Implementing FASB 116 and 117
Not-for-profit organizations (NPOs) face some crucial decisions. Financial Accounting Standards Board Statement no. 116, Accounting for Contributions Received and Contributions Made, and no. 117, Financial Statements of Not-for-Profit Organizations, established accounting standards for contributions received by NPOs and standards for their general-purpose external financial statements. To highlight the decision-making process NPOs will go through in implementing the standards, this article is written from the viewpoint of Nonprof, a hypothetical NPO. It follows the organization as it decides what changes it needs to make during the implementation process. Statement nos. 116 and 117 are effective for financial statements issued for fiscal years beginning after December 15, 1994. However, the effective date for organizations with less than $5 million in total assets and less than $1 million in annual expenses is for fiscal years beginning after December 15, 1995. Implementation Timetable FASB 116 and 117 Larger entities: Calendar year 1995, Fiscal year 1996 Smaller entities: Calendar year 1996, total assets > $5 million Fiscal year 1997 annual expenses > $1 million The controller of Nonprof, the hypothetical NPO, approached implementation systematically by * Developing or revising systems for identifying and recording contributions. * Choosing accounting policies for recognizing certain contributions. * Classifying fund balances by net asset class. * Deciding on the format and content of financial statements. * Drafting the appropriate financial statement disclosures. Each of these major steps is discussed below. DEVELOPING SYSTEMS FOR TRACKING CONTRIBUTIONS Implementing Statement nos. 116 and 117 required Nonprof to capture, process and communicate information differently and to improve certain of its organizational interfaces, including * Establishing clear definitions of terms such as intention to give, promise to give, conditional or unconditional promise to give, permanently restricted, temporarily restricted, unrestricted, time restricted and purpose restricted which all departments likely to receive contributions must understand. * Ensuring the wording of pledge cards and other fundraising materials results in unambiguous responses. * Creating communication mechanisms to keep all interested parties apprised of the status of restricted contributions. * Establishing systems to record and value contributed goods and services. * Enhancing systems that track volunteer services. Identifying contributions. Statement no. 116 says contributions should be recognized as revenues or gains, in the period received, and also as assets, decreases in liabilities or as expenses--depending on the form of benefits received. As it began to implement Statement no. 116, Nonprof identified several types of transactions that might require new or different recognition, such as contributions previously recorded as deferred revenue, promises to give and contributions of goods and services. Traditionally, contributions of cash or other assets had been recorded as deferred revenue if they were related to programs or activities that had not yet begun. During implementation, the controller reviewed the deferred revenue accounts and discovered most items represented tuition deposits for classes and workshops in the coming year. Because these were reciprocal transactions, they were properly classified. One item, however, had to be reclassified as temporarily restricted revenue; it was a contribution from a foundation for the following year's education program. Before implementing Statement no. 116, Nonprof had not recorded promises to give--"pledges." The development department tracked pledges and reported them to the accounting department only on receipt of cash or other assets. …