4
STATEMENT OF ACTIVITIES
PERSPECTIVE AND ISSUES
“Statement of Activities” is the name given to a statement that reflects all of the organization's financial transactions and calculations from the beginning to the end of the fiscal year which result in increases and decreases in an organization's net assets. It is a not-for-profit organization's income statement. The title of the statement could be any one of a number of different names, including “Statement of Revenue, Expenses, and Changes in Net Assets,” or “Statement of Income and Expenses.” The title is not particularly important so long as the statement shows all relevant activity.
The statement of activities could be broken into two sections, and each treated as a separate statement; that is, a section showing revenue, expenses, and nonexpendable additions, and a section showing changes in net assets. However, there seems little purpose in creating a separate statement of changes in net assets since the only types of transactions normally shown in the “changes in net assets” section of the statement of activities are the addition of the excess or loss for the year and certain reclassifications. Most organizations will prepare a single, all-inclusive statement of activities.
FASB ASC 958-225 provides the basic GAAP requirements for the statement of activities.
In August 2016 the FASB issued Accounting Standards Update 2016-14 entitled Not-for-Profit Entities (Topic 958) Presentation of Financial Statements of Not-for-Profit Entities. Upon implementation of ASU 2016-14, the statement of activities would report the changes in net assets for two classes of net assets at the end of the period—net assets with donor restrictions and net assets without donor restrictions—rather than for the currently required three classes. The statement of activities would also continue to report the amount of change in total net assets. Additional details on reporting net assets under ASU 2016-14 are provided in Chapter 8. ASU 2016-14 is effective for annual financial statements issued for fiscal years beginning after December 15, 2017, with early application permitted.
CONCEPTS, RULES, AND EXAMPLES
FASB ASC 958-225-05-2 describes the purpose of the statement of activities as to provide information about:
- The effects of transactions and other events and circumstances that change the amount and nature of net assets;
- The relationships of those transactions and other events and circumstances to each other; and
- How the organization's resources are used in providing various programs or services.
A subtle difference in a not-for-profit organization's statement of activities and a commercial organization's statement of earnings is that the statement of activities reflects changes in the “nature” of net assets in addition to changes in the amount of net assets. Because the statement of activities reflects changes for each of the three types of net assets (unrestricted, temporarily restricted, and permanently restricted), a change in the type of an asset (usually a temporarily restricted net asset becomes an unrestricted net asset) would be reflected on the statement of activities. Upon implementation of 2016-14, the statement of activities will reflect the changes in two net asset classes—net assets with donor restrictions and net assets without donor restrictions.
The information provided by the statement of activities, along with the related note disclosures and other financial statement information, is intended to provide the reader with information that will:
- Evaluate the not-for-profit organization's performance during the period being reported, generally its fiscal year;
- Assess the not-for-profit organization's service efforts and its ability to continue to provide services; and
- Assess how a not-for-profit organization's managers have discharged their stewardship responsibilities and other aspects of their performance.
As will be described in Chapter 14 on Functional Reporting, the statement of activities of a not-for-profit organization provides not only information on increases and decreases in net assets, but also how assets were spent by the organization.
The statement of activities reports the organization's change in net assets, or the “increase/decrease in net assets,” and this change must equal the change in the net assets reported on the statement of financial position. In particular, the statement of activities should report the change in each class of net assets (i.e., unrestricted, temporarily restricted, and permanently restricted) for the period shown. Information about the organization's revenues, gains, losses, expenses, and reclassification should be reported. The statement of activities should apply the GAAP disclosure and display provisions related to extraordinary items, discontinued operations, and accounting changes, and present a subtotal for the change in each class of net assets before those items.
Elements of the Change in Net Assets
According to Statement of Financial Accounting Concepts (SFAC) 6, Elements of Financial Statements, each item presented in the statement of activities may be categorized according to one of the following components:
- Revenues—Cash inflows (or the equivalent) from delivering or producing goods, rendering services, or other activities that have occurred or will eventuate as a result of an entity's major or central operations. The cash inflows may be actual cash receipts or expected cash receipts.
- Expenses—Outflows or other using up of assets or incurrences of liabilities (or a combination of both) from delivering or producing goods, rendering services, or carrying out other activities that constitute the entity's ongoing major or central operations.
- Gains—Increases in net assets from peripheral or incidental transactions of an entity and from all other transactions and other events and circumstances affecting the entity except those that result from revenues.
- Losses—Decreases in net assets from peripheral or incidental transactions of an entity and from all other transactions and other events and circumstances affecting the entity except those that result from expenses.
- Reclassifications—Increases to one net asset class and decreases to another give rise to reclassification. These occur as donor restrictions become satisfied either because of the passage of time or are fulfilled and removed by actions of the organization in compliance with those stipulations. In this case, temporarily restricted net assets would be reclassified to unrestricted net assets. (Reclassifications, accordingly, do not involve inflows, outflows, or other changes in assets or liabilities.)
Classifying amounts as revenues, expenses, gains, or losses varies depending on the nature of each organization's operations and historical accounting practices. Importantly, the statement of activities must show these classifications of increases and decreases in net assets for each of the three categories of net assets—unrestricted, temporarily restricted, and permanently restricted.
Classification of Revenues, Expenses, Gains and Losses, and Reclassifications
The statement of activities reports revenues as increases in unrestricted net assets unless the use of the assets received is limited by donor-imposed restrictions. For example, fees from rendering services and income from investments generally are unrestricted; however, income from donor-restricted permanent or term endowments may be donor-restricted and increase either temporarily restricted net assets or permanently restricted net assets. The essence of this discussion will not change upon implementation of ASU 2016-14, although both of the net assets classified as temporarily and/or permanently restricted will be reported as part of a single net asset class—net assets with donor restrictions. Donor, organizational and legal requirements as to the spending of the earnings on endowments is not changed by the changes in the accounting rules. Not-for-profit organizations will continue to need to keep underlying records of the types of donor restrictions that exist on their donor-restricted net assets to ensure compliance with these requirements.
In the absence of a donor's explicit stipulation or circumstances surrounding the receipt of the contribution that make clear the donor's implicit restriction on use, contributions are reported as unrestricted revenues or gains (unrestricted support), which increase unrestricted net assets. Donor-restricted contributions are reported as restricted revenues or gains (restricted support), which increase temporarily restricted net assets or permanently restricted net assets depending on the type of restriction. However, donor-restricted contributions whose restrictions are met in the same reporting period may be reported as unrestricted support provided that an organization reports consistently from period to period and discloses its accounting policy. Accounting for contributions is more fully discussed in Chapter 9.
The statement of activities also reports gains and losses recognized on investments and other assets (or liabilities) as increases or decreases in unrestricted net assets unless their use is temporarily or permanently restricted by explicit donor stipulations or by law. For example, net gains on investment assets, to the extent recognized in financial statements, are reported as increases in unrestricted net assets unless their use is restricted to a specified purpose or future period. If the governing board determines that the relevant law requires the organization to permanently retain some portion of gains on investment assets of endowment funds, that amount shall be reported as an increase in permanently restricted net assets. Accounting for investments is more fully discussed in Chapter 10.
The statement of activities reports expenses as decreases in unrestricted net assets.
Classifying revenues, expenses, gains, and losses within classes of net assets does not preclude incorporating additional classifications within a statement of activities. For example, within a class or classes of changes in net assets, an organization may classify items as operating or nonoperating, expendable and nonexpendable, earned and unearned, recurring and nonrecurring, or in other ways.
Expirations of donor-imposed restrictions that simultaneously increase one class of net assets and decrease another are referred to as “reclassifications.” According to FASB ASC 958-225-45-3, reclassifications are required to be reported as separate items on the statement of activities.
Information about Gross Amounts of Revenues and Expenses
To help explain the relationships of a not-for-profit organization's ongoing major or central operations and activities, the statement of activities reports the gross amounts of revenues and expenses. In other words, revenues are not reported net of related expenses and expenses are not reported net of related revenues. However, investment revenues may be reported net of related expenses, such as custodial fees and investment advisory fees, provided that the amount of the expenses is disclosed either on the face of the statement of activities or in notes to financial statements.
A statement of activities may report gains and losses as net amounts if they result from peripheral or incidental transactions or from other events and circumstances that may be largely beyond the control of the organization and its management. Information about their net amounts generally is adequate to understand the organization's activities.
Information about an Organization's Operations
FASB ASC 958-225 permits not-for-profit organizations to include additional classifications of revenues, expenses, gains, and losses within the statement of activities. The most common classification seen in practice is the segregation of operating items from nonoperating items. Many not-for-profit organizations find this helpful to report the results of their operations separately from items such as investment gains and losses or gains and losses from the sale of property or other fixed assets that are unrelated to the day-to-day operations of most not-for-profit organizations. FASB ASC 958-225-45-9 provides additional examples of segregating expendable items from nonexpendable items, earned items from unearned items, and recurring from nonrecurring items. GAAP neither specifically encourages nor discourages the use of these further classifications of revenues, expenses, gains, or losses.
When a not-for-profit organization does report results of operations separately from nonoperating items (such as reporting the excess of operating revenues over operating expenses, or vice versa), these amounts should be reported within a financial statement that, at a minimum, reports the change in unrestricted net assets for the period. In addition, if an organization's use of the term “operations” is not apparent from the details presented on the face of the financial statements, a note to the financial statement should be provided that describes the nature of the reported measure of operations or the items excluded from operations. Essentially, GAAP requires two things—that a stand-alone statement presenting only operating items is not appropriate and that a reader be able to understand the types of items that are considered operating and nonoperating.
Information about an Organization's Service Efforts
One of the more important uses of a not-for-profit organization's financial statements, in particular the statement of activities, is to determine how much of the total of an organization's expenses were spent on program activities, management and general activities, and fundraising activities. GAAP contains specific guidance on reporting expenses in these classifications. Voluntary health and welfare organizations are also required to report expenses in their natural classification (such as rent, salaries, etc.). Other not-for-profit organizations are encouraged by GAAP to provide this additional natural expense classification information. These specific requirements are discussed in Chapter 14. In addition, Chapter 11 describes how to account for expenses that relate to more than one activity, particularly program activities that contain a fundraising appeal.
FINANCIAL STATEMENT PRESENTATION
GAAP does not require any particular format for the statement of activities as long as revenues, expenses, gains, losses, and reclassifications are properly classified by net asset class, and the change in net assets is presented both by net asset class and in total. Presenting activities for each of the three classifications of net assets makes it somewhat challenging to present a not-for-profit organization's statement of activities in a clear, readable manner. Furthermore, GAAP does not require not-for-profit organizations to report “comprehensive income” as do commercial enterprises. Upon implementation of ASU 2016-14, only two classifications of net assets will be reported on the statement of activities—net assets with donor restrictions and net assets without donor restrictions. There are three formats for the statement of activities:
- Single column. This format reports information in a single column. Since it reports changes in the three net asset classes one after the other, it is also referred to as the layered format. This format most easily accommodates presentation of comparative amounts for prior years. Exhibit 1 presents an example of a single-column format.
The Helping Hand Children's Organization
Statement of Activities
Year Ended June 30, 20X1
(in thousands)Change in unrestricted net assets: Revenues and gains: - Contributions
$xxx - Fees
xxx - Income on long-term investments (Note E)
xxx - Other investment income (Note E)
xxx - Net unrealized and realized gains on long-term investments (Note E)
xxx - Other
xxx - Total unrestricted revenues and gains
xxx - Net assets released from restrictions (Note D):
- Satisfaction of program restrictions
xxx - Satisfaction of equipment acquisition restrictions
xxx - Expiration of time restrictions
xxx - Total net assets released from restrictions
xxx - Total unrestricted revenues, gains, and other support
xxx Expenses and losses: - Program A
xxx - Program B
xxx - Program C
xxx - Management and general
xxx - Fundraising
xxx - Total expenses (Note F)
xxx - Fire loss
xxx - Total expenses and losses
xxx - Increase in unrestricted net assets
xxx Change in temporarily restricted net assets: - Contributions
xxx Income on long-term investments (Note E) xxx Net unrealized and realized gains on long-term investments (Note E) xxx Actuarial loss on annuity obligations (xxx) Net assets released from restrictions (Note D) (xxx) - Decrease in temporarily restricted net assets
(xxx) Change in permanently restricted net assets: - Contributions
xxx - Income on long-term investments (Note E)
xxx - Net unrealized and realized gains on long-term investments (Note E)
xxx - Increase in permanently restricted net assets
xxx Increase in net assets xxx Net assets at beginning of year xxx Net assets at end of year $xxx - Multi column. A multicolumn format presents a column for each class of net assets and adds an optional total column. This format highlights the effects of expirations on donor restrictions because it results in reclassifications between classes of net assets. It also accommodates presentation of aggregated information about contributions and investment income for the entity as a whole. Exhibit 2 presents an example of a multicolumn format.
The Helping Hand Children's Organization
Statement of Activities
Year Ended June 30, 20X1
(in thousands)Unrestricted Temporarilyrestricted Permanentlyrestricted Total Revenues, gains, and other support: - Contributions
$xxx $xxx $xxx $xxx - Fees
xxx xxx - Income on long-term investments (Note E)
xxx xxx xxx xxx - Other investment income (Note E)
xxx xxx - Net unrealized and realized gains on long-term investments (Note E)
xxx xxx xxx xxx - Other
xxx xxx Net assets released from restrictions (Note D): - Satisfaction of program restrictions
xxx (xxx) - Satisfaction of equipment acquisition restrictions
xxx (xxx) - Expiration of time restrictions
xxx (xxx) - Total revenues, gains, and other support
xxx (xxx) xxx xxx Expenses and losses: - Program A
xxx xxx - Program B
xxx xxx - Program C
xxx xxx - Management and general
xxx xxx - Fundraising
xxx xxx - Total expenses (Note F)
xxx xxx - Fire loss
xxx xxx - Actuarial loss on annuity obligations
xxx xxx - Total expenses and losses
xxx xxx xxx Change in net assets xxx (xxx) xxx xxx Net assets at beginning of year xxx xxx xxx xxx Net assets at end of year $xxx $xxx $xxx $xxx - Two separate statements. In this format, two separate statements are presented with summary amounts from a statement of revenues, expenses, and other changes in unrestricted net assets (Statement 1) and a statement of changes in net assets (Statement 2). The two-statement approach focuses attention on changes in unrestricted net assets. This format may be preferred by organizations that view their operating activities as excluding receipts of donor-restricted revenues and gains from contributions and investment income. Exhibit 3 presents an example of the two-statement format.
The multicolumn format appears to have gained the greatest popularity for financial reporting by not-for-profit organizations.
| The Helping Hand Children's Organization Statement of Unrestricted Revenues, Expenses, and Other Changes in Unrestricted Net Assets Year Ended June 30, 20X1 (in thousands) |
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| Unrestricted revenues and gains: | |
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$xxx |
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xxx |
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xxx |
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xxx |
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xxx |
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xxx |
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xxx |
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xxx |
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xxx |
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xxx |
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xxx |
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xxx |
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xxx |
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xxx |
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xxx |
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xxx |
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xxx |
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$xxx |
| The Helping Hand Children's Organization Statement of Changes in Net Assets Year Ended June 30, 20X1 (in thousands) | |
| Unrestricted net assets: | |
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$xxx |
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xxx |
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(xxx) |
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xxx |
| Temporarily restricted net assets: | |
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xxx |
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xxx |
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xxx |
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(xxx) |
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(xxx) |
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(xxx) |
| Permanently restricted net assets: | |
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xxx |
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xxx |
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xxx |
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xxx |
| Increase in net assets | xxx |
| Net assets at beginning of year | xxx |
| Net assets at end of year | $xxx |
| The Helping Hand Children's Organization Statement of Changes in Net Assets Year Ended June 30, 20X1 (in thousands) | ||||
| Unrestricted | Temporarilyrestricted | Permanentlyrestricted | Total | |
| Revenues, gains, and other support: | ||||
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$xxx | $xxx | ||
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$xxx | $xxx | xxx | |
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xxx | xxx | xxx | |
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xxx | xxx | xxx | |
| Net assets released from restrictions (Note D) | xxx | (xxx) | ||
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xxx | (xxx) | xxx | xxx |
| Expenses and losses: | ||||
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xxx | xxx | ||
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xxx | xxx | ||
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xxx | xxx | xxx | |
| Change in net assets | xxx | (xxx) | xxx | xxx |
| Net assets at beginning of year | xxx | xxx | xxx | xxx |
| Net assets at end of year | $xxx | $xxx | $xxx | $xxx |
DISCLOSURE REQUIREMENTS
The following disclosures should be made in the statement of activities:
- The amount of unrestricted revenue by major category;
- The amount of unrestricted support by major source;
- The amount of current restricted revenue and support by major source;
- The amount of gifts and other income restricted by nonexpendable purposes;
- Change in net assets by class and in total.
There is no requirement that the aggregate of unrestricted support and unrestricted revenue be shown. All of these items should be shown, except that there is no requirement to show “nonexpendable additions” and the excess before that amount separately.
The statement of activities is one of the basic financial statements necessary to present a not-for-profit organization's financial position and changes in net assets in conformity with generally accepted accounting principles. It should report the amount of the changes in each class of net assets and the changes in total net assets for the period for the organization as a whole.