutes "income" or "support" to the organization. Is a gift that can only be used for a specific project or after a specified time "income" to the organization at the time the gift is received, or does this restricted gift represent an amount which should be looked on as being held in a form of escrow until it is expended for the restricted purpose (cancer research in the above example), or the specified time has arrived (20XX in the above example)? If it is looked on as something other than income, what is it—deferred income or part of a restricted net asset balance?

If a current restricted gift is considered income or support in the period received—whether expended or not—the accounting is fairly straightforward. It would be essentially the same as for unrestricted gifts, described earlier, except that the gift is reported in the temporarily restricted class rather than in the unrestricted class of net assets. But if the other view is taken, the accounting can become complex.

The approach required by SFAS No. 116 is to report a current restricted gift as income or support in full in the year received, in the temporarily restricted class of net assets. In this approach, gifts are recognized as income as received and expenditures are recognized as incurred. The unexpended income is reflected as part of temporarily restricted net assets.

Observe, however, that in this approach, a current restricted gift received on the last day of the reporting period will also be reflected as income, and this would increase the excess of support over expenses reported for the entire period. Many boards are reluctant to report such an excess in the belief this may discourage contributions or suggest that the board has not used all of its available resources. Those who are concerned about reporting an excess of income over expenses are therefore particularly concerned with the implications of this approach: a large unexpected current restricted gift may be received at the last minute, resulting in a large excess of income over expenses.

Others, in rejecting this argument, point out that the organization is merely reporting what has happened and to report the gift otherwise is to obscure its receipt. They point out that in reality all gifts, whether restricted or unrestricted, are really at least somewhat restricted and only the degree of restriction varies; even "unrestricted" gifts must be spent realizing the stated goals of the organization, and therefore such gifts are effectively restricted to this purpose even though a particular use has not been specified by the contributor.

There are valid arguments on both sides. This approach is the one recommended in the AICPA Audit Guide for Voluntary Health and Welfare Organizations and therefore has been very widely followed. It will now become the method used by all not-for-profit organizations if they want their independent auditor to be able to say that their financial statements are prepared in conformity with generally accepted accounting principles.

Grants for Specific Projects. Many organizations receive grants from third parties to accomplish specific projects or activities. These grants differ from other current restricted gifts principally in the degree of accountability the recipient organization has in reporting back to the granting organization on the use of such monies. In some instances, the organization receives a grant to conduct a specific research project, the results of which are turned over to the grantor. The arrangement is similar to a private contractor's performance on a commercial for-profit basis. In that case, the "grant" is essentially a purchase of services. It would be accounted for in accordance with normal commercial accounting principles, which call for the revenue to be recognized as the work under the contract is performed. In other instances, the organization receives a grant for a specific project, and while the grantee must specifically account for the expenditure of the grant in detail and may have to return any unexpended amounts, the grant is to further the programs of the grantee rather than for the benefit of the grantor. This kind of grant is really a gift, not a purchase.

The line between ordinary current restricted gifts and true "grants" for specific projects is not important for accounting purposes because the method of reporting revenue is now the same for both. What can get fuzzy is the distinction between grants and purchase of services contracts. Most donors of current restricted gifts are explicit as to how their gifts are to be used, and often the organization will initiate a report back to the donors on the use of their gifts. However, restricted gifts and grants usually do not have the degree of specificity that is attached to purchase contracts. Appendix 35.1 contains a checklist to help readers distinguish between gifts and purchase contracts in practice.

Grants and contracts can be structured in either of two forms: In one, the payor remits the amount up front and the payee then spends that money. In the other, the payee must spend its own money from other sources and is reimbursed by the payor.

In the case of a purchase contract, amounts remitted to the organization in advance of their expenditure should be treated as deferred income until such time as expenditures are made that can be charged against the contract. At that time, income should be recognized to the extent earned. Where expenditures have been made but the grantor has not yet made payment, a receivable should be set up to reflect the grantor's obligation.

In the case of a true grant (gift), advance payments must be recognized as revenue immediately upon receipt, as is the case with all contributions under SFAS No. 116. Reimbursement grants are recognized as revenue as reimbursements become due, that is, as money is spent that the grantor will reimburse. This is the same method as is used under cost-reimbursement purchase contracts.

Some organizations have recorded the entire amount of the grant as a receivable at the time awarded, offset by deferred grant income on the liability side of the balance sheet. This is no longer appropriate under SFAS No. 116. If the entire grant amount qualifies as an unconditional pledge (see below), then that amount must be recorded as revenue, not deferred revenue.

Frequently, an organization will receive contributions that are in the form of investment securities: stocks and bonds. These contributions should be recorded in the same manner as cash gifts. The only problem usually encountered is difficulty in determining a reasonable basis for valuation in the case of closely held stock with no objective market value.

The value recorded should be the fair market value at the date received. Marketable stocks and bonds present no serious valuation problem. They should be recorded at their market value on the date of receipt or, if sold shortly thereafter, at the amount of proceeds actually received. However, the "shortly thereafter" refers to a sale within a few days or perhaps a week after receipt. Where the organization deliberately holds the securities for a period of time before sale, the securities should be recorded at their fair market value on the date of receipt. This will result in a gain or loss being recorded when the securities are subsequently sold (unless the market price remains unchanged).

For securities without a published market value, the services of an appraiser may be required to determine the fair value of the gift. See Subsection 35.2(b) for further discussion of investments.

Contributions of fixed assets can be accounted for in one of two ways. SFAS No. 116 permits such gifts to be reported as either unrestricted or temporarily restricted income at the time received. If the gift is initially reported as temporarily restricted, the restriction is deemed to expire ratably over the useful life of the asset: that is, in proportion to depreciation for depreciable assets. The expiration is reported as a reclassification from the temporarily restricted to the unrestricted class of net assets. Nondepreciable assets such as land would remain in the temporarily restricted class indefinitely—until disposed of. (Recognizing the gift as income in proportion to depreciation recognized on the asset is not in conformity with generally accepted accounting principles.)

Supplies and equipment should be recorded at the amount that the organization would normally have to pay for similar items. A value for used office equipment and the like can usually be obtained from a dealer in such items. The valuation of donated real estate is more difficult, and it is usually necessary to get an outside appraisal to determine the value.

Despite some controversy over the subject, the new AICPA Audit Guide specifically requires the recording of a value for contributed inventory expected to be sold by thrift shops and similar organizations at the time the items are received. The amount will be an estimate based on the estimated quantities and quality of goods on hand and known statistics for the percentage of the goods that will eventually be sold for cash (versus given away or discarded).

SFAS No. 116 makes an exception for recording a value for donated (and purchased) museum collection objects, if certain criteria are met and certain disclosures are made. Owners of such objects do not have to record them, although they may if they wish.

Many organizations depend almost entirely on volunteers to carry out their programs and sometimes supporting functions. Should such organizations place a value on these contributed services and record them as "contributions" in their financial statements?

Criteria for Recording. The answer is yes, under certain circumstances. These circumstances exist only when either of the following two conditions is satisfied:

If neither criterion is met, SFAS No. 116 precludes recording a value for the services, although disclosure in a footnote is encouraged. These criteria differ considerably from criteria in the earlier Audit Guides/SOP.

Creating or Enhancing Fixed Assets. The first criterion is fairly straightforward. It covers volunteers constructing or making major improvements to buildings or equipment. It would also cover things like building sets or making costumes for a theater or opera company, and writing computer programs, since the resulting assets could be capitalized on the balance sheet. The criterion says "nonfinancial" assets so as not to cover volunteer fund-raisers who, it could be argued, are "creating" assets by soliciting gifts.

Specialized Skills. The second criterion has three parts, all of which must be met for recording to be appropriate. The first part deals with the nature of the services themselves. The intent is deliberately to limit the types of services that must be recorded, thus reducing the burden of tracking and valuing large numbers of volunteers doing purely routine work, the aggregate financial value of which would usually be fairly small. SFAS No. 116 gives very little guidance about how to identify, in practice, those skills that would be considered "specialized," as opposed to nonspecialized. There is a list of skills that are considered specialized, but it merely recites a list of obvious professions, such as doctors, lawyers, teachers, carpenters. What is lacking is an operational definition of specialized that can be applied to all types of services. Appendix 35.2 contains a checklist to help readers make this distinction in practice.

The second part of the criterion will usually cause no problems in practice, as persons practicing the types of skills contemplated should normally possess the skills (if not, why are they performing the services?).

Would Otherwise Purchase. The third part of the criterion will be the most difficult of all to consider, as it calls for a pure judgment by management. Would the organization or would it not purchase the services? This is similar to one in SOP 78-10, which was as follows:

Probably the most important requirement is that the services being performed are an essential part of the organization's program. The key test is whether the organization would hire someone to perform these services if volunteers were not available.

This is a difficult criterion to meet. Many organizations have volunteers involved in peripheral areas which, while important to the organization, are not of such significance that paid staff would be hired in the absence of volunteers. But this is the acid test: If the volunteers suddenly quit, would the organization hire replacements? Appendix 35.3 contains a checklist to help readers assess this criterion.

Basis on Which to Value Services. An additional criterion that is not explicitly stated in SFAS No. 116 in connection with donated services is that there must be an objective basis on which to value these services. It is usually not difficult to determine a reasonable value for volunteer services where the volunteers are performing professional or clerical services. By definition, the services to be recorded are only those for which the organization would in fact hire paid staff if volunteers were not available. This suggests that the organization should be able to establish a reasonable estimate of what costs would be involved if employees had to be hired.

In establishing such rates, it is not necessary to establish individual rates for each volunteer. Instead, the volunteers can be grouped into general categories and a rate established for each category.

Some organizations are successful in getting local businesses to donate one of their executives on a full- or part-time basis for an extended period of time. In many instances, the amount paid by the local business to the loaned executive is far greater than the organization would have to pay for hired staff performing the same function. The rate to be used in establishing a value should be the lower rate. This also helps to get around the awkwardness of trying to discern actual compensation.

An organization may wish not to record a value unless the services are significant in amount. There is a cost to keep the records necessary to meet the reporting requirements, and unless the resulting amounts are significant, it is wasteful for the organization to record them.

Accounting Treatment. The dollar value assigned to contributed services should be reflected as income in the section of the financial statements where other unrestricted contributions are shown. In most instances, it is appropriate to disclose the amount of such services as a separate line.

On the expense side, the value of contributed services should be allocated to program and supporting service categories based on the nature of the work performed. The amounts allocated to each category are not normally disclosed separately. If volunteers were used for constructing fixed assets, the amounts would be capitalized rather than being charged to an expense category. Unless some of the amounts are capitalized, the recording of contributed services will not affect the excess of income over expenses, since the income and expense exactly offset each other.

The footnotes to the financial statements should disclose the nature of contributed services and the valuation techniques followed.

Occasionally a not-for-profit organization will be given use of a building or other facilities either at no cost or at a substantially reduced cost. A value should be reflected for such a facility in the financial statements, both as income and as expense. The value to be used should be the fair market value of facilities that the organization would otherwise rent if the contributed facilities were not available. This means that if very expensive facilities are donated, the valuation to be used should be the lower value of the facilities that the organization would otherwise have rented. Implicit in this rule is the ability to determine an objective basis for valuing the facilities. If an organization is given the use of facilities that are unique in design and have no alternative purpose, it may be impossible to determine what they would have to pay to rent comparable facilities. This often occurs with museums that occupy elaborate government-owned buildings.

Where a donor indicates that the organization can unconditionally use such rent-free facilities for more than a one-year period, the organization should reflect the arrangement as a pledge and record the PV of the contribution in the same way as other pledges.

Donor-restricted endowment fund contributions should be reported as revenue upon receipt in a restricted class of net assets: temporary in the case of a term endowment gift, otherwise permanent.

Gifts of term endowment are later reclassified to the unrestricted class when the term of the endowment expires. (If, upon expiration of the endowment restriction, the gift is still restricted— likely for some operating purpose—it would not be reclassified until money was spent for that purpose. If upon expiration of the term endowment restriction, the gift becomes permanently restricted, it should be recorded in that class initially.)

A pledge^[5] is a promise to contribute a specified amount to an organization. Typically, fund-raising organizations solicit pledges because a donor either does not want to or is not able to make a contribution in cash in the amount desired by the organization at the time solicited. In giving, as with consumer purchases, the "installment plan" is a way of life. Organizations find donors are more generous when the payments being contributed are smaller and spread out over a period of time.

A pledge may or may not be legally enforceable. The point is largely moot because few organizations would think of trying to legally enforce a pledge. The unfavorable publicity that would result would only hurt future fund raising. The only relevant criteria are: Will the pledge be collected and are pledges material in amount?

If these criteria are satisfied, then there are two accounting questions: Should a pledge be recorded as an asset at the time the pledge is received? If the answer is "yes," the next question is: When should the pledge be recognized as income?

Recording as an Asset. For many organizations, a significant portion of their income is received by pledge. The timing of the collection of pledges is only partially under the control of the organization. Yet over the years most organizations find they can predict with reasonable accuracy the collectible portion of pledges, even when a sizable percentage will not be collected. Accounting literature requires that unconditional pledges the organization expects to collect be recorded as assets and an allowance established for the portion that is estimated to be uncollectible.

Historically, there was considerable difference of opinion on this subject, with the AICPA Audit Guides and the SOP taking different positions. The College Audit Guide said recording of pledges was optional, and most colleges did not record them until collected. The other three guides required recording pledges, although their criteria and method of recording differed slightly. Now, SFAS No. 116 requires all organizations to record unconditional pledges.

Conditions versus Restrictions. The requirement in SFAS No. 116 is to record unconditional pledges as assets. Unconditional means without conditions. What is meant by conditions? FASB defines a condition as "a future and uncertain event" that must occur for a pledge to become binding on the pledgor. There are two elements to this definition: future and uncertain. Future means it has not happened yet; this is fairly clear. Uncertain is, however, more subject to interpretation. How uncertain? This will be a matter of judgment in many cases.

If a donor pledges to give to a charity "if the sun rises tomorrow," that is not an uncertain event; the sun will rise tomorrow, at a known time. If a donor pledges to give $10,000 to the Red Cross "if there's an earthquake in California," that is very uncertain (a geologist will say the eventual probability of an earthquake happening is 100 percent, but the timing is completely uncertain). This latter pledge would be conditional upon an earthquake occurring. Once an earthquake occurs, then the donor's pledge is unconditional (the condition has been removed), and the pledge would be recorded by the Red Cross.

Another example of a condition is a matching pledge (also known as a challenge grant). A donor pledges to give an amount to a charity if the charity raises a matching amount from other sources. (The "match" need not be one for one; it can be in any ratio the donor specifies.) In this case, the charity is not entitled to receive the donor's gift until it has met the required match. Once it does, it will notify the donor that the pledge is now due.

A third type of donor stipulation sounds like a condition, but it may or may not actually be one. A donor pledges to contribute to a symphony orchestra "if they will perform my favorite piece of music [specified by name]." (A cynical person would call this a bribe.) Yes, this is an uncertain future event, since the piece of music has not yet been performed, but how uncertain is it? If the orchestra might very well have played the piece anyway, then the "condition" is really trivial, and the event would not be considered uncertain. However, if the piece were one that the orchestra would be very unlikely to perform without the incentive represented by the pledge in question, then the event would be considered uncertain and the pledge conditional. In this case, the condition is fulfilled when the orchestra formally places the music on its schedule and so informs the donor.

Note that the concept of a condition is quite different from that of a restriction. Conditions deal with events that must occur before a charity is entitled to receive a gift. Restrictions limit how the charity can use the gift after receipt. Unconditional pledges can be either unrestricted or restricted; so can conditional pledges. Donor stipulations attached to a gift or pledge must be read carefully to discern which type of situation is being dealt with. For example, "I pledge $20,000 if you play my favorite music" is conditional but unrestricted (the donor has not said the gift must be used to pay for the performance), whereas "I pledge $20,000 for [the cost of] playing my favorite piece of music" is restricted, but unconditional. In the latter case, the donor has said the pledge will be paid but can only be used for that performance. The difference in wording is small, but the accounting implications are great. The conditional pledge is not recorded at all until the condition is met; the unconditional restricted pledge is recorded as revenue (in the temporarily restricted class) upon receipt of notification of the pledge. Appendix 35.4 contains a checklist to help readers determine whether an unconditional pledge actually exists. Appendix 35.5 contains a checklist to help distinguish conditions from restrictions.

Discounted to Present Value. Prior to SFAS No. 116, pledges were recorded at the full amount that would ultimately be collected. None of the accounting literature for not-for-profit organizations talked about discounting pledges to reflect the time value of money. There had been for many years an accounting standard applicable to business transactions that does require such discounting (APB No. 21), but not-for-profit organizations universally chose to treat this as not applicable to them, and accountants did not object.

SFAS No. 116 does require recipients (and donors) of pledges payable beyond the current accounting period to discount the pledges to their PV, using an appropriate rate of interest. Thus, the ability to receive $1,000 two years later is really only equivalent to receiving about $900 (assuming about a five percent rate of interest) now, because the $900 could be invested and earn $100 of interest over the two years. The higher the interest rate used, the lower will be the PV of the pledge, since the lower amount would earn more interest at the higher rate and still be worth the full $1,000 two years hence.

The appropriate rate of interest to use in discounting pledges will be a matter of some judgment. In many cases, it will be the average rate the organization is currently earning on its investments or its idle cash. If the organization is being forced to borrow money to keep going, then the borrowing rate should be used. Additional guidance is in SFAS No. 116 and APB No. 21.

As the time passes between the initial recording of a discounted pledge and its eventual collection, the PV increases since the time left before payment is shorter. Therefore, the discount element must be gradually "accreted" up to par (collection) value. This accretion should be recorded each year until the due date for the pledge arrives. The accretion is recorded as contribution income. (This treatment differs from that specified in APB No. 21 for business debts for which the accretion is recorded as interest income.)

Pledges for Extended Periods. There is one limitation to the general rule that pledges be recorded as assets. Occasionally, donors will indicate that they will make an open-ended pledge of support for an extended period of time. For example, if a donor promises to pay $5,000 a year for 20 years, would it be appropriate to record as an asset the full 20 years' pledge? In most cases, no; this would distort the financial statements. Most organizations follow the practice of not recording pledges for future years' support beyond a fairly short period. They feel that long-term open-ended pledges are inherently conditional on the donor's continued willingness to continue making payments and thus are harder to collect. These arguments have validity, and organizations should consider very carefully the likelihood of collection before recording pledges for support in future periods beyond five years.

Allowance for Uncollectible Pledges. Not all pledges will be collected. People lose interest in an organization; their personal financial circumstances may change; they may move out of town. This is as true for charities as for businesses, but businesses will usually sue to collect unpaid debts; charities usually will not. Thus another important question is how large the allowance for uncollectible pledges should be. Most organizations have past experience to help answer this question. If over the years, 10 percent of pledges are not collected, then unless the economic climate changes, 10 percent is probably the right figure to use.

Recognition as Income. The second, related question is: When should a pledge be recognized as income? This used to be a complicated question, requiring many pages of discussion in earlier editions of this Handbook. Now, the answer is easy: immediately upon receipt of an unconditional pledge. This is the same rule that applies to all kinds of gifts under SFAS No. 116. Conditional pledges are not recorded until the condition is met, at which time they are effectively unconditional pledges. Footnote disclosure of unrecorded conditional pledges should be made.

Under the earlier Audit Guides/SOP, pledges without purpose restrictions were recorded in the unrestricted fund. Only if the pledge has a purpose restriction would it be recorded in a restricted fund. Even pledges with explicit time restrictions were still recorded in the unrestricted fund, to reflect the flexibility of use that would exist when the pledge was collected. Under SFAS No. 116, all pledges are considered implicitly time-restricted, by virtue of their being unavailable for use until collected. Additionally, time-restricted gifts, including all pledges, are now reported in the temporarily restricted class of net assets. They are then reclassified to the unrestricted class when the specified time arrives.

This means that even a pledge not payable for 10 years or a pledge payable in many installments is recorded as revenue in full (less the discount to PV) in the temporarily restricted class in the year the pledge is first received. This is a major change from earlier practice, which generally deferred the pledge until the anticipated period of collection.

Sometimes a charity may not want to have to record a large pledge as immediate revenue; it may feel that its balance sheet is already healthy and recording more income would turn away other donors. If a pledge is unconditional, there is no choice: The pledge must be recorded. One way to mitigate this problem is to ask the donor to make the pledge conditional; then it is not recorded until some later time when the condition is met. Of course, there is a risk that the donor may not be as likely ever to pay a conditional pledge as one that is understood to be absolutely binding, so nonprofit organizations should consider carefully before requesting that a pledge be made conditional.

SFAS No. 116 requires that donors follow the same rules for recognition of the expense of making a gift as recipients do for the income: that is, immediately on payment or of making an unconditional pledge. Sometimes a charity will find a donor reluctant to make a large unconditional pledge but willing to make a conditional pledge. Fund raisers should be aware of the effect of the new accounting principles in SFAS No. 116 on donors' giving habits as well as on recipients' balance sheets.

A bequest is a special kind of pledge. Bequests should never be recorded before the donor dies—not because death is uncertain, but because a person can always change a will, and the charity may get nothing. (There is a special case: The pledge payable upon death. This is not really a bequest, it is just an ordinary pledge, and should be recorded as such if it is unconditional.)

After a person dies, the beneficiary organization is informed that it is named in the will, but this notification may occur long before the estate is probated and distribution made. Should such a bequest be recorded at the time the organization first learns of the bequest or at the time of receipt? The question is one of sufficiency of assets in the estate to fulfill the bequest. Since there is often uncertainty about what other amounts may have to be paid to settle debts, taxes, other bequests, claims of disinherited relatives, and so on, a conservative, and recommended, approach is not to record anything until the probate court has accounted for the estate and the amount available for distribution can be accurately estimated. At that time, the amount should be recorded in the same manner as other gifts.

Thus, if an organization is informed that it will receive a bequest of a specific amount, say $10,000, it should record this $10,000 as an asset. If instead the organization is informed that it will receive 10 percent of the estate, the total of which is not known, nothing would be recorded yet although footnote disclosure would likely be necessary if the amount could be sizable. Still a third possibility exists if the organization is told that while the final amount of the 10 percent bequest is not known, it will be at least some stated amount. In that instance, the minimum amount would be recorded with footnote disclosure of the contingent interest.

Split-Interest Gifts. The term split-interest gifts is used to refer to irrevocable trusts and similar arrangements (also referred to as deferred gifts) where the interest in the gift is split between the donor (or another person specified by the donor) and the charity. These arrangements can be divided into two fundamentally different types of arrangements: lead interests and remainder interests. Lead interests are those in which the benefit to the charity "leads" or precedes the benefit to the donor (or other person designated by the donor). To put this into the terminology commonly used by trust lawyers, the charity is the "life tenant," and someone else is the "remainderman." The reverse situation is that of the "remainder" interest, where the donor (or the donor's designee) is the life tenant and the charity is the remainderman, that is, the entity to which the assets become available upon termination (often called the maturity) of the trust or other arrangement. There may or may not be further restrictions on the charity's use of the assets and/or the income therefrom after this maturity.

Under both types of arrangement, the donor makes an initial lump-sum payment into a fund. The amount is invested, and the income during the term of the arrangement is paid to the life tenant. In some cases, the arrangement is established as a trust under the trust laws of the applicable state. In other cases, no separate trust is involved, rather the assets are held by the charity as part of its general assets. In some cases involving trusts, the charity is the trustee; in other cases, a third party is the trustee. Typical third-party trustees include banks and trust companies or other charities such as community foundations. Some arrangements are perpetual, that is, the charity never gains access to the corpus of the gift; others have a defined term of existence that will end either upon the occurrence of a specified event such as the death of the donor (or other specified person) or after the passage of a specified amount of time.

To summarize to this point, the various defining criteria applicable to these arrangements are:

Lead Interests. There are two kinds of such arrangements as normally conceived.^[6] These are:

In both of these cases, the charity receives periodic payments representing distributions of income, but never gains unrestricted use of the assets that produce the income. In the first case, the payment stream is for a limited time; in case two, the payment stream is perpetual.

A charitable lead trust is always for a defined term, and usually held by the charity. At the termination of the trust, the corpus (principal of the gift) reverts to the donor or to another person specified by the donor (may be the donor's estate). Income during the term of the trust is paid to the charity; the income may be unrestricted or restricted. In effect, this arrangement amounts to an unconditional pledge, for a specified period, of the income from a specified amount of assets. The current value of the pledge is the discounted PV of the estimated stream of income over the term of the trust. Although the charity manages the assets during the term of the trust, it has no remainder interest in the assets.

A perpetual trust held by a third party is the same as the lead trust, except that the charity does not manage the assets, and the term of the trust is perpetual. Again the charity receives the income earned by the assets, but never gains the use of the corpus. In effect, there is no remainderman. This arrangement is also a pledge of income, but in this case the current value of the pledge is the discounted PV of a perpetual stream of income from the assets. Assuming a perfect market for investment securities, that amount will equal the current quoted market value of the assets of the trust or, if there is no quoted market value, then the "fair value," which is normally determined based on discounted future cash flows from the assets.

Some may argue that since the charity does not and never will have day-to-day control over the corpus of this type of trust, it should only record assets and income as the periodic distributions are received from the trustee. In fact, that is the way the income from this type of gift has historically been recorded. In the authors' view, this is overcome by the requirement in SFAS No. 116 that long-term unconditional pledges be recorded in full (discounted) when the pledge is initially received by the pledgee. Since SFAS No. 116 requires that the charity immediately record the full (discounted) amount of a traditional pledge, when all the charity has is a promise of future gifts, with the pledgor retaining control over the means to generate the gifts, then the charity surely must record immediately the entire amount (discounted) of a "pledge" where the assets that will generate the periodic payments are held in trust by a third party, and receipt of the payments by the charity is virtually assured.

A variation of this type of arrangement is a trust held by a third party in which the third party has discretion as to when and/or to whom to pay the periodic income. Since in this case the charity is not assured in advance of receiving any determinable amount, no amounts should be recorded by the charity until distributions are received from the trustee; these amounts are then recorded as contributions.

Remainder Interests. There are four types of these arrangements. These are:

These arrangements are always for a limited term, usually the life of the donor and/or another person or persons specified by the donor—often the donor's spouse. The donor or the donor's designee is the life tenant; the charity is the remainderman. Again, in the case of a trust, the charity may or may not be the trustee; in the case of a CGA, the charity usually is the holder of the assets. Upon termination of the arrangement, the corpus usually becomes available to the charity; the donor may or may not have placed further temporary or permanent restrictions on the corpus and/or the future income earned by the corpus.

In many states, the acceptance of these types of gifts is regulated by the state government—often the department of insurance—since, from the perspective of the donor, these arrangements are partly insurance contracts, essentially similar to a commercial annuity.

A charitable remainder annuity trust (CRAT) and Charitable Remainder Unitrust (CRUT) differ only in the stipulated method of calculating the payments to the life tenant. An annuity trust pays a stated dollar amount that remains fixed over the life of the trust; a unitrust pays a stated percentage of the then current value of the trust assets. Thus, the dollar amount of the payments will vary with changes in the market value of the corpus. Accounting for the two types is the same except for the method of calculation of the amount of the PV of the life interest payable to the life tenant(s). In both cases, if current investment income is insufficient to cover the stipulated payments, corpus may have to be invaded to do so; however, the liability to the life tenant is limited to the assets of the trust.

A charitable gift annuity (CGA) differs from a CRAT only in that there is no trust; the assets are usually held among the general assets of the charity (some charities choose to set aside a pool of assets in a separate fund to cover annuity liabilities), and the annuity liability is a general liability of the charity—limited only by the charity's total assets.

A pooled income fund (PIF) (also sometimes called a life income fund) is actually a creation of the Internal Revenue Code Section 642(c) (5), which, together with sec 170, allows an income tax deduction to donors to such funds. (The amount of the deduction depends on the age(s) of the life tenant(s) and the value of the life interest and is less than that allowed for a simple charitable deduction directly to a charity, to reflect the value that the life tenant will be receiving in return for the gift.) The fund is usually managed by the charity. Many donors contribute to such a fund, which pools the gifts and invests the assets. During the period of each life tenant's interest in the fund, the life tenant is paid the actual income earned by that person's share of the corpus. (To this extent, these funds function essentially as mutual funds.) Upon termination of a life interest, the share of the corpus attributable to that life tenant becomes available to the charity.

Accounting for Split-Interest Gifts. The essence of these arrangements is that they are pledges. In some cases, the pledge is of a stream of payments to the charity during the life of the arrangement (lead interests). In other cases, the pledge is of the value of the remainder interest. Calculation of the value of a lead interest is usually straightforward, as the term and the payments are well defined. Calculation of remainder interests is more complicated, since life expectancies are usually involved and the services of an actuary will likely be needed.

SFAS No. 116 gives very little guidance specific to split-interests. Chapter 6 of the new AICPA Audit Guide for not-for-profit organizations discusses in detail the accounting for split-interest gifts. Briefly, the assets contributed are valued at their fair value on the date of gift (the same as for any donated assets). The related contribution revenue is usually the PV of the amounts expected to become available to the organization, discounted from the expected date(s) of such availability (in the case of a remainder interest, the actuarial death date of the last remaining life tenant.) The difference between these two numbers is, in the case of a lead interest, the PV of the amount to be distributed at the end of the term of the agreement according to the donor's directions, and, under a remainder agreement, the PV of the actuarial liability to make payments to life tenants.

Note that the columns on the balance sheet reflect the funds used for bookkeeping purposes. This is permissible, as long as the net asset amounts for each of the three classes defined in SFAS No. 117 are shown in the net assets section of the balance sheet.

In Exhibit 35.5 we have shown the totals for the previous year to provide a comparison for the reader. SFAS No. 117 does not require presentation of a comparison column, but it is recommended.

While it is a little more awkward to show when the balance sheet is presented in a columnar fashion as in Exhibit 35.5, it is still possible to disclose the composition of the unrestricted net assets of $135,516.

For example, the unrestricted net assets of the National Association of Environmentalists of $135,516 (Exhibit 35.5) could be split into several amounts, representing the board's present intention of how it plans to use this amount. Perhaps $50,000 of it is intended for Project Seaweed, and the balance is available for undesignated purposes. The net assets section of the Balance Sheet would appear:

Figure 35.5. A balance sheet prepared in columnar format.

Figure 35.6. Income statement that meets the requirements of SFAS No. 117.

Figure 35.7. An analysis of the various program expenses showing the natural expense categories making up each of the functional or program categories

As monies are expended for Project Seaweed in subsequent periods, they would be recorded as an expense in the Statement of Support, Revenue and Expenses, and Changes in Net Assets. At the same time, the amount of the net assets designated by the board for Project Seaweed would be reduced and the amount "undesignated" would be increased by the same amount.

Functional Classification of Expenses. Exhibit 35.6 shows the expenses of the National Association of Environmentalists reported on a functional basis. This type of presentation requires management to tell the reader how much of its funds were expended for each program category and the amounts spent on supporting services, including fund raising.

SFAS No. 117 states that this functional reporting is not optional. SFAS No. 117 requires that disclosure of expenses by function must be made either in the primary financial statements or in the footnotes.

In many instances, the allocation of salaries between functional or program categories should be based on time reports and similar analyses. Other expenses such as rent, utilities, and maintenance will be allocated based on floor space. Each organization will have to develop time and expense accumulation procedures that will provide the necessary basis for allocation. Organizations have to have reasonably sophisticated procedures to be able to allocate expenses between various categories. An excellent reference source is the third edition (1988) of the "Black Book," Standards of Accounting and Financial Reporting for Voluntary Health and Welfare Organizations.

Program Services. Not-for-profit organizations exist to perform services either for the public or for the members of the organization. They do not exist to provide employment for their employees or to perpetuate themselves. They exist to serve a particular purpose. The Audit Guide re-emphasizes this by requiring the organization to identify major program services and their related costs. Some organizations may have only one specific program category, but most will have several. Each organization should decide for itself into how many categories it wishes to divide its program activities.

Supporting Services. Supporting services are those expenses that do not directly relate to performing the functions for which the organization was established, but that nevertheless are essential to the continued existence of the organization.

The Statement of Support, Revenue and Expenses, and Changes in Net Assets must clearly disclose the amount of supporting services. These are broken down between fund raising and administrative (management and general) expenses. This distinction between supporting and program services is required, as is the separate reporting of fund raising.

Management and General Expenses. This is probably the most difficult of the supporting categories to define because a major portion of the time of top management usually will relate more directly to program activities than to management and general. Yet many think, incorrectly, that top management should be considered entirely "management and general." The AICPA Audit Guide defines management and general expenses as follows:

Fund-Raising Expenses. Fund-raising expenses are a very sensitive category of expense because a great deal of publicity has been associated with certain organizations that appear to have very high fund-raising costs. The cost of fund raising includes not only the direct costs associated with a particular effort, but a fair allocation of the overhead of the organization, including the time of top management.

Fund-raising activities involve inducing potential donors to contribute money, securities, services, materials, facilities, other assets, or time. They include publicizing and conducting fund-raising campaigns; maintaining donor mailing lists; conducting special fund-raising events; preparing and distributing fund-raising manuals, instructions, and other materials; and conducting other activities involved with soliciting contributions from individuals, foundations, governments, and others. The financial statements should disclose total fund-raising expenses.

Fund-raising expenses are normally recorded as an expense in the Statement of Activity at the time they are incurred. It is not appropriate to defer such amounts. Thus the cost of acquiring or developing a mailing list that has value over more than one year would nevertheless be expensed in its entirety at the time the list was purchased or the costs incurred. The reason for this conservative approach is the difficulty accountants have in satisfying themselves that costs that might logically be deferred will in fact be recovered by future support related thereto. Further, if substantial amounts of deferred fund-raising costs were permitted, the credibility of the financial statements would be in jeopardy, particularly in view of the increased publicity surrounding fund-raising expenses.

If fund raising is combined with another function it may be possible to allocate the costs among the functions. In order to allocate any such costs to other than fund raising, criteria of purpose, audience and content as defined in SOP 98-2 must be met. These criteria are discussed in the next section.

Cost of Obtaining Grants. Organizations soliciting grants from governments or foundations have a cost that is somewhat different from fund-raising costs. Where such amounts are identifiable and material in amount, they should be separately identified and reported as a supporting service.

In 1998, the ACIPA issued a SOP 98-2 now included in the Audit Guide. This SOP, "Accounting for Cost of Activities of Not-for Profit Organizations and State and Local Government Entities that Include Fund Raising," replaced SOP 87-2. Compliance with SOP 87-2 had been much criticized by charity watchdogs such as the National Charities Information Bureau and the Philanthropic Advisory Services of the Council of Better Business Bureaus (now merged into the BBB Wise Giving Alliance) and by state attorneys general. Charities were criticized that they were allocating costs to program that were really fund raising in nature. The greatest criticism was leveled against charities using significant direct mail campaigns that allocated a significant portion of those costs to program on the basis that it met the program goal of providing educational literature to recipients.

The new SOP, while similar in many ways to the old one, provides a clear step-by-step analysis that must be followed in determining whether costs can be allocated to other than fund raising. If any of the criteria of purpose, audience, and content are not met, all costs of the joint activity must be reported as fund raising. This is so even if some of the costs, if incurred in an activity without fund raising, would be properly allocated to program or management and general costs. One important change from the prior rules is that education about the cause of an organization does not meet the purpose criterion unless it is part of a call for specific action by the audience that will help accomplish the entity's mission. Previously, educational information about the cause was routinely allocated to program costs.

The criteria that must be met for allocation are as follows:

The SOP does not prescribe or prohibit any specific allocation methods although it does describe some acceptable methods. General cost accounting principles should be used in allocating costs, and they should be consistently applied.

All Expenses Reported as Unrestricted. This is a new requirement in SFAS No. 117, and a significant change for almost all not-for-profit organizations (except hospitals). In the past, expenses were reported in the same fund as the revenue that was used to pay for the expenses. Thus unrestricted revenue, and expenses paid for out of that revenue were shown together in the unrestricted fund. Current restricted revenue, and the expenses paid for out of that revenue, were in the current restricted fund. (No expenses could ever be paid out of the permanent endowment fund, due to the nature of the restriction of those amounts.)

With the adoption of SFAS No. 117, all expenses, regardless of the origin of the resources used to finance the expenses, will be shown in the unrestricted class of net assets; no expenses will be in the temporarily restricted class. This is shown in Exhibit 35.6 The method of relating the restricted revenue to the expenses financed out of that revenue is to reclassify an amount of temporarily restricted net assets equal to the expenses to the unrestricted net assets class ($26,164 in Exhibit 35.6).

Columnar Presentation. The statement presentation is in a columnar format and, as can be observed in Exhibit 35.6, includes all three classes on one statement. It is also possible to present the information in a single column. In this format, information for the three classes is shown sequentially, including the change in net assets for the class, followed by the total change in net assets for the year. An advantage of such a format is the ease of showing comparative prior year information for each class; a disadvantage is the inability to present a total column.

It should be noted that this statement provides a complete picture of all activity of this organization for the year—not just the activity of a single class or fund. Further, by including a "total" column on the statement, the reader is quickly able to see the overall activity and does not have to add together several amounts to get the complete picture. This represents a major advance in not-for-profit accounting.

Unrestricted Activity in a Single Column. One of the most significant features of this presentation is that all legally unrestricted revenues and all expenses are reported in the single column representing the unrestricted class of net assets. The use of a single column in which all unrestricted activity is reported greatly simplifies the presentation and makes it more likely that a nonaccountant will be able to comprehend the total picture of the organization.

Many organizations, of course, will want to continue to keep board-designated accounts within their bookkeeping system. This is fine. But, for reporting to the public, all unrestricted amounts must be combined and reported as indicated in this exhibit.

While not recommended, there would appear to be no prohibition to an organization's including additional columns to the left of this total "unrestricted" column to show the various unrestricted board-designated categories of funds that make up the total unrestricted class. However, where an organization does so, it must clearly indicate that the total unrestricted column represents the total unrestricted activity for the year and that the detailed columns to the left are only the arbitrarily subdivided amounts making up this total. Probably an organization is better advised to show such detail in a separate supplementary schedule, if at all.

Where an organization chooses to show its unrestricted class broken into two columns and has only one class with restricted resources, it may be acceptable to eliminate the total unrestricted column in the interest of simplicity. An example of the column headings might be:

The key to whether this would be acceptable is the extent of activity in the various columns. For example, if the temporarily restricted class in the above illustration were relatively minor in amount, then the total column would largely reflect the unrestricted class (i.e., the general fund and the investment fund). This is a judgment call.

Temporarily Restricted Column. The "temporarily restricted" column represents those amounts that have been given to the organization for a specified purpose other than for permanent endowment. It should be observed that the amounts reported as revenues in this fund represent the total amount the organization received during the year, and not the amount that was actually expended.

Use of Separate Fixed Asset (Plant) Fund. SFAS No. 117 does not mention a separate fixed asset category; rather it includes amounts related to fixed assets in the three classes of net assets discussed earlier. Even though a fixed asset fund is maintained in the organization's bookkeeping system, for external financial reporting purposes, the organization would include most of the amounts of the fixed asset fund in the unrestricted class. This has the additional advantage of reducing the number of columns and eliminating the need for certain reclassifications.

Appreciation (or depreciation) of investments is shown on the Statement of Support, Revenue and Expenses, and Changes in Net Assets. In this instance, the net appreciation of investments was $33,025. Assuming there were no sales or purchases of investments during the year, this amount would have been determined by comparing the market value of the investments at the end of the year with the market value at the beginning of the year. Normally, however, there will be some realized gain or loss during the year. While there is no technical objection to reporting the realized gain or loss separately from the unrealized appreciation (or depreciation), there seems little significance to this distinction.

Operating Statement. A variation on this statement that some may wish to use is to present a subtotal of "operating" revenue in excess of "operating" expenses. This would focus the reader's attention on what the organization considers its core "operations," as distinguished from matters that it considers peripheral or incidental to its operations. SFAS No. 117 permits, but does not require, this presentation. If an organization chooses this presentation, it will decide for itself what it considers to be its operations, versus other activities. Appendix 35.6 contains a checklist to help organizations decide what they wish to consider as operating versus nonoperating transactions.

Subscription and membership income should be recognized in the periods in which the organization provides goods or services to subscribers or members. This usually requires deferring such amounts when received and recognizing them ratably over the membership or subscription period. Special calculations, based on life expectancy, are required when so-called life memberships are involved.

Organizations that award grants should record a grant as a liability and an expense in the period in which the recipient is entitled to the grant. This is usually the period in which the grant is authorized, even though some of the payments may not be made until later periods.

Under SFAS No. 116, grantors account for grants in the same way as grantees—except backward–expense and liability instead of revenue and receivable. See Subsection 35.2(j) for a discussion of accounting for restricted gifts and pledges.