1. Restricted Funds & Transaction Analysis
hodya75m3sAshford 5: - Week 4 - Instructor Guidance
"The statement of activities is the not-for-profit Organization’s version of an income statement. This statement shows revenues, expenses and realized and unrealized gains and losses for the not-for-profit organization. A not-for-profit Organization is different and unique from private for-profit entities in that is lacks the ‘Ownership’ attribute, which means they do not issue stock that can be bought, sold or traded (Marsh & Fischer, 2011). Because of the nature of revenue from donations, which have strings attached sometimes, it is required that changes in net assets be reported by class. The different classes are, Temporarily Restricted, Permanently Restricted and Unrestricted (Williams, 1996). This requirement is a part of the Financial Accounting Standards Board (FASB) Pronouncement 117 (FAS-117) which was passed in 1993. The financials of NFP organizations have to report in compliance with FAS-117 in order to adhere to Generally Accepted Accounting Principles, or GAAP.
The Statement of Activities is one of three required financial statements that must be prepared by not-for-profit organizations. The other two statements are the Statement of Financial Position and the Statement of Cash Flows. The statement of activities also ties to the statement of financial position. The change in net assets shown on the statement of activities can be added to the balance of assets at the beginning of the year, and should match the total net assets figure at the end of the year shown in the statement of financial position.
A statement of activities is supposed to clearly show changes in net assets by category. The Permanently Restricted category is for endowments that are required to be held in perpetuity. Income from restricted assets can usually be used for general operations and is classified as additions to unrestricted assets. Temporarily restricted funds can be conditionally restricted or time restricted. This means if someone donates to a NFP organization with the provision that the money be used for a specific purpose, such as capital expenditures, these funds are restricted until the condition has been met. Some donations are restricted by time, for example, money donated to be used for operations in 2016 would be temporarily restricted and cannot be used until that time. At the time the condition, or restriction has been satisfied, the assets are then re-classified, increasing unrestricted assets and decreasing temporarily restricted assets. The statement of activities shows movement of funds from class to class over a period of time (Finkler, Purtell, Calabrese, & Smith, 2013).
The statement of activities was introduced as a requirement for NFP organizations to make their reporting uniform in a way that outside users can understand financials of different NFPs and to make them comparable. This statement is also useful for internal budgeting purposes so that entities know what money is available to them for operations, capital expenditures, etc. in the current and upcoming years. This is key for cash planning.
It is important to for administrators to understand the statement of activities because it gives vital information regarding restrictions in place and when certain monies can be used for operations. In government, similar reports are required but are set up differently, governmental not-for-profits must also report their expenses in a matrix form by ‘function’ and by natural expense category. Government agencies are held accountable for performance in accordance with their adopted budget. Because of this, governments are also required to supply supplementary information which includes the approved budget (Finkler, Purtell, Calabrese, & Smith, 2013).
In private not-for-profit accounting, the definition of restriction is more narrowly tailored in that only donor can restrict the use of funds. In government, any external party, such as creditors, legislation and constitutional provisions can all impose restrictions on funds. This is a major difference in how assets are classified in government vs not-for-profit statements of activities (Marsh & Fischer, 2011)
Below are some links to documents that describe the statement of activities and how it is related to other financial statements in an easy to understand format:
http://www.nonprofitaccountingbasics.org/reporting-operations/statement-financial-activities "
References
Presented by Maureen McGill
Finkler, S. A., Purtell, R. M., Calabrese, T. D., & Smith, D. L. (2013). Financial Management for Public, Health and Not-for-Profit Organizations. Upper Saddle River, NJ: Pearson Education, Inc.
Marsh, T., & Fischer, M. (2011). FASB/GASB Reognition and Reporting Differences. Journal of Accounting and Finance, 21-29.
Williams, J. R. (1996). Miller GAAP Guide. New York, San Diego, London: Harcourt Brace Publishing Company.