Required question suggested solutions

Required question suggested solutions

Note: For disclosure purposes many entities will continue to maintain their revenue accounts separately as shown. However, for balance sheet purposes they need to be combined under the two net asset classes. Theoretically, an entity could choose to use one restricted account, but this will create difficulties for disclosure purposes.

Required question suggested solutions

1. The title indicates a statement of operations instead of statement of cash flow.
2. Cash contributions for investment in endowment are listed as operating.
3. Cash contributions restricted for investment in term endowment are listed as operating.
4. Purchase of investments is listed as financing.
5. Purchase of equipment is listed as financing.
6. Cash contributions restricted for investment in plant are listed as investing.
7. Transfers between accounts should not be reflected in the statement of cash flow.
8. “Provided by” versus “Used in” totals are used incorrectly.
9. Missing reconciliation of beginning to ending balance of net assets.
10. Net decrease is a net increase in cash.

Required question suggested solutions

1. The basis of presentation disclosure meets the requirements of disclosure checklist.
2. The revenue disclosure meets the requirements of the disclosure checklist.
3. The income tax disclosure meets the requirements of the disclosure checklist.
4. The Fair Value Footnote is missing a description of the valuation methodologies used for assets measured at net asset value (NAV).

An example of this disclosure would be:

Following is a description of the valuation methodologies used for assets measured at fair value.

• Mutual funds: Valued at the daily closing price as reported by the fund. Mutual funds held by the Foundation are open-end mutual funds that are registered with the SEC. These funds are required to publish their daily NAV and to transact at that price. The mutual funds held by the Foundation are deemed to be actively traded.
• Exchange traded funds: Exchange traded funds are baskets of securities designed to replicate various indexes and whose value is determined through daily market action in the shares of the exchange traded fund. Fair market value is determined by obtaining prices from quoted market sources.
• Private equity investments: The Foundation's private equity investments include a direct investment in a limited partnership. The NAV, as provided by the limited partnership, is used as a practical expedient to estimate fair value. The NAV is based on the fair value of the underlying investments held by the fund less its liabilities. This practical expedient is not used when it is determined to be probable that the fund will sell the investment for an amount different than the reported NAV.

The Fair Value Footnote does not disclose where the unrealized gain was recognized in the statement of activities. The following is an example of this disclosure.

For the year ended June 30, 2019, the Foundation recorded an unrealized gain of $1,034,633, which is reflected as a component of gain on investments, net in the statement of activities.

The Fair Value Footnote does not include the required NAV disclosures. The following is an example of this disclosure.

Required question suggested solutions

1. When the promise is made, provided that the promise is an unconditional promise to give rather than an intention to give. Promises to give are recognized at the fair value of the asset or services promised or liabilities satisfied and discounted to present value where appropriate. The fair value of promises that are due in more than one year are generally reported using the income approach (present value of the future cash flows). Presentation on the balance sheet of promises that are expected to be collected within one year of the financial statement date may be recognized at net realizable value. Contribution revenue from promises would be recorded in the appropriate net asset class—net assets with donor restrictions and net assets without donor restrictions. Contributions due in future periods generally are recorded as net assets with donor restrictions. The difference between the previously recorded present value and the current amount collected is considered contribution revenue, not interest income.
2. The organization can mail (or email) a confirmation form to the pledger, thanking him or her for the pledge and showing again the amount and terms of the pledge. If the pledge is fictitious or the address is incorrect, the post office will return the confirmation, or the email will not deliver it. If it is received by the donor and the donor disagrees, he or she may respond to correct the error or send the correct pledge amount. If the confirmation is by email, the organization might request a reply from the donor.
3. Yes. For example: “Our organization needs money this year for plans to renovate the meeting hall. Will you promise to give $100 or some other amount to help us meet this need?”
4. 1. Conditional—met when $2,000 is raised (other performance related barrier)
   2. Restricted—released in 2025, income is without donor restrictions (time)
   3. Restricted—released when dorm is remodeled (purpose)
   4. Restricted—released in 2020 (time)
   5. Conditional—met when $100,000 is raised from others; Restricted—released when used for Program B (measurable performance related barrier)
   6. Good Causes Foundation determines that it should account for this grant as conditional. The agreement contains a right of release from obligation because the resource provider will only transfer assets if Workvets provides training to at least 4,000 disabled veterans during the year (with a minimum requirement of 1,000 per quarter) as specified in the agreement. The Foundation requires Workvets to achieve a specific level of service that would be considered a measurable performance-related barrier (in the form of milestones by specifying the number of veterans that must be served per quarter). In this example, Workvets’s entitlement to the transferred assets is contingent upon meeting minimum service requirements. The likelihood of serving at least 1,000 disabled veterans for the quarter is NOT a consideration from the perspective of either the Foundation nor the NFP when assessing whether the contribution contains a barrier and is deemed conditional.
   7. Sealand Grace determines that this grant is conditional. The grant agreement limits the hospital’s discretion as a result of the specific requirements on how it may spend the assets (incurring certain qualifying expenses in accordance with the Office of Management and Budget rules and regulations). The grant also includes a release from the promisor’s obligation for unused assets. The requirement to spend the assets on qualifying expenses is a barrier to entitlement because the requirement limits Sealand Grace’s discretion about how to use the assets, and the assets would need to be spent on specific items on the basis of the requirements of the agreement (for example, adherence to cost principles) before the hospital is entitled to the assets. This is in contrast to a restriction that typically places limits only on a specific activity that is being funded. Sealand Grace records revenue during the grant period when the barriers have been overcome as it incurs qualifying expenses. The likelihood of incurring qualifying expenses is not a consideration when assessing whether the contribution is deemed conditional.
   8. The adoption center determines that this grant is conditional. The grant includes a measurable barrier (2,000 additional square feet) that must be achieved in order to be entitled to the assets and a right of return for unused assets or unmet requirements.

Case study 6

Part A: Required question suggested solutions

1. Contribution only — Debit cash, credit contribution revenue
2. Contribution only — Debit cash, credit contribution revenue, debit fundraising expense
3. Part contribution, part exchange — Debit cash, credit contribution revenue, credit sponsorship revenue
4. Contribution only — Debit cash, credit contribution revenue
5. Part contribution, part exchange — Debit cash, credit contribution revenue, credit-naming revenue

Part B:

1. The grant was awarded to the student, not to the university. The university entered into an exchange transaction with the student and accounts for the $45,000 of revenue in accordance with the guidance in the appropriate Subtopic. The $20,000 grant does not create additional revenue but, rather, serves as a partial payment against the $45,000 due to CPA University. Jane Hoya, who is receiving the benefit from the grant transaction, is an identified customer of CPA University. This is an example of the third-party payer scope exception.
2. ReSurch University concludes that this grant is not a transaction in which there is commensurate value being exchanged. The federal government, as the resource provider, does not receive direct commensurate value in exchange for the assets provided because the university retains all rights to the research and findings. ReSurch University and the public receive the primary benefit of any findings. The federal government only receives an indirect benefit because the research and findings serve the general public. Thus, ReSurch University determines that this grant should be accounted for under the contribution guidance in this Subtopic.

Required question suggested solutions

Required question suggested solutions

1. To qualify as a collection, the museum must have a policy that requires the proceeds of items that are sold to be used to acquire other items for collections. Therefore, if the museum anticipates that it will need to sell certain items (such as the folk art paintings) to raise money for operating costs or costs of maintaining the collection, it should not add those items to the collection. Items not added to the collection must be capitalized. The collection could certainly include the three types of displayed items—the china, the antique furniture, and the portraits. The other items may or may not be included in the collection. Because the children’s toys and the craft equipment are used frequently in educational activities, it may be that they are not “protected, kept unencumbered, cared for, and preserved,” and if they are not, then the items do not qualify as collection items. The library collection of letters and other paper memorabilia probably has no determinable value. A few of the costume items may have value and may be “protected, kept unencumbered, cared for, and preserved,” but identification of these particular items could be difficult. Perhaps the museum should obtain expert advice about which of the items should be considered part of the collection.
2. Advantages of valuing the collection
   • Some museums do recognize the value of their collections.
   • Some believe that recognition is necessary to provide users with relevant information on the entity’s financial position.
   • A collection is clearly one of the most important assets of a museum. Other assets are recognized. Why not one of the most important?
   • Collections certainly have economic benefit to the museum, by attracting visitors who pay for admission or by licensing images (for reproduction or for use in advertising).

   Disadvantages of valuing the collection

   • Some studies have not indicated that there is much demand for information on the value of the collection among users of financial statements.
   • The cost of valuing a collection may be a great burden, compared with the benefit of the information. However, various techniques can be used to estimate fair value.
   • The disclosure alternatives to valuation will go a long way toward assessing managers’ performance of their responsibility for safekeeping of collections.
3. In order to meet the definition of a collection, the collection must be protected, kept unencumbered, cared for, and preserved. If the museum does not have resources to maintain the collection, then the items cannot meet the definition of a collection, and the items must be capitalized.
4. Assets that are not part of a collection must be capitalized and depreciated (except land).
5. The Mona Lisa is likely not depreciated due to its value. It is well protected and cared for.
6. This might raise the question of cash flow and could potentially be a going concern issue for auditing purposes.

Required question suggested solutions

1. If the three criteria (purpose, audience, and content) are met, joint cost should be allocated. The joint cost should be allocated because the purpose criterion is met (that is, the program helps accomplish the mission, and the objectives are clearly communicated to senior citizens by authorized representatives). The audience criterion is met because it targets senior citizens in a particular city. The content is met because it calls for specific action (exercise) that improves quality of life.
2. In this scenario, the audience criteria would not be met and therefore the entire cost would be charged to fundraising.
3. Costs are allocated for various reasons including reporting expenses for tax purposes, applying for grants, grant requirements, evaluating fundraising efforts, costing or pricing programs.
4. Answers will vary. Examples include development staff time and related expenses, printing of program-related brochures that include a fundraising appeal, maintenance of member or donor database.
5. Educational tables and discussions at a fundraising event have elements of fundraising and program activities. A dinner dance where the NFP also conducts its required annual meeting has elements of both fundraising and support activities. The dinner dance is also open to the public and serves as a major fundraising activity for the NFP organization.

Required question suggested solutions

1. The Foundation follows Uniform Prudent Management of Institutional Funds Act of 2006 (UPMIFA).
2. The board of directors of the Foundation has interpreted current law, UPMIFA, as requiring the preservation of the fair value of the original gift as of the gift date of the donor-restricted endowment funds absent explicit donor stipulation to the contrary. As a result of this interpretation, we retain in perpetuity (a) the original value of gifts donated to the perpetual endowment, (b) the original value of subsequent gifts to the perpetual endowment, and (c) accumulations to the perpetual endowment made in accordance with the direction of the applicable donor gift instrument at the time the accumulation is added to the fund. Donor-restricted amounts not retained in perpetuity are subject to appropriation for expenditure by the Foundation in a manner consistent with the standard of prudence prescribed by UPMIFA.
3. The Foundation has interpreted UPMIFA to permit spending from underwater endowments in accordance with prudent measures required under law.
4. The Foundation has a policy that permits spending form underwater endowment funds depending on the degree to which the fund is underwater, unless otherwise precluded by donor intent or relevant laws and regulations. If the fair value of the endowment fund falls below 66% of the original gift amount, the spendable amount is limited to interest and dividends subject to donor appeal. If the fair value of the endowment fund falls below 50% of the original gift amount, the spendable amount is limited to interest and dividends without donor appeal.
5. The Foundation has adopted investment and spending policies for endowment assets that attempt to provide a predictable stream of funding to programs supported by its endowment while seeking to maintain the purchasing power of the endowment assets. Endowment assets include those assets of donor-restricted funds that the Foundation must hold in perpetuity or for a donor-specified period as well as board-designated funds.
6. Under this policy, as approved by the board of directors, the endowment assets are invested in a manner that is intended to produce results that exceed the price and yield results of a weighted benchmark composed of 16.5% of the S&P 500 Index, 5% of the Russell 2000 Index, 12.5% of the MSCE EAFE Index, 9.5% of the MSCE Emerging Markets Index, 11.5% of the Barclays U.S. Aggregate Bond Index, 4% of the ML 1-3 Year Corporate/Government Bond Index, 1.5% of the NCREIF Property Index, 11% HFRI Equity Hedge Index, 7% of the HFRI Fund-of-Funds Index, 2.5% of the Alerian MLP Index, 3% of the CPI + 8% Index, 1.5% of the DB Liquid Commodity Index, OY Div., 3% of the DJ/CS HFI Multi-Strategy Index, 2.5% of the Thomson One All Private Equity Index, and 9% of the S&P 100 Index, while assuming a moderate level of investment risk.

   The Foundation expects its endowment funds, over a full market cycle (five years), to provide an average annual real rate of return, net of fees, equal to or greater than spending, administrative fees, and inflation (consumer price index + 6%). Actual returns in any given year may vary from this amount.

7. The 2017 net assets without donor restrictions totaled $44,669,950 and the net assets with donor restrictions totaled $240,306,459.

Required question suggested solutions

1. No. It would be impossible to define operations in a way that would fit all organizations.
2. Yes. For example, an organization might consider grants as a major operating source of revenues. The Performing Arts Organization desires a measure of “success” without the help of grants. This shows the dependency of the organization on grants because it cannot support its activities simply through its earned income (ticket sales, concessions, and so forth).
3. Yes. Another theater organization might define operations strictly enough and narrowly enough to exclude “concessions and other support,” especially if “concessions and other support” was exploited more in one year than another. The definition of operating or non-operating is supposed to be clarified in a footnote to financial statements, unless the meaning is obvious from the details provided on the face of the statement.
4. The auditors might help the officers and board members consider choices. But the treasurer or controller would be more likely to make the choice, perhaps after consulting with other officers and board members on the usefulness of the distinction and the practical concerns about the reliability of the amounts described as non-operating. Other standards require the inclusion of certain amounts if, for example, a subtotal such as “Income from Operations” is presented.
5. The footnote might read as follows:

   Operating results

   Deficiency from operations ($536,295), as shown in the statement of activities, presents the results of theater operations for the year from its earned revenues. It is computed without the annual giving received during the annual giving appeal, grants received from foundations, and the costs of raising contributed funds. Therefore, the deficiency shows the dependency of the organization on annual giving and grants.

6. Yes. It depends upon how thorough the Performing Arts Organization has been in allocating its expenses. If part of “general and administrative expense” was incurred in administering restricted resources, it could potentially be non-operating. If Performing Arts Organization reported “general and administrative expense” in both operating and non-operating sections, the footnote that defines the operating measure should describe how the distinction between the two is made because the distinction would be unclear from the face of the statement.
7. The meaning of operating in the statement of activities will vary among different types of organizations and different individual organizations of the same type, depending on each organization’s needs. The definition of operating in the statement of cash flows is entirely determined by definitions in the FASB ASC It states that operating activities are “all transactions…that are not defined as investing or financing activities.”

Required question suggested solutions

1. The lead would be the $7,500 for 10 years at 6% or $55,200 (7,500 × 7.36009 per the table in the participant manual).
2. Debit investments $100,000, credit split-interest liability $55,200, credit contribution revenue $44,800.
3. Change in fair value ($104,000 – $100,000) – Debit investment $4,000, credit investment income 4,000.

   Annuity payment – Debit split-interest liability $7,500, credit cash $7,500

   Change in liability – $7,500 for nine years at 6% = $51,012 ($7,500 × 6.80169). $55,200 (original value – $7,500 (payment) – $51,012 (change in liability) = $3,312. Debit change in split-interest liability, credit split interest liability $3,312.

Required question suggested solutions

1. A membership entity may establish and sponsor a political action committee (PAC) whose mission is to further the interests of the membership entity. The resources held by the PAC are used for the purposes of the membership entity and the governing board of the PAC is appointed by the board of the membership entity. In the circumstances described, both control and economic interest are present, and the PAC should be consolidated. Control through a majority voting interest in the board of the PAC exists because the governing board of the PAC is appointed by the board of the membership entity. An economic interest exists because the PAC holds significant resources that must be used for the purposes of the membership entity.
2. A provision that entitles any individual limited partner to remove the general partner or a provision that requires a vote of two of the limited partners to remove the general partner would meet the requirements for a substantive kick-out right.

   However, if a vote of all three limited partners is required to remove the general partner, the right would not meet the requirements for a substantive kick-out right because the required vote is greater than a simple majority of the limited partners voting interests.

3. In the separate financial statements of the subsidiary, those assets are not separately reported as donor-restricted assets because the use of the assets is no narrower than the nature of the NFP. However, when the subsidiary is consolidated with the university parent, the gift would be reported separately as donor restricted because the donor-imposed restriction related to teacher training is narrower than the broad mission of overall education of the reporting entity.

Required question suggested solutions

1. The will stipulates that the church should give $40,000 to the local Boy Scout troop unless the finance committee designates it for other expenses. Because the finance committee has variance power to direct the assets to its own uses, the church should record an asset (cash) and a contribution.
2. The Boy Scout troop would record nothing, unless they ultimately received some of the $40,000.
3. Yes. If the variance power was not present in the will, the church would debit cash and credit a liability. The Boy Scout troop would debit accounts receivable and credit contribution revenue.
4. The church should not recognize a contribution because the will specifies eligibility criteria and states that $50,000 be divided to all who meet those criteria, even though the church is responsible for determining those who meet it.
5. The church should recognize a contribution for $10,000 because Mrs. Smith used language that is a broad generalization to describe beneficiaries. The choice of specific beneficiaries is within the control of the church.

Required question suggested solutions

1. In this scenario, Foundation A does not believe that they will receive all of the cash and they are charging a below market rate. The amount of the loan receivable should reflect the amount that they actually believe they will receive (not adjusted for TVM). A discount should then be calculated for the discount based on the actual cash flows. In this example, it was a 10-year period and the market rate was 5 percent. Cash out the door was $100,000, so the contribution is a difference to balance the journal entry.

   7,500 (75% of the $10,000 per year payments) × 7.72173 (from the table) = 57,913

   Debit	Loan receivable	75,000 (75% of $100,000, which is the amount expected to be received)
   Debit	Contribution	42,087 (difference)
   Credit	Cash	100,000 (cash out the door for the loan)
   Credit	Discount	17,087 ($75,000 loan receivable less $57,913 calculated above)

2. Unlike the earlier case, in this scenario the NFP believes that repayment is probable. However, they do provide a below market interest rate. Therefore, the amount of the contribution is the impact of the market interest rate. The loan receivable is the $2,000 per year ($10,000 over five years) times the factor that provides 5% and five years.

   $2,000 × 4.32948 = $8,659

   Debit	Loan Receivable	$8,659 (calculated above)
   Debit	Contribution	$1,341 (difference)
   Credit	Cash	$10,000 (total cash)

Case study 16

Suggested solutions to required questions

1. Statement of financial position
   1. The statement of financial position should not show “Due from Other Funds” as an asset and “Due to Other Funds” as a liability. Inter-fund amounts are not assets or liabilities of the entity as a whole. Including “Due to Other Funds” and “Due From Other Funds” in both totals overstates both total assets and total liabilities.
   2. If assets are classified, liabilities should be classified.
   3. The terminology used to describe the net asset classes is incorrect because they interchange prior ASU No. 2016-14 and post ASU No. 2016-14 terminology.
   4. Board-designated endowments can be reported separately, provided they are included under the caption net assets without donor restrictions and included in its total. Net assets without donor restrictions should total $121,000 ($80,000 plus the $41,000 board-designated total).
   5. Current contributions receivable should be recorded at fair value, which is its net realizable value. Reporting the gross amount of promises due within one year as receivable is appropriate only if management expects to collect that amount. The noncurrent amount should not be reported gross because a valuation allowance is required for contributions receivables and for the discount of the present value of future cash flows.
   6. Fundraising costs should be expensed as incurred, not capitalized.
2. Statement of activities
   1. The amounts for the special event should be shown gross. Otherwise, both the total revenues and total expenses are understated. Net presentation of special events is appropriate only if the special event is a peripheral or incidental transaction. This “special event” does not appear to be peripheral. The total revenues for this event were $64,000, nearly as much as ticket revenues.
   2. Expirations of donor-imposed restrictions (which simultaneously increase one class of net assets and decrease another) should be reported as separate items. Some might say that reporting net assets released from restrictions as a separate line item with revenues and gains is inappropriate. This could be easily remedied by retitling the section of the statement of activities, Revenues, Gains, and Other Support. The $4,000 of fundraising expenses, like all others, expenses should be reported as decreases in the net assets without donor restrictions class.
   3. The functional presentation of expenses includes the item “Interest Expense.” Interest expense is not a function. Interest costs, including interest on a building’s mortgage, should be allocated to specific programs or supporting services to the extent possible. Interest costs that cannot be allocated should be reported as part of the management and general function. Complete functional presentation is required—in the body of the statements or the footnotes.
   4. The terminology used to describe the net asset classes is incorrect because they interchange prior ASU No. 2016-14 and post ASU No. 2016-14 terminology.
3. Statement of cash flows
   1. The decrease in mortgage payable is included in cash flows from operating activities. It should be shown in a separate section called Cash Flows from Financing Activities.
   2. Sale of investments and gain on sale of investments are both shown in Cash Flows from Investing Activities, with the gain reflected as a deduction. This $3,000 deduction should be shown as a reconciling item after change in net assets, among “adjustments to reconcile change in net assets to net cash used by operating activities.” Only the total amount of cash received from sale of investments ($38,000) should be included in the Cash Flows from Investing Activities section.
   3. Cash received from the sale of donated financial assets (such as donated debt or equity securities) that were converted nearly immediately after receipt and carry no donor-imposed restrictions on their use is displayed under cash flows from operating activities. If, on the other hand, the donor imposed a restriction on the proceeds for a long-term purpose, it would be displayed under financing activities.