Children and Family Service Center case study.

Tomlinson, Vickie ; Ward, Terry J. ; Smith, G. Robert, Jr. 等

CASE DESCRIPTION

Students often fail to understand that much of the FASB's work does address not-for-profit entities. This case attempts to demonstrate to students the differences between for-profit and notforprofit organizations and how SFACs impact the theory underlying subsequent FASB standards on reporting. Thus, this case attempts to help students better understand the basic principles and concepts that differ between for-profit and not-for-profit organizations. This case specifically addresses SFAC # 4 and SFASs 116 and 117.

This case was designed to be used in a graduate theory or financial reporting class that has a nonprofit component. The case allows students to see through basic research how nonprofits fundamentally differ from for profit entities conceptually and theoretically.

An instructor could also use this case in an undergraduate nonprofit class as a project to introduce students to parts of the FASB's Conceptual Framework that relate to nonprofits, thus helping students to understand the theory behind reporting in a nonprofit environment. Thus, this case can be used in either undergraduate or graduate classes depending on which of the requirements the instructor wishes the students to complete.

CASE SYNOPSIS

In this case, you are asked to take the role of the Director of Fiscal Operations of a not-forprofit organization, Children and Family Service Center. The Trustees have hired you because of concerns that the accounting records are not adequate. You are give ten areas of concern and asked to answer various questions related to these concerns. Thus, you attempt to determine the appropriate treatment for each item. This case will help you to better understand the basic principles and concepts that differ between for-profit and not-for-profit organizations.

INSTRUCTORS' NOTES

Solutions to Requirements

1. Explain what makes a not-for-profit entity distinct from a for-profit entity? You may wish to include in your discussion how Statement of Financial Accounting Concepts (SFAC) # 4 distinguishes the two types of entities.

According to SFAC # 4, the major distinguishing characteristics of a not-for-profit entity from a for-profit entity are as follows:

Receipts of significant amounts of resources are from resource providers who do not expect to receive either repayment or economic benefits proportionate to the resources provided. These resource providers are interested in the services the organization provides.

Operating purposes are not to provide goods and services at a profit or profit equivalent. A not-for-profit's purpose is to use resources to provide goods and services to its constituents and beneficiaries, and it is generally prohibited from distributing assets as dividends to its members, directors, officers, or others.

Absence of defined ownership interests that can be sold, transferred, or redeemed, or that convey entitlement to a share of a residual distribution of resources in the event of liquidation of the organization (SFAC # 4, paragraph 6).

2. According to SFAS # 117, what is the primary purpose of not-for-profit financial statements? Based on SFAC # 4, what are the objectives of not-for-profit financial reporting? Compare these objectives to the objectives of financial reporting for business enterprises described in SFAC # 1. What are the similarities and dissimilarities?

According to SFAS # 117, "the primary purpose of financial statements is to provide relevant information to meet the common interests of donors, members, creditors, and others who provide resources to not-for-profit organizations" (SFAS # 117, paragraph 4). These users have the common interest in "assessing (a) the services an organization provides and its ability to continue to provide those services and (b) how managers discharge their stewardship responsibilities and other aspects of their performance." According to SFAC # 4, the objectives of financial reporting for nonbusiness organizations are:

 To provide information that is useful to present and potential
 resource providers and other users in making rational decisions
 about the allocation of resources to those
 organizations (SFAC # 4, paragraph 35).

 To provide information to help present and potential resource
 providers and other users in assessing the services that a
 nonbusiness organization provides and its
 ability to continue to provide those services
 (SFAC # 4, paragraph 38).

 To provide information that is useful to present and potential
 resource providers and other users in assessing how managers
 of a nonbusiness organization have discharged their stewardship
 responsibilities and about other aspects of their
 performance (SFAC # 4, paragraph 40).

 To provide information about the economic resources,
 obligations, and net resources of an organization, and the
 effects of transactions, events, and circumstances that
 change resources and interest in those resources
 (SFAC # 4, paragraph 43).

According to SFAC # 1, the objectives of financial reporting for business enterprises are:

 To provide information that is useful to present and
 potential investors and creditors and other users in
 making rational investment, credit, and similar decisions
 (SFAC # 1, paragraph 34).

 To provide information to help present and potential
 investors and creditors and other users in assessing the
 amounts, timing, and uncertainty of prospective cash
 receipts from dividends or interest and the proceeds from
 the sale, redemption, or maturity of securities or loans
 (SFAC # 1, paragraph 37).

 To provide information about the economic resources of an
 enterprise, the claims to those resources, and the effects
 of transactions, events, and circumstances that
 change its resources and claims to those resources
 (SFAC # 1, paragraph 40).

Both sets of objectives focus on providing information that would be useful in deciding whether to provide resources to an entity. However, the two sets of objectives reflect different interests of the respective resource providers; investors and creditors seek monetary repayment of, and a return on, resources they provide. Nonbusiness resource providers expect no, or disproportionate, benefits to the resources provided.

One of the primary objectives of financial reporting in SFAC # 4 was providing information to assess how managers have discharged their stewardship responsibilities. This objective is important in not-for-profit organizations because these organizations are not profit oriented and are dependent upon the continuing support of resource providers. However, in SFAC # 1, this objective is viewed as less important in financial reporting for business entities.

The objectives regarding economic resources of an enterprise are very similar. The main distinguishing difference is in the terminology that reflects one of the distinguishing characteristics of nonbusiness organizations-the lack of ownership interests entitled to a residual distribution in the event of liquidation.

3. SFAS # 117 requires that the net assets of nonprofit organizations be classified in one of three ways. Identify these three classifications and briefly distinguish between them.

The classifications required by SFAS # 117 were first identified in SFAC # 6. These classifications are: permanently restricted; temporarily restricted; and unrestricted. Permanently restricted net assets result from:

 contributions of assets where donors impose limitations that expire
 as time passes or may be fulfilled by other organization actions,

 other asset changes subject to similar limitations, and

 where donors require reclassifications from (or to) other
 classes of net assets (SFAC # 6, paragraph 92).

These assets include endowments whose term lasts indefinitely and other certain assets that must be maintained or used in a certain way. The assets will be restricted so long as the organization has custody of those assets. Temporarily restricted net assets result from:

 contributions of assets where donors impose limitations
 that expire as time passes or may be fulfilled by other
 organization actions,

 other asset changes subject to similar limitations, and

 where donors require reclassifications from (or to) other
 classes of net assets (SFAC # 6, paragraph 93).

These assets include term endowments where the term lasts for a specific period or expires once certain requirements are met. Unrestricted net assets result from:

 all revenues, expenses, gains, and losses that are not
 changes in permanently or temporarily restricted net assets,
 and

 reclassifications from (or to) other classes of net
 assets (SFAC # 6, paragraph 94).

All assets are assumed unrestricted unless there are specific donor limitations.

4. Based on SFAC # 6 and SFAS # 116, explain the difference between a donor-imposed gift restriction and a conditional promise to give. How is a conditional promise to give reported on the financial statements?

According to SFAS # 116, a donor-imposed gift restriction is a donor stipulation that specifies a use for a contributed asset that may be temporary or permanent (SFAS # 116, paragraphs 11 through 16). The donor has already transferred the asset to the organization, but the asset must be used according to the specific use set by the donor. However, the use must fall within the broad limits resulting from the nature of the organization, the environment in which it operates, and the purposes specified in its articles of incorporation or bylaws or comparable documents.

A conditional promise to give depends on the occurrence of a specified future and uncertain event. The donor does not transfer the gift to the donee until the conditions on which the promise depends are substantially met.

Recipients of conditional promises to give are to disclose the following in the financial reports:

 The total of the amounts promised.

 A description and amount for each group of promises
 having similar characteristics, such as amounts of promises
 conditioned on establishing new programs, completing
 a new building, and raising matching gifts by a specified date.

5. Following the enumerated items in this case, prepare the journal entries necessary to reclassify net assets at December 31, 2001 into the various classes required by SFAS # 117. Explain the reason for each reclassification and the reason for each nonreclassification.

1) SFAS # 116, paragraph 14, requires that a donor's restriction to restrict use of an asset be explicit or clearly evident as an implicit stipulation. It is impossible for the CFSC to determine the nature of the restriction in this case. Since the accounts were established before any accounting standard addressed the concept of donor restrictions, and since no documentation on the purpose of the accounts can be found, it may be assumed that the accounts represent unrestricted net assets.

2) One of the requirements for an asset to remain restricted is that the asset be under the control of the entity from which the donation was made. Since the Institute for Family Services no longer exists, it may be interpreted to mean that these monies are no longer restricted. To confirm this, the entity should attempt to gain the signatures on the Authorization for Termination of Accounts.

3) The will stipulated the principal amount be restricted for a specific purpose-college scholarships. The will did not stipulate the earnings from this fund also be restricted for this purpose. Kate cannot determine that no student resident of CFSC would ever attend college; some may attend if funds were available. Therefore, since the restricted use is within the nature and purposes of CFSC, the corpus amount would need to be reclassified to temporarily restricted net assets.

Dr. Unrestricted Net Assets $50,000
Cr. Temporarily Restricted Net Assets $50,000

As the funds are used for college scholarships, an entry would be made to release temporarily restricted net assets by debiting Temporarily Restricted Net Assets and crediting Unrestricted Net Assets.

4) According to SFAC # 6, paragraph 96,

"Donors need not explicitly limit uses of contributed assets for a not-for-profit organization to classify the increase in net assets as restricted if circumstances surrounding those receipts make clear the donor's implicit stipulation of restricted use. For example, use of contributed assets is restricted despite absence of a donor's explicit stipulation about use if the assets are received in a fund-raising drive declared to be for a specific purpose . . ."

Therefore, the journal entry needed is:

Dr. Unrestricted Net Assets $800,000
Cr. Temporarily Restricted Net Assets $800,000

According to SFAS # 116, paragraph 9, "Contributions of services shall be recognized if the services received (a) create or enhance nonfinancial assets or (b) require specialized skills, are provided by individuals possessing those skills, and would typically need to be purchased if not provided by donation." Therefore, an additional journal entry needed is:

Dr. Diagnostic Treatment Center, Bristol, TN $20,000
Cr. Temporarily Restricted Net Assets $20,000

According to SFAC # 6, paragraph 115,

"Restrictions are removed from temporarily restricted net assets when stipulated conditions expire or are fulfilled by the organization. . . Purpose-restricted net assets generally become unrestricted when the organization undertakes activities pursuant to the specified purpose, perhaps over several periods, depending on the nature of donors' stipulations. The resulting reclassifications increase unrestricted net assets, often at the same time that the activities that remove the restrictions result in expenses that decrease unrestricted net assets. Temporarily restricted net assets may become unrestricted when an organization incurs liabilities to vendors or employees as it undertakes the activities required by donor stipulations."

Therefore, an additional journal entry needed is:

Dr. Temporarily Restricted Net Assets $120,000
Cr. Unrestricted Net Assets $120,000

It does not matter that more was raised than needed for the project. Once the project is completed, the remaining balance of gifts temporarily restricted for this purpose will be transferred to Unrestricted Net Assets.

5) No journal entry is required for this board designation of endowments. Board designations are not the same as donor restrictions. SFAS # 117 discusses this issue as part of unrestricted net assets (paragraph 116). The standard allows disclosure of board designations in the notes or on the face of the financial statements. However, these designations would be shown as a component on unrestricted net assets.

When the Statement of Financial Position is prepared, the net unrestricted net asset amount, shown as a "Board-designated Endowment", should be $9,455,350 (the $10,305,350 investment account, less the restricted amounts in journal entries 3 ($50,000) and 4 ($800,000) above).

6) SFAS # 116, paragraph 16, addresses the issue of what may be done with long-lived assets that have no donor restrictions. This land is clearly restricted as to use. The covenants restrict the CFSC from ever selling the land or using it for a purpose consistent with the purpose of the organization. Therefore, it should be recorded as permanently restricted.

If the land had not been recorded in the accounting records of the entity, the following entry should be made:

Dr. Land $20,000
Cr. Permanently Restricted Net Assets $20,000

7) SFAS # 116, paragraph 14, clearly requires reporting this type of donation as restricted net assets. Therefore, the entry to correct the receipt is:

Dr. Unrestricted Net Assets $25,000
Cr. Permanently Restricted Net Assets $25,000

SFAS # 117, paragraph 22, requires that changes in fair values of investments be reported as increases or decreases in unrestricted net assets, unless the use of the change in value is restricted by the donor. In this case, the donor said that interest and dividends were to be used for ongoing operations. Thus, these amounts would be reported as changes in unrestricted net assets. Therefore, the loss on the investment should also be reported as a change in unrestricted net assets.

8) SFAS # 116, paragraph 22, states that conditional promises to give should be recognized when the conditions are substantially met. Clearly, this situation exists. Assuming that the donor has not yet been notified, the following entries should be made:

For the amount due from the businessman:

Dr. Promises Receivable $30,000
Cr. Permanently Restricted Net Assets $30,000

For the amounts already received from the "matching donors" and the amount to be reclassified by the CFSC:

Dr. Unrestricted Net Assets $30,000
Cr. Permanently Restricted Net Assets $30,000

9) According to SFAS # 116 paragraph 20, not-for-profit organizations "shall report the contribution income as an increase in either temporarily or permanently restricted net assets if the underlying promise to give is donor restricted." According to paragraph 15, "Receipts of unconditional promises to give with payments due in future periods shall be reported as restricted support unless explicit donor stipulations or circumstances surrounding the receipt of a promise make clear that the donor intended it to be used to support activities of the current period."

In addition, according to SFAS # 116, "Recipients of unconditional promises to give shall disclose the following:

 The amounts of promises receivable in less than one year, in one to
 five years, and in more than five years.

 The amount of the allowance for uncollectible promises receivable.

Therefore, the journal entry needed is:

Dr. Pledges Receivable $5,000
Cr. Allowance for Uncollectible Pledges $500
Cr. Temporarily Restricted Net Assets $4,500

According to SFAS # 116, paragraph 155, the Financial Accounting Standards Board (FASB) decided to permit contributions with restrictions that are met in the same reporting period to be reported as unrestricted support provided that an organization reports consistently from period to period and discloses its accounting policy. Therefore, the gifts of $15,000 would not need to be reclassified to Temporarily Restricted Net Assets because the stipulation has been fulfilled during the same year that the gifts were received.

10) According to SFAS # 116, paragraph 7, "A donor-imposed condition on a transfer of assets or a promise to give specifies a future and uncertain event whose occurrence or failure to occur gives the promisor a right of return of the assets transferred or releases the promisor from its obligation to transfer assets promised." Therefore, the gift must be returned to the donor. The journal entry needed is:

Dr. Unrestricted Net Assets $10,000
Cr. Gifts payable due to unfulfilled condition $10,000

6. SFAS # 117 further requires certain financial statements be prepared for nonprofit entities. Identify these financial statements and briefly describe what is reported in each. Based on the data provided in the case and the journal entries prepared in question five, prepare an adjusted Statement of Financial Position.

Three financial statements are required of all nonprofit organizations. These three statements are as follows.

Statement of Financial Position. This financial statement reports in three broad categories: assets, liabilities, and net assets. The net asset classifications were discussed in a previous question. The standard does not require that assets and liabilities be reported in the same classifications.

Statement of Activities. This financial statement reports the revenues, expenses, gains, and losses of the nonprofit entity. These elements must be reported by net asset classification. In addition, the standard requires that reclassifications between the classes of net assets be reported.

Statement of Cash Flows. This statement follows the guidelines of SFAS # 95, The Statement of Cash Flows, with some modifications, including: requiring that donor-restricted contributions be reported as cash flows investing activities; and interest and dividends that are part of donor restrictions not be reported as cash flows operating activities.

A fourth financial statement, Statement of Functional Expenses, is required of all voluntary health and welfare organizations. This statement is to be prepared as a matrix showing natural classifications of expenses (salaries, rent, depreciation, etc.) by functional activity. This information may be presented by other nonprofit entities in the notes to the financial statements.

Vickie Tomlinson, Tennessee Children's Home, Inc., Retired

Terry J. Ward, Middle Tennessee State University

G. Robert Smith, Jr.,Middle Tennessee State University