Not For Profit Organizations Prepare Financial Statement Accounting Essay

Not For Profit Organizations Prep atomic number 18 Financial Statement physical composition EssayContributions argon the primary revenue enhancement to a Not-for-profit organisation. Because of the depotamental explanation of NFPO is opposite with profit-oriented companies, NFPO has its own accounting rule for recognizing contributions. There are deuce methods of accedeing contributions are circumscribe line method and recession method. The object glass of paper is to identify which method should be used. The restrict strain method recognizes dependant contributions as revenue when they are received. The break method recognizes restricted contributions until related expenses are incurred in future period. The paper will illustrate an example to compare the residuum between the two methods, analyze the effects on financial statements and advantages and disadvantages of for each one method. The timing treatment restricted donation is primary divergence among two methods. The advantages of deferral method is reduces noise from timing mismatch between when expenses are incurred and when revenues are recognized. The matching helps avoid misstating cost for a period. It divulge evaluate the actual expectant punishment of agreement. And deferral method can help the organization to develop an accounting plan extends beyond the current period which more sharp-witted use the contributions. al adept downstairs the deferral method, it is not clear presents breeding regarding how the organization manages the restricted contributions. And deferral of external restricted contributions to a liability may be confuse to the primary users. The restricted fund method will give a different result than deferral method. limit fund method is more clearly to present the information regarding restricted contributions how to use. An other advantage is the restricted funds method increasing comparability between current year and previous eld in one orga nization. This is go forn as both advantage and disadvantage in the same time. Because of an organization chooses which restricted funds to stem, it lack comparability between with two organizations. Choosing an appropriate accounting method is important for non-profit-making. It can attract more donations to support organization activities. Organizations should taste the help of professionals to assist it in implementing its accounts.2.0 IntroductionContributions are the primary revenue to a Not-for-Profit Organization (NFPO). Because the NFPO has characteristics which difference with the for-Profit Organization, its accounting method of recording contributions has own standards in Part III of CICA Handbook-Accounting section. NFPO is required to use the restricted fund method or the deferral method of recording contributions. The purpose of this report is to identify which accounting method should be used to record contributions when Not-for-Profit organization prepares the fi nancial statements. The report will illustrate an example to compare the different between the two methods, analyze the effects on financial statements and advantages and disadvantages of each method. This report is significance because adoption of different accounting method will affect result of financial statement presented. Financial statements are important communication information about NFPO to members, contributors and creditors. Financial statements satisfy their and others interested needs, like the financial condition of organizations and how the management has discharged its stewardship responsibility to those that strike offerd resources to the organizations, especiall(a)y important as resources are contributed for specific purposes and management is accountable for the appropriate utilization of such resources. The study is limited to Not-for-Profit Organization.The potentially benefit from this report is for all Not-for-Profit organizations. CICA states that many no t-for-profits are line of business to account requirements such as the production of audited statements or mandatory reporting to funders. (Improved Annual Reporting by Not-for-Profit Organizations.p4) Thus, effective financial report help develop an organizations reputation. They can make a support, and can be a key means of reaching new partners and volunteers.3.0 BackgroundAlthough the not-for-profit organization applies a separate answer of accounting standards in Part III of the CICA Handbook, the Accounting Standards Board (AcSB) emphasizes that the accounting standards for not-for-profit are not a stand-alone set of standard, there should be no differences in accounting between profit-oriented enterprises and non-for-profit organizations when the circumstances and transaction are the some. (CICA. Handbook) In 2008, the AcSB invited not-for-profit organizations to comment on a proposal that would see them use the same outline of financial reporting that publicly traded co rporations would soon be using. Some respondents opposed change the rules goerning the way they report their financial information. When you try to put human organizations in the same realm as publicly traded organizations it becomes a challenge because the users of the financial statements have very different needs than a shareholder would have. verbalize Michael Herrea, interim treasurer for the Anglican Church of Canada. If the church was required to use IFRS, Mr. Herrera said it would greatly increase the amount of financial reporting required the supernumerary information generated would be of no benefit to end users. According to comments received, the AcSB adopted a free choice of the accounting standards for not-for-profit organizations in Part III or IFRSs in Part I of the Handbook. Let us assume that non-for-profit organizations apply Part III of Handbook, which requires recording contributions should adopt restricted fund method or deferral method.4.0 DefinitionNot-for -profit organizations have three types of contributions to report open-ended contributions, restricted contributions and gift contributions. Following I will discuss that how three types of contributions are accounted for under the restricted fund method and the deferral method.4.1 Deferral orderUnder the deferred method, unrestricted contributions are automatically recorded as revenue when they are received. Restricted contributions are recorded as revenue until the related expense as been incurred in the future. Endowment contributions are recognized as direct increases in give notice summations, which are shown in the statement of changes in net assets. Especially, restricted contributions for the purchase of depreciable capital assets are deferred the revenue is realized as the asset is being amortized. Non-depreciable capital assets, like land, are recognized as increase in net assets.4.2 Restricted Fund MethodThe restricted fund method requires the entity must have a wo rldwide fund and at least one restricted fund. The Unrestricted contributions and investment income are recorded as revenue in general fund. Restricted contributions are recognized as revenue if a restricted fund has been established for that purpose. If no related fund has been established, restricted contributions are interact the same way under the deferred method in general fund.5.0 Comparison on Deferral Method and Restricted fund MethodThe primary difference among two methods is timing treatment restricted contributions. This affects the amount of liabilities and revenues reported. There is an example details a NFPO using deferral method and restricted fund method of recording contributions separately blow.The first rudiment Company is a not-for-profit training organization, funded through an agreement with the Province of AB. alphabets purpose is to provide accounting training program to all accountants in Alberta. alphabet received $100,000 from the Province to establis h the Princess Royal Scholarship endowment. This amount was invested in debt securities, which generated the $50,000 of investment income. The investment income is restricted for use to provide yearly scholarships. $900,000 received from a wealthy and grateful benefactor on Jan 1, 2012 the beginning of its fiscal year. He requested that the property was to be used for get and maintaining a property to house the administrative offices and operating facility. At the July 1, the following item were purchased in cash Land $400,000 operating facility $300,000, it estimated life of 20 years. At the November 21, a donor contributes $10,000, without restriction for the operation of alphabet. $ 25,000 of investment income paid out for Scholarship. In addition, ABC spent $16,000 for the year on maintenance be for the operating facility.DonationsDeferral MethodRestricted Fund MethodPresentationOne fundone general fund one capital fund one endowment fundScholarshipAs net assetRecognized as revenue in endowment fundFacilityinclude in deferred contribution Recognized as revenue until facility expense incurredRecognized as revenue in capital fundAmortization find to amortize deferred contributionIncluded in capital fundInterest earned on endowmentIncluded in deferred contributionRecognized as revenue until scholarships paid outRecognized as revenue in endowment fundLandAs net assetAs asset in capital fund6.0 What are the effects on Financial Statements?Primarily the nonprofit organization must produce three important annual financial statements the statement of financial position, the statement of operation, and the statement of cash flow. Kelly Bourgeois conclude that each component of a nonprofit organizations existence, like organizations programs or projects, is babelike on the organizations financial feasibility. Financial feasibly is accounted for through primarily those three financial statements. One of the principle differences in nonprofit financial statements compared to for-profit entities is the objective of a nonprofit is to realize its socially desirable goals and objectives for the community it serves, rather than to realize a net profit (2003. P16). According to analysis above, financial statements are showed blow.6.1 Deferral MethodABCThe Statement of OperationFor the year ended celestial latitude 31, 2012RevenueContributions 58,500ExpenseMaintenance expense 16,000Amortization 7,500Scholarship 25,00048,500Excess revenues over expenses 10,000ABCStatement of Changes in internet AssetsFor the year ended December 31, 2012Unrestricted Investment in Restricted for beFunds Capital Assets Endowment top assets at theBeginning of the year -Add Excess revenuesOver expenses 10,000 10,000Investment inLand 400,000 400,000Endowment 100,000 100,000Net assets at end of year 10,000 400,000 100,000 510,000ABCStatement of Financial PositionFor the year ended December 31, 2012AssetsCash and investment 319,000Capital assetsLand 400,000Operating f acility 300,000Accumulated amortisation (7,500) 692,5001011,500LiabilitiesDeferred contributions 501,500Net assetsInvested in capital assets 400,000Restricted for endowment 100,000Unrestricted net assets 10,000 510,0001011,5006.2 Restricted Fund MethodIf the ABC adopts the restricted fund method of recording contributions, the different format and results of financial statements will be presented than the deferral method.ABCStatement of OperationFor the year ended of December 31, 2012General Capital Endowment TotalFund Fund FundRevenuesContributions 10,000 900,000 100,000 1010,000Interest income 50,000 50,000ExpensesMaintenance 16,000 16,000Amortization 7,500 7,500Scholarship 25,000 25,000Excess of revenuesOver expenses 10,000 876,500 125,000 1011,500ABCStatement of PositionFor the year ended of December 31, 2012General Capital Endowment TotalFund Fund FundAssetsCash and investment 10,000 184,000 125,000 319,000Capital assetsLand 400,000 400,000Operating facility 300,000 300,000Ac cumulated amortization (7,500) (7,500)10,000 876,500 125,000 1,011,500LiabilitiesDeferred contributions Fund balancesInvested in capital assets 692,500 692,500Externally restricted 184,000 184,000Endowment 125,000 125,000Unrestricted 10,000 10,00010,000 876,500 125,000 1,011,500(Fund balance=Asset-Liability)Under the deferral method, interest is recognized as an increase in the contribution revenue on the statement of operation as scholarship paid out. The operating facility is capitalized and amortization is recorded as expense. The amount of the restricted contribution recognized as revenue for the year is equal to the corresponding expenses incurred. The revenue over expense $10,000 which is unrestricted contribution received. The amount of the contribution not used at the end of the year is recorded as an increase in the liabilities deferred contributions on the statement of position. The deferred contributions decrease when the related revenues are recognized. Land and endowm ent are recorded as increase in net asset. Under the restricted fund method, the contributions are classified to general fund, capital fund and endowment fund. Each fund has a self-balancing separately. The Contributions and interest earned are immediately recognized as revenues in the corresponding fund. Any expenditure related to that fund is deducted from the balance. In this case, using the restricted fund method of recording contributions is better than using the deferral method. Because the restricted fund method is more clearly shows the ABC how to spend the restricted contributions. The restricted fund method makes ABC easy to report activity to its members, donators, and also to any government entity that is charged with the responsibility of overseeing its operation.7.0 Advantages and Disadvantages in the first place identify which accounting method should be used of recording contributions for nonprofit, it is necessary to know the advantages and disadvantages of the rest ricted fund method and the deferral method. In terms of the ABC example this means that two methods would give different results of financial statements.7.1 Deferral MethodUnder the deferral method, the recorded deferred contributions are transferred to the income statement as revenue when corresponding expenses been incurred. The contribution revenue is matched to the related expenses in the same accounting period.7.1.1 AdvantagesFor an accounting perspective, using the deferral method means the contribution revenues expected during a specific accounting period are directly matched to the anticipated expenses during this period. This helps the organization to develop an accounting plan extends beyond the current period which more rational use the contributions. Secondly, the deferral method reduces noise from timing mismatch between when expenses are incurred and when revenues are recognized. The matching helps avoid misstating cost for a period. The mention above, the objective of nonprofit financial statements is assessing whether the organization is achieving its objectives at the lowest possible cost. The deferral method can avoid misstating, for instance, avoid result in understated cost. Thus, it better evaluate the actual performance of organization.7.1.2 DisadvantagesAlong with the benefits of the deferral method, there are several disadvantages need to be aware of. Using the deferral method the results of the unrestricted and restricted contributions are combined, and organization-wide totals are presented in the each of the financial statement. The restricted contributions remain unfulfilled are accumulated as deferred contribution. The organizations excess of revenue over expenses for the period represents the increase in resources that are not restricted to cover specific expenses of a future period (Cynthia L. Orr. 1996. P4). Thus, it is not clearly presents information regarding how the organization manages the restricted contributions. Another disadvantage is the restrictions are deferred and not reported until used. Deferral of external restricted contributions to a liability may be confuse to the basic users.7.2 Restricted Fund MethodAs mentioned above that the fund accounting must be set up if a nonprofit adopts the restricted fund method. The organization would choose which restricted funds to report, and all similar contributions would be treated in the same manner.7.2.1AdvantagesUsing fund accounting ashes to record contributions can help to ensure that organizations use their resources in accordance with the stipulations donors granting agencies and governing boards impose. Fund accounting segregates the account balances related to its purpose and keeps these funds from mingling with the other accounts of the organization. This ensures that the assets assigned to each fund remain available for the purpose of that fund. And the restricted fund method keeps the organization accountable to the donors who support the organization. Each donor wants to see the nonprofit serve the individuals who need its assistance. When the nonprofit organization issues its financial statements at the end of the year, the contributors can review the performance of each fund. The financial statements identify the money received for each fund and how the organization distributes those funds (Kathy Adams Mclntosh). Thus, the restricted fund method is more clearly to present the information of restrictions. Secondly, choosing the restricted funds to report and treating similar contributions in same manner consistently that is increase comparability between current year and previous years in one organization. This is seen as both advantage and disadvantage in the same time.7.2.2DisadvantagesBecause of an organization chooses which restricted funds to report, it lack comparability between with two organizations. Because of this choice, two organizations following the restricted fund method may each report similar kind s of restricted contributions differently. For example, one organization may present contributions restricted for purchasing equipment in a separate restricted capital fund. Another organization may not report a separate capital fund. It results in lacking comparability on similar contributions of two organizations.8.0 RecommendationWhich accounting method is best? This is a matter of what the entity wants to communicate in the financial statements. The best system is a system that gives the members of an organization control over its financial health and portrays this health through their records.(Kelly Bourgeo. June, 2003. p16). So the executive director and board of nonprofit should assess the financial health thought that, the financial statements should be easily comprehensible so that any person taking the time to read them will understand the financial project they should be concise and they should clearly show the relationship among the each transaction without confusing d etail involving transfers (Kelly Bourgeo. P17).First, I recommend that using fund accounting. Because the fund accounting approach is more clearly presents information regarding how the restrictions are distribution and spent. And it can be effective, especially when accounting reports must be sent to more than one government agency. For example, if a charity receives an endowment for the childcare program, a contribution restricted to support homeless shelter and a grant for providing meals to stray pets, each of these programs is to fall into the jurisdiction of a different government agency. So by creating funds for each program, it is provide each monitoring agency with an accounting of what has been through with(p) with the donations received to support each program (Malcolm Tatum. 2012).The organizations determine an appropriate accounting method should determine who the uses of the financial statements will be and what their needs. For a nonprofit, it receives recurring rest ricted contributions, so donors will be one of the major users. In my opinion, the restricted fund method is better than deferral method. Because the restricted fund method provides donors with entirely but robust information on how their contributions are be used. It let users clearly to understand the financial pictures. And it reflects a more accurate accrual al-Qaida of revenue recognition for the funds presented than the deferral method. The deferral method may be confusing to users because of recording restricted contributions as a liability. Each method has advantages and disadvantages separately for its use. So organizations should seek the help of professionals to assist it in implementing its accounts.9.0 ConclusionThe not-for-profit organization is required to choose either the restricted fund method or the deferral method of recording contributions when it prepares financial statements. According to analysis above, the timing restriction treatment is the primary cause for some of the more significant reporting and recognition differences. Using the restricted fund method, the restricted contributions are recognized as revenue when they are received. It more clearly presents the information of restrictions for the funds presented. The deferral method recognizes contributions until they are spent. The matching principle helps avoid misstating cost for a period. It better evaluate the actual performance of organization. But it may be confusing to basic users because of deferred restricted contributions as a liability. Each method has its advantages and disadvantages. The choice depends on the financial reporting objective and on the motivations of organizations manager. The accounting method, once selected, all received contributions must been applied that method consistently. The accounting policy seems be changed if the organization changes its method. There is not required to, I recommend that nonprofit uses fund-based structure. If no such fund has been established, restricted contributions are treated the same way as under the deferred contribution method. Choosing an appropriate revenue recognition policy is important. The organizations should seek the help of professionals to assist it in implementing its accounts.