NANCY E. SHELMON retired as a senior partner from PricewaterhouseCoopers in 2010 after more than thirty years working with not-for-profit and higher education clients. A frequent speaker at AICPA and state society conferences, she also served as a member of the AICPA's Not-for-Profit Expert Panel for eleven years and has worked with some of the most widely respected not-for-profit organizations in North America.

JOHN A. MATTIE serves as PricewaterhouseCoopers' National Education and Nonprofit Practice Leader. He currently serves on the Financial Accounting Standards Board Not-for-Profit Advisory Committee, and is the firm's representative on the AICPA Not-for-Profit Entities Expert Panel and the AICPA Government Audit Quality Control Center.

Contributors xix

Preface xxi

INTRODUCTION Including the FASB Codification 1

CHAPTER 1 Responsibilities for Fiscal Management 5

1.1 Keeping Financial Records for the Organization 6

1.2 Preparing Accurate and Meaningful Financial Statements 6

1.3 Implementing a Budget and Anticipating Financial Problems 7

1.4 Safeguarding Financial Assets and Providing Effective Internal Controls 8

1.5 Complying with Federal and State Reporting and Regulatory Requirements 9

1.6 Communicating Fiscal Information to the Board of Directors and the Audit Committee 9

1.7 Ten Key Points to Consider in Not-for-Profit Fiscal Management 10

1.8 Conclusion 14

PART I KEY FINANCIAL CONCEPTS 15

CHAPTER 2 Accounting Distinctions between Not-for-Profit and Commercial Organizations 17

2.1 Stewardship versus Profitability 17

2.2 Principal Areas of Accounting Differences 18

2.3 Conclusion 22

CHAPTER 3 Cash- versus Accrual-Basis Accounting 23

3.1 Cash and Accrual Statements Illustrated 23

3.2 Combination Cash Accounting and Accrual Statements 27

3.3 Modified Cash Basis 29

3.4 Legal Requirements 30

3.5 Conclusion 30

CHAPTER 4 Fund Accounting and Internal Financial Reporting 31

4.1 Fund Accounting Defined 33

4.2 Categories of Funds 34

4.3 Alternative Fund Groupings 37

4.4 Typical ‘‘Fund’’ Financial Statements 38

4.5 Transfers between Funds 40

4.6 Elimination of Funds for Reporting Purposes 41

4.7 Conclusion 43

CHAPTER 5 Fixed Assets and Depreciation 45

5.1 General Principles—Working Definitions 45

5.2 Property and Equipment—Classes and Kinds of Assets 47

5.3 Fixed Assets Where Title May Revert to Grantors 49

5.4 Collections 50

5.5 Fair Value Measurement 51

5.6 Contributions Restricted for Purchase of Fixed Assets 51

5.7 Impairment or Disposal of Long-Lived Assets 52

5.8 Conclusion and Recommendations 55

CHAPTER 6 Investment Income, Gains and Losses, and Endowment Funds 57

6.1 Accounting Principles 58

6.2 Total Return Concept 68

CHAPTER 7 Affiliated Organizations, Pass-Through Transactions, and Mergers 73

7.1 Types of Relationships Often Found 74

7.2 Definition of the Reporting Entity 76

7.3 Mergers of Not-for-Profit Organizations 81

Appendix 7-A Factors to Be Considered in Deciding Whether a Pass-Through Gift Is Truly Revenue and Expense to a Pass-Through Entity 84

Appendix 7-B Transfers of Assets to a Not-for-Profit Organization or Charitable Trust That Raises or Holds Contributions of Others 87

Appendix 7-C Factors Related to Control That May Indicate That an Affiliated Organization (A) Should Be Combined with the Reporting Organization (R), If Other Criteria for Combination Are Met 91

CHAPTER 8 Contributions, Pledges, and Noncash Contributions 93

8.1 Expendable Current Support 94

8.2 Gifts-in-Kind 99

8.3 Support Not Currently Expendable 103

Appendix 8-A: Checklist: Factors to Be Considered in Deciding Whether a Particular Gift (for Operating Purposes) Should Be Classified as Purpose-Restricted or Not 114

Appendix 8-B: Checklist: Factors to Be Considered in Distinguishing Contracts for the Purchase of Goods or Services from Restricted Grants 116

Appendix 8-C: Checklist: Factors to Be Considered in Assessing Whether Contributed Services Are Considered to Require Specialized Skills 118

Appendix 8-D: Checklist: Factors to Be Considered in Determining Whether an Organization Would Typically Need to Purchase Services If Not Provided by Donation 120

Appendix 8-E: Checklist: Factors to Be Considered in Assessing Whether a Donor Has Made a Bona Fide Pledge to a Donee 123

Appendix 8-F: Checklist: Factors to Be Considered in Deciding Whether a Gift or Pledge Subject to Donor Stipulations Is Conditional or Restricted 126

CHAPTER 9 Accounting Issues Relating to Fundraising 129

9.1 Accounting for Gifts 130

9.2 Accounting for Fundraising Expenses 137

9.3 Other Tax Considerations 141

PART II FINANCIAL STATEMENT PRESENTATION 143

CHAPTER 10 Cash-Basis Financial Statements 145

10.1 Simple Cash-Basis Statement 145

10.2 Simple Statement with Last Year’s Figures and Budget 147

10.3 Combined Cash-Basis Income Statement and Balance Sheet 147

10.4 Separate Statement of Receipts and Disbursements and Statement of Net Assets 150

10.5 Statement of Income with Certain Cash Transactions Omitted 152

10.6 Modified Cash-Basis Statements 154

10.7 Conclusion 155

CHAPTER 11 Accrual-Basis Financial Statements 157

11.1 Simple Accrual-Basis Statements 157

11.2 Accrual-Basis Statements—Fundraising Organization 160

11.3 Accrual-Basis Statements—International Organization 163

11.4 Conclusion 166

CHAPTER 12 Multiclass Financial Statements 167

12.1 FASB Accounting Standards Codification 958, Not-for-Profit Entities 168

12.2 Preparation of Statement of Cash Flows 171

12.3 ‘‘Class’’ Financial Statements Explained 182

12.4 Columnar Format Presentation 191

12.5 A Complicated Set of Class Financial Statements 193

12.6 Summary or Condensed Statements 204

12.7 Conclusion 205

Appendix 12-A Financial Statements of Not-for-Profit Organizations—Review Points 206

PART III ACCOUNTING AND REPORTING GUIDELINES 211

CHAPTER 13 Voluntary Health and Welfare Entities 213

13.1 Accounting Principles 215

13.2 Accounting for Contributions 215

13.3 Accounting for Other Income 218

13.4 Accounting for Expenses 218

13.5 Accounting for Assets 218

13.6 Net Assets 219

13.7 Financial Statements 220

Appendix 13-A Checklist: Factors to Be Considered in Deciding Whether Allocation of Joint Costs of Multipurpose Activities (under ASC 958-720-55) Is Appropriate 235

Appendix 13-B Checklist: Consideration of Whether Items Might Be Reported as Operating or Nonoperating (within the Context of ASC 958-225-45) 238

CHAPTER 14 Colleges and Universities 241

14.1 Authoritative Pronouncements 242

14.2 The Principal Financial Statements 242

14.3 Accounting Principles 246

CHAPTER 15 The External Financial Statement Reporting Model for Organizations Reporting under GASB Standards 251

15.1 Introduction 252

15.2 Definition of a Government 252

15.3 Generally Accepted Accounting Principles 253

15.4 External Financial Reporting Model 254

15.5 Basic Financial Statements 255

15.6 The Reporting Entity 262

15.7 Assets, Liabilities, and Deferred Inflows/Outflows 264

15.8 Revenues and Expenses 272

15.9 Other Reporting Matters 277

CHAPTER 16 Health Care Organizations 281

16.1 Introduction 282

16.2 Accounting Guidance 282

16.3 Financial Statements 285

16.4 Accounting Principles 289

CHAPTER 17 Accounting Standards for Other Not-for-Profit Organizations 313

17.1 Accounting Principles 313

17.2 Financial Statements 317

17.3 Combined Financial Statements 317

17.4 Appendix 17-A:Checklist: Factors to Be Considered in Deciding Whether a Payment Described as Membership Dues Is Properly Recorded by the Recipient as Dues or as a Contribution 319

CHAPTER 18 Special Accounting Issues for Specific Organizations 323

18.1 Associations and Professional Societies 324

18.2 Churches 326

18.3 Clubs 327

18.4 Libraries 329

18.5 Museums 329

18.6 Performing Arts Organizations 330

18.7 Private Foundations 332

18.8 Religious Organizations Other Than Churches 334

18.9 Research and Scientific Organizations 335

18.10 Private Elementary and Secondary Schools 336

18.11 Public Broadcasting Stations 337

CHAPTER 19 The Financial Accounting Standards Board and Future Trends in Not-for-Profit Accounting 339

19.1 Financial Accounting Standards Board 340

19.2 Trends in Not-for-Profit Accounting 348

19.3 New FASB Statements of Financial Accounting Standards That Affect Not-For-Profit Organizations 353

19.4 Other FASB Pronouncements and Projects 359

19.5 Conclusion 362

PART IV CONTROLLING THE NOT-FOR-PROFIT ORGANIZATION 363

CHAPTER 20 The Importance of Budgeting 365

20.1 The Budget: A Plan of Action 365

20.2 Monthly and Quarterly Budgets 370

20.3 Timely Interim Statements 373

20.4 A Five-Year Master Plan 380

20.5 Conclusion 384

CHAPTER 21 Small Organizations—Obtaining the Right Accountant 385

21.1 Level of Accounting Services Needed 386

21.2 Personality Characteristics 388

21.3 Alternatives to Accountants 388

21.4 Timing in Hiring a Replacement 390

21.5 Conclusion 390

CHAPTER 22 Small Organizations—Providing Internal Control 391

22.1 Reasons for Internal Control 392

22.2 Fundamentals of Internal Control 393

22.3 Some Basic Controls 394

22.4 Fidelity Insurance 398

22.5 Conclusion 399

CHAPTER 23 Effective Internal Accounting Control for Not-for-Profit Organizations 401

23.1 Introduction to Internal Accounting Control 402

23.2 Elements of an Effective Internal Accounting Control System 406

23.3 Basic Internal Accounting Control System 411

23.4 Specific Nonprofit Internal Accounting Controls 419

CHAPTER 24 Independent Audits 427

24.1 Functions and Limitations 427

24.2 Benefits of an Independent Audit 432

24.3 Selecting a Certified Public Accountant 434

24.4 Public Accountants 435

24.5 Audit Committees 436

24.6 Conclusion 438

Appendix 24-A Checklist: Criteria for Selection of a CPA 440

Appendix 24-B Changing Role for the Audit Committee 443

Appendix 24-C Basic Template for an Audit Committee Charter 446

CHAPTER 25 Investments 453

25.1 Types of Investments 454

25.2 Valuation of Investments 456

25.3 Key Considerations When Investing in Alternative Investment Funds 458

25.4 Pooling versus Individual Investments 460

25.5 Calculating Share Values in Pooled Investments 463

25.6 Allocation of Pooled Income 466

25.7 Conclusion 467

PART V PRINCIPAL FEDERAL TAX AND COMPLIANCE REQUIREMENTS 469

CHAPTER 26 E-Business for Not-for-Profit Organizations: How Can Not-for-Profits Manage the Risks to Maximize E-Business Opportunities? 471

26.1 Whether You Call It E-Business or Technology-Enabled Business, It Still Matters 472

26.2 Ask Yourself These Questions 474

26.3 Objectives 475

26.4 How Did We Get to the Internet Economy? 475

26.5 Where Are We Today? 477

26.6 What Is Risk Management? 478

26.7 How Are Not-for-Profit Organizations Using E-Business Today? 490

26.8 How Are Academic Institutions Using E-Business? 491

26.9 What Is the Path to E-Business Success? 493

26.10 What E-Business Models Exist? 494

26.11 Cloud Computing 496

CHAPTER 27 Principal Tax Requirements 497

27.1 Organizations Exempt from Tax 499

27.2 Charitable Organizations 500

27.3 Tax Status of Charitable Organizations: Public Charity or Private Foundation 502

27.4 Other Concerns for Charities 505

27.5 Private Foundations 517

27.6 Private Operating Foundations 521

27.7 Noncharitable Exempt Organizations 522

27.8 Recognition of Exemption and Annual Reporting to IRS 527

27.9 Federal Information and Tax Return Filing Requirements 530

27.10 State Information and Tax Reporting Issues 546

27.11 Donor-Advised Funds 548

27.12 Restrictions on Supporting Organizations 550

27.13 Federal Employment Taxes 551

27.14 IRS Audits and Compliance Programs 551

CHAPTER 28 Audits of Federally Funded Programs 553

28.1 Basic Requirements 553

28.2 Requirements and Definitions 555

28.3 Responsibilities of the Receiving Organization 558

28.4 What to Expect from the Audit 562

28.5 American Recovery and Reinvestment Act of 2009 565

28.6 Conclusion 566

PART VI SETTING UP AND KEEPING THE BOOKS 567

CHAPTER 29 Cash-Basis Bookkeeping 569

29.1 Three Steps in a Bookkeeping System 569

29.2 Checkbook System 570

29.3 Cash-Basis System 575

29.4 Conclusion 584

CHAPTER 30 Simplified Accrual-Basis Bookkeeping 585

30.1 Books and Records 586

30.2 Chart of Accounts 587

30.3 Monthly Accrual Entries 588

30.4 Payroll Taxes 594

30.5 Fixed-Asset Register and Depreciation Schedule 596

30.6 Investment Ledger 600

30.7 Conclusion 602

CHAPTER 31 Full Accrual-Basis Bookkeeping 603

31.1 Books and Records 603

31.2 Chart of Accounts and Coding 605

31.3 Sales Register 607

31.4 Accounts Receivable Subsidiary Ledger 610

31.5 Cash Receipts Book 612

31.6 Accounts Payable Register 612

31.7 Cash Disbursements Book 614

31.8 Monthly Accrual Entries 616

31.9 Conclusion 618

CHAPTER 32 Fund Accounting Bookkeeping 619

32.1 Chart of Accounts 620

32.2 Books and Records 622

32.3 Interfund Transactions 624

32.4 Trial Balance 629

32.5 Conclusion 629

CHAPTER 33 Automating the Accounting Records 631

33.1 When to Consider Automating or Upgrading 631

33.2 What to Automate 632

33.3 Selecting the Right Software 636

33.4 Implementing the New System 639

33.5 Common Pitfalls to Successful Automation 640

33.6 Conclusion 642

CHAPTER 34 Tax-Exempt Debt 643

34.1 Characteristics 643

34.2 Accounting and Reporting 644

34.3 The SEC’s Role and Authority 648

34.4 Proposed Municipal Market Reforms 653

Appendix A Code of Conduct 655

Appendix B The Future of U.S. Standard Setting 665

Appendix C Keeping Current 671

Appendix D Alternative Investments—Audit Considerations 688

Index 709

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