Case study solutions

There are several deficiencies in the statement prepared by Bob, including the following:

• The statement would report only two classes of net assets: net assets without donor restrictions and net assets with donor restrictions.
• The statement does not report a change in total net assets for the year.
• The statement reports the using up of restricted resources as expenses in net assets with donor restrictions. All expenses should be recorded as decreases in net assets without donor restrictions. Using resources to meet a donor-stipulated restriction would decrease net assets with donor restrictions and increase net assets without donor restrictions simultaneously.
• It appears that all gifts were recorded as increases in net assets without donor restrictions and the restricted gifts then transferred to the proper class of net assets. Restricted gifts should be recorded directly in the proper class of net assets.
• The statement uses the term expenditures instead of expenses. The statement should report expenses, not expenditures.
• The statement reports depreciation. This is not a functional classification of expense.

The following are additional observations about Bob's statement. They are not errors.

• The statement is titled “statement of operations,” not the statement of activities. It is acceptable to label this statement something other than the statement of activities.
• The statement reports a “loss from operations.” This is acceptable. An entity may choose to report some intermediate measure of operations, such as operating revenues over expenses.
• The statement does not report total revenue or expenses. Revenues, gains, expenses, losses, and reclassifications can be arranged in a variety of orders. There is no requirement to report totals for these items.

The following are possible additional changes from the implementation of FASB ASU 2016-14:

• Additional information would need to be disclosed in the footnotes for any board designations on net assets without donor restrictions.
• The entity would also be required to present expenses by function and nature in one location.
• The NFP would be required to disclose both quantitative and qualitative information about liquidity of assets and short-term demands on those assets.

Practice question solutions

1. c.
2. c.
3. d.
4. c.
5. a.
6. d.
7. d.

Knowledge check solutions

1.  
   1. Correct. Footnote disclosures are required to include the timing and nature of the donor-imposed restrictions, as well as the composition of net assets with donor restrictions at the end of the period. The disclosures will continue to show an analysis by time, purpose, and perpetual restrictions.
   2. Incorrect. Management cannot impose such restrictions; board designations would be classified as net assets without donor restrictions.
   3. Incorrect. Without donor-imposed restrictions, net assets are classified as net assets without donor restrictions.
   4. Incorrect. Endowment funds with donor-imposed restrictions do not expire with the passage of time.
2.  
   1. Incorrect. In general, FASB ASC 958 allows significant flexibility in presenting certain information, allowing financial reporting to evolve to meet the needs of different NFP groups.
   2. Correct. FASB ASC 958 focuses on reporting aggregated information about the entity as a whole.
   3. Incorrect. The general purpose financial statements required by FASB ASC 958 for NFP entities are the statement of financial position, the statement of activities, the statement of cash flows, and accompanying notes to the financial statements. The statement of functional expense is not a required statement; however the information is required to be disclosed either on the face of the statement of activities, in the notes, or as a separate statement.
   4. Incorrect. FASB ASC 958 does not require information be reported by funds.
3.  
   1. Correct. In many ways, the statement of activities is like an income statement for an NFP organization.
   2. Incorrect. Because NFP entities have an operating purpose other than making a profit, terms like income statement and net income are not used.
   3. Incorrect. The statement of activities focuses on the entity as a whole.
   4. Incorrect. Entities are not required to report some intermediate measure of operations, such as operating revenues over expenses.
4.  
   1. Correct. The statement of activities reports revenues, gains, expenses, and losses for the period.
   2. Incorrect. Revenues are reported as increases in net assets without donor restrictions unless the use of the assets received is limited by donor-imposed restrictions.
   3. Incorrect. All expenses are reported as decreases in net assets without donor restrictions.
   4. Incorrect. NFP entities have much flexibility in how items are sequenced in the statement of activities.
5.  
   1. Correct. Investments that are purchased are recorded at their acquisition costs.
   2. Incorrect. Investments that are contributed are recorded at fair value.
   3. Incorrect. Derivative instruments are measured at fair value.
   4. Incorrect. Not all investments are recorded at cost.
6.  
   1. Incorrect. Investment income includes dividends.
   2. Incorrect. If there are no donor-imposed restrictions on the use of the income, it should be reported as an increase in net assets without donor restrictions.
   3. Correct. Investment income includes interest.
   4. Incorrect. Investment income includes gains on investments.
7.  
   1. Correct. Realized gains and losses arise from selling or otherwise disposing of investments.
   2. Incorrect. If realized gains and losses arise from selling or otherwise disposing of investments for which unrealized gains and losses have been recognized in the statement of activities of prior reporting periods, the amount reported in the statement of activities as gains or losses upon the sale or other disposition of the investments should exclude the amount that has previously been recognized in the statement of activities.
   3. Incorrect. Realized gains and losses should be reported in the statement of activities as changes in net assets without donor restrictions unless their use is restricted by explicit donor-imposed stipulations or by law.
   4. Incorrect. Unrealized gain and losses on investments reported at fair value are reported in the statement of activities.

Case study solutions

Practice question solutions

1. d.
2. a.
3. a.
4. c.
5. RC Unconditional promises to give with payments due in future periods UC Gift of a car the entity plans to sell

   E Dues that cover the cost of publications

   RC Gift of securities to create an endowment fund

   NR Gift of art work to a collection (collection not capitalized)

   UC Donated accounting services by a CPA UC Free use of office space in the current year

   NR Conditional promise to give if an organization can raise a certain amount

   UC Donated services to replace a roof

Knowledge check solutions

1.  
   1. Correct. NFPs receive resources from activities such as investment activities.
   2. Incorrect. NFP entities receive inflows of resources from a variety of sources.
   3. Incorrect. Inflows from transfers where the entity is acting as an agent, trustee, or other intermediary for the donor are referred to as agency transactions.
   4. Incorrect. NFPs do engage in reciprocal (exchange) transactions.
2.  
   1. Correct. Exchange transaction revenues result from an entity satisfying a performance obligation by transferring a promised good or service to a customer.
   2. Incorrect. Fees charged for providing goods and services to members, clients, students, and customers that receive substantive benefits are revenues from exchange transactions.
   3. Incorrect. In some situations, judgment is required to determine whether an increase in net assets should be reported as a revenue or as a gain.
   4. Incorrect. A transaction can be considered part exchange and part contribution.
3.  
   1. Correct. Revenues from exchange transactions should be recognized based on accrual accounting principles.
   2. Incorrect. The recognition, measurement, and display of revenues and related receivables arising from exchange transactions are similar for both NFP and for-profit entities.
   3. Incorrect. Revenues from exchange transactions should be reported as increases in unrestricted net assets in a statement of activities.
   4. Incorrect. Revenue should be reported net of regularly provided discounts.
4.  
   1. Correct. Some entities receive grants, awards, or sponsorships from other entities. Many of these are contributions, but some of these items may be exchange transactions.
   2. Incorrect. If dues are classified as exchange transactions, they should be recognized as revenue as the earnings process is completed.
   3. Incorrect. Some entities receive dues from their members. These dues may be considered exchange, part exchange and part contribution, or all contribution.
   4. Incorrect. If items of nominal value are given, the transaction will still be reported as a contribution.
5.  
   1. Correct. A conditional promise to give should be recognized only when the conditions are substantially met.
   2. Incorrect. An example of a conditional contribution is where a donor pledges $100,000 if the entity can raise an additional $100,000 in the next 12 months.
   3. Incorrect. Donor-imposed conditions should be substantially met by the entity before the receipt of assets (including contributions receivable) is recognized as a contribution.
   4. Incorrect. Conditional promises to give can contain restrictions.
6.  
   1. Correct. Donor-imposed restrictions can either be purpose, time or perpetual in nature.
   2. Incorrect. In some cases, donor-imposed restrictions are met in the same period that the contribution is received.
   3. Incorrect. Generally, restrictions are stipulated explicitly by the donor in a written or oral communication accompanying the gift.
   4. Incorrect. Contributions can have implied restrictions.
7.  
   1. Correct. Examples of activities that may be reported as gains and losses would include changes in fair value of equity securities.
   2. Incorrect. An important determination in financial reporting for NFPs is whether an item is a revenue or expense, or a gain or loss.
   3. Incorrect. Donations received at an annual fund-raising event would be considered revenue.
   4. Incorrect. Gains and losses can be reported for all classes of net assets.

Case study solutions

Practice question solutions

1. a.
2. c.
3. b.

Knowledge check solutions

1.  
   1. Incorrect. Program services are activities that result in goods and services being distributed to beneficiaries, customers, or members that fulfill the purposes or mission of the organization.
   2. Incorrect. Supporting services may include, as one or more separate categories, cost of sales and costs of other revenue-generating activities that are not program related.
   3. Correct. Supporting services are activities other than program services and include management and general, fund-raising, and membership-development activities.
   4. Incorrect. Classification of supporting services other than management and general and fund-raising can be used by entities.
2.  
   1. Correct. The proper classification of expenses between program services and supporting services is often important to NFP entities.
   2. Incorrect. An entity must report expense information about program services that it provides.
   3. Incorrect. Resource providers often compare the percentage of expenses that go to providing program services to the percentage of expenses that go to supporting services.
   4. Incorrect. Functional reporting of expenses can be reported in the statement of activities or in the notes to the financial statements.
3.  
   1. Incorrect. One entity may report a single classification of program expenses, while others may report several classifications.
   2. Incorrect. Entities may consider guidance in FASB ASC 280 in determining the number of major classes to use.
   3. Correct. The number of classes to use requires professional judgment.
   4. Incorrect. There is no limit on the number of program service classifications.
4.  
   1. Incorrect. They include budgeting activities.
   2. Incorrect. They include oversight activities.
   3. Correct. They include financing activities.
   4. Incorrect. They exclude fund-raising.
5.  
   1. Correct: The analysis is required for all NFP entities.
   2. Incorrect: The analysis reports expenses by functional and natural classification.
   3. Incorrect: It is required for all NFP entities.
   4. Incorrect: The analysis is required for all NFP entities.