Question

The Statement of Financial Accounting Standards (SFAS) Numbers116 & 117 relate how non-governmental nonprofits account forcontributions, and how they present their financial statements.These pronouncements have created much confusion among nonprofitswith regard to their accounting methods. Since the word “fund” isno longer used in financial statements, do nonprofits still need”fund accounting?” Since SFAS No. 117 relates to the presentationof financial statements, does it impact day-to-day record keeping?Do nonprofits still need to track individual funding sourcesseparately in their books anymore, or should they be commingled?First, let's understand what Fund Accounting is, then we'll look atthe impact of SFAS 116 & 117 on accounting for nonprofits. FundAccounting The need for greater accountability to funding sourcesand donors gave rise to the traditional style of nonprofitaccounting called “fund accounting,” which has been used bynonprofits for many years. A fund is “an independent fiscal andaccounting entity with a self-balancing set of accounts recordingcash and/or other resources together with all related liabilities,obligations, reserves, and equities which are segregated for thepurpose of carrying on specific activities or attaining certainobjectives in accordance with special regulation, restrictions, orlimitations.” In other words, in fund accounting you allocate moneyinto separate funds and produce financial statements and reports byfund, or by grouping funds together. Many nonprofits use funds tosegregate their monies according to its source, so that their fundsare essentially the same as funding source. In addition to detailedlevels of tracking, Fund Accounting software provides the reportingflexibility required to present information to many requesters,both internal and external to nonprofits.

SFAS 116 & 117 When the Financial Accounting Standards Board(FASB) introduced SFAS Numbers 116 & 117, it was the first timeFASB issued statements regarding how nonprofit organizations shouldaccount for contributions and how these contributions are presentedin financial statements. Specifically, SFAS 116 defines howdonations are accounted for by donors and receivers, according todonor-imposed restrictions. SFAS 117 further clarified generallyaccepted accounting principles with regard to how nonprofits reportcontribution information in financial statements. It affectsfinancial statements for fiscal years beginning after December 15,1994, except for organizations with less than $5 million in totalassets and less than $1 million in annual expenses. Thoseorganizations must begin to use SFAS 117 for fiscal years beginningafter December 15, 1995. The intent of SFAS 116 & 117 was toenhance the relevance, understandability and comparability ofnonprofits' financial statements. These reports are primarily usedby donors, members, creditors, and others who provide resources tononprofits. By having standardized financial statements, theseresource providers can make better assessments concerning how wella nonprofit can continue to provide services, as well as how thenonprofits performed, and how well their management dischargedtheir stewardship. The focus of SFAS 117 financial statementreporting is now on “net asset” classification, rather than ontraditional funds or groups of funding sources. The new net assetclasses aggregate contributions with like donor-imposedrestrictions, and are: unrestricted, temporarily restricted, andpermanently restricted. Other significant SFAS 116 & 117changes are: ? There are now three required financial statements: oStatement of Financial Position (new name for Balance Sheet) oStatement of Activities (essentially a combined Statement ofRevenues and Expenditures by function). This statement does notpreclude providing disaggregated information by fund groups. oStatement of Cash Flows ? Promises to give (pledges) are recorded,in total, when the promise is made ? The entire amount of amultiple-year contribution or pledge is recorded in the initialyear it is awarded to the organization ? Baring specific donor orlegal restrictions, income from permanently restricted assets;i.e., endowments, are reported as unrestricted income separatelyfrom the permanently restricted assets ? Certain recordingrestrictions apply to the recording of contributed services ? Allorganizations must show expenses by function in total (e.g., totalsfor programs, fund raising etc). In addition, voluntary health andwelfare organizations must provide a separate statement thatdetails expenses, in a grid, showing natural classification byfunction. A separate statement of functional expenses by naturalclassification is optional, but encouraged, for non voluntaryhealth and welfare organizations

Do I still need to track and report using fund?

SFAS 117 does not preclude or prevent nonprofits from issuingfinancial statements in whatever format they need, in order toserve a purpose. This means it's fine to continue using fundclassifications if it helps a contributor track how their money isbeing spent, or if it helps your departments track whose money isbeing applied to programs and how much of it remains. SFAS 117 didnot mandate the way nonprofits can create many other kinds ofreports, nor did it mandate the format of budgets (though there isan optional SFAS 117 format available). It also did not dictate thespecific reports that funding sources or donors mayrequire–funding sources and donors can ask for either SFAS117-compliant statements, or financial statements formatted byfund, as well as their own unique report formats. However, mostnonprofits will probably need to comply with SFAS 117 in order toreceive a “clean” opinion from their auditor. So, SFAS 117 did noteliminate the reason for nonprofits to track and report by fund.Nonprofits will likely need to internally track funds to ensurethat monies received from a variety of sources are not commingled,while, for external purposes, they need the net assetclassifications required by SFAS 117. Tracking by fund enablesnonprofits to create internal reports on how much of a particularfunding source remains unspent versus a budgeted amount, or howmuch of a variety of funding sources were spent by a particularprogram or department. Alternatively, if you don't need to maintainfunds for internal purposes, you don't have to have funds.

If I don't need funds, do I still need fund accountingsoftware?

Since tracking and reporting by funds are only a small part ofnonprofit accounting, and SFAS 117 focuses only on the financialstatements of nonprofits, there are many other considerations tokeep in mind. For example, see the list of accounting functionalitynonprofits need that was mentioned in the earlier section “What'sthe Difference Between Commercial & Nonprofit AccountingSystems?” You can also refer to the informative free booklet, “AGuide to Purchasing Accounting Software for Nonprofit Organizationsand Governmental Agencies” distributed by MIP. Even if you don'tneed funds, it will be difficult for you to successfully track andreport assets and liabilities, as well as expenditures and revenuesby key funding sources at the level of detail and with theflexibility required without a system specifically designed fornonprofits. SFAS 117 created another tracking and reportingrequirement above and beyond what you were already doing. With allthe tracking and reporting requirements you're already faced with,a good fund (nonprofit) accounting system becomes more imperativethan ever. A good fund accounting system should accommodate anorganization's internal needs to track by key funding sources aswell as grouping funding sources then reporting them according toSFAS 117. In the MIP NonProfit Series for Windows fund is anoptional account segment you can choose to use, so you can trackand report the exact way your organization needs.

FAS 117 on Financial Statement Display

* A set of financial statements should include a balance sheet,statement of activity, statement of cash flows and, for voluntaryhealth and welfare organizations, a statement of functionalexpenses. Note that the statement of cash flows has not previouslybeen required for many nonprofit organizations.

* Financial statements should focus on the entity as a whole,rather than reporting on separate fund groups. Reporting totals forall fund groups has been done by some nonprofits but many have notdone so in the past.

* Contributions and net assets (previously called fund balance)must now be separated into three categories based solely on donorimposed restrictions. The three categories are “unrestricted”,”temporarily restricted” and “permanently restricted”.

* Expenses are to be reported (1) by functional categories(programs, management and general, and fundraising) rather than bynatural categories and (2) in the unrestricted column or categoryeven though the source of the funds may have been restricted. Thismethod of reporting has only previously been followed by hospitalsand will be a significant change for many nonprofits.

* All capital gains and losses on investments and other assetswill be reported in the unrestricted category, unless there areexplicit donor restrictions, or state law, which require thereporting of gains or losses in a restricted category. This mayrequire substantial research by many nonprofits as to how gains andlosses on endowment funds have been accounted for in the past.

FAS 116 on Contributions Made and Received

* This standard covers accounting by for profit as well asnonprofit entities and for contributions made as well asreceived.

* Contributions are defined as being an unconditional,nonreciprocal transfer of assets. This means that a contributionwith a donor imposed condition, such as a matching requirement,should not be recognized until the condition has been met and,secondly, the donor should not be receiving anything of value backfor a contribution to exist; otherwise, the contribution is eitherjust part contribution and part fee for service or possibly not acontribution at all.

* Contributions will be recorded not just when cash is received,but also when pledges are made. This means donees must recordpledges receivable and contribution income prior to receiving thecash. This will be a change in practice for many nonprofits whopreviously only recorded pledged amounts when the cash wasreceived.

* Contributions will be recorded immediately as income eventhough the contribution may have had donor restrictions that havenot been met. This requirement has been particularly controversialas most nonprofits record donor restricted contributions, that iscontributions that are restricted for a specific operating purposeor future period, as “deferred revenue” on the balance sheet untilthe restriction of the gift has been met. The FASB concluded thatrestricted contributions only limit the use of the funds but do notresult in liabilities. Therefore, the amounts should be recognizedas income currently even though the related expenditure thatsatisfies the restriction may not be made until a futureperiod.

* Noncash contributions, such as buildings and equipment, andcontributed services, such as the time of volunteers, should berecorded, but the criteria for recognition, particularlycontributed services, is much more restrictive. Noncashcontributions that do not meet the criteria cannot be recorded.Basically, a volunteer's time can only be recorded if the time isspent building an asset for the nonprofit or the volunteerpossesses a professional skill such as an attorney or CPA, and thenonprofit would have paid for the service had the service not beendonated.