Special Issues Relating to Implementation of FASB Statements 116, 117, and 124

SFAS 116

One of the most unique features of not-for-profit organizations is their frequent receipt of voluntary contributions for support. Contributions (which are often referred to as "support") may be in the form of gifts, grants, bequests, promises to give, or donations of services, materials, or facilities. Not only do contributions pose some of the most complex and challenging accounting, reporting, and auditing issues in not-for-profit organization engagements, but many organizations are changing their accounting treatment for some contributions and pledges as they apply SFAS No. 116, Accounting for Contributions Received and Contributions Made.

In a broad sense, a contribution may be described as a transfer of an asset or cancellation of a liability without consideration. The significant words in this description are "without consideration," which means that contributions are nonreciprocal (the recipient does not give up an asset or incur a liability of commensurate value). In contrast, earned revenues are reciprocal transactions, because they involve an exchange of goods for services of approximately equal value. The distinction between nonreciprocal and reciprocal transactions is important because there are significant accounting and reporting differences between a contribution (or nonreciprocal transactions) and earned revenue (or reciprocal transactions).

Another distinguishing feature of contributions is that they may carry donor-imposed restrictions limiting the use of the contributed asset, or donor-imposed conditions, which give the donor the right of return of the contributed asset if a specified future event does not (or does) occur.

Timing of Revenue Recognition. Recognition of earned revenue is triggered by the completion of an action, such as delivery of services sold or the transfer of ownership of materials sold. No such action is required for recognizing contributions because, by definition, contributions are nonreciprocal and involve no delivery of services or transfer of ownership. Under SFAS No. 116, recognition of contribution revenue is usually triggered by the transfer of an economic benefit, the receipt of either the contribution (cash or other economic benefit) or a promise to make a contribution in the future, even if the donor imposes restrictions on the use of the donated asset. If a pledge is conditioned on the occurrence or nonoccurrence of a future, uncertain event, revenue is not recognized until that condition is substantially fulfilled by the event's occurrence or nonoccurrence.

Frequently, donors stipulate how their gifts are to be used by placing restrictions on them. SFAS No. 116 requires recognition of contribution revenue upon the transfer of an economic benefit, usually the receipt of either the contribution (cash or other economic benefit) or a pledge (a promise to make a contribution in the future). Restrictions may be permanent, such as the establishment of an endowment in perpetuity, or they may be temporary, such as for next year's operations or a specific project.

The underlying concept of SFAS No. 116 is that receipt of restricted contributions does not amount to incurring a liability, but merely accepting limits on the future use of the contributions. The concept is based on the belief that adequate disclosure of donor-imposed restrictions and properly stated liabilities is more important than matching revenue and expenses.

Therefore, under SFAS No. 116, contributions with donor-imposed restrictions are reported as restricted revenue, which increase either permanently restricted or temporarily restricted net assets. As restrictions are fulfilled or the stipulated time period for the restriction has expired, the amount should be reclassified to unrestricted net assets.

SFAS No. 116 does, however, permit an organization the option of establishing a policy that restricted contributions whose restrictions are met in the same reporting period as they are made may be reported as unrestricted support, provided that the organization reports consistently from period to period and discloses this policy.

Identifying Restrictions. Usually, determining whether a restriction exists is not difficult. Stipulations such as, "for a scholarship for an architecture student from the state of Oklahoma," or "for sending a missionary to Brazil," or "to buy a new school bus" are fairly straightforward limitations on the use of contributed funds. Contributions are also restricted when donors respond to a specific appeal from the organization, such as, "Please send a contribution for California earthquake relief."

However, other donor communications may be less specific or less clear as to whether a restriction exists. A key factor to consider is whether the restriction limits the use of the funds.

Likewise, some donor communications may sound like they impose restrictions, but the uses stipulated by the donors are so broad that they do not in fact limit the organization's discretion as to how to use the donated assets. Donor statements such as "here is $100 for the good work that you do" would be too broad to constitute a restriction. The authors believe that SFAS No. 116 would indicate that donor-imposed restrictions that relate to the ongoing operations or mission of the not-for-profit organization should be accounted as unrestricted.

Care should be exercised by the organization to distinguish between donor restrictions and donor conditions. Although conditions usually apply to promises to give, organizations may receive advances on conditional pledges that would have to be refunded if the conditions are never fulfilled. These receipts are not contributions, and should be accounted for as refundable advances until the donor's conditions are met.

Grants. Grants can be received from a number of sources, including individuals, corporations, governmental agencies, and private foundations. In most cases, grants are merely a type of restricted contribution - the grantor awards funds to an organization accompanied by specific restrictions as to how and when the grant proceeds may be used.

However, many not-for-profit organizations receive "grants," "awards," or "sponsorships" that on the surface appear to be restricted contributions, but are in substance reciprocal or earned revenue transactions, because they amount to a contract for the purpose of services by the grantor or sponsor. This type of earned revenue can usually be identified by provisions that stipulate that the organization will receive a fixed amount per unit of service (such as per meal, per bed-day, etc.). Frequently, under such a contract, the organization must send the grantor a "voucher", which amounts to a statement of services provided and an invoice for the amount of the grant that was earned that month. The vouchers should be recorded as receivables. Sometimes, a grantor gives an organization an "advance" under the contract, knowing that payment for each month's voucher will not be paid for weeks or months; since the transaction is reciprocal, these advances should be recorded as deferred revenues (liabilities).

Some organizations, such as universities, may receive grants to sponsor research and development activities, with the stipulation that the grantor retains proprietary or other rights (such as patents, copyrights, or advance and exclusive knowledge of the research outcomes), or with the stipulation that the research and development activities be conducted in a manner so that the research outcome would be particularly valuable to the grantor. SFAS No. 116 points out that such transactions are earned revenue, not contributions, if the potential public benefits are secondary to the potential proprietary benefits of the grantor.

Promises to Give. Under SFAS No. 116, promises to give should be recognized at fair value (as revenue and receivable) when the promise is received, even if the donor restricts the promised contribution to use in a future period, and even if the promise will not be paid until a future period.

The fair value of a promise that is expected to be collected in less than one year is measured at net realizable value, which in most cases would be the face value of the promise net of any estimated uncollectible amount. Many organizations have historical data from which they calculate anticipated collection rates. Such organizations use these rates to estimate the net realizable value at which to record promises (or they may record promises at face value and then record a contra-asset account for uncollectible promises). If actual collections fall short or exceed the estimated net realizable value, the variance affects the next period's revenue.

For promises anticipated to be collected after one year, SFAS No. 116 states that fair value should be based on future cash receipts, discounted at a rate "commensurate with the risks involved." In other words, the determination of the discount rate should be based on the same criteria that would be used for a trade receivable in accordance with APB No. 21. Each period's accrual of the interest element of this discount should be accounted for as an additional contribution in the appropriate class of net assets.

SFAS No. 116 directs that promises should be recognized without regard to their legal enforceability. It points out a promise to give carries the social, moral, and, generally, legal obligation to make the promised transfer. Following applicable state laws to determine the accounting treatment for a transaction could require the same transaction to be recorded differently in different states. Consistent accounting treatment was desired, and accordingly the Statement was written to require recording a promise to give without regard to legal enforceability.

Conditional Promises to Give. SFAS No. 116 describes every promise to give as either conditional or unconditional. A promise is conditional if the donor specifies a future and uncertain event whose occurrence or failure to occur gives the promisor a right of return of the assets contributed or releases the promisor from its obligation to transfer the assets promised. Conditional promises to give are recognized only when the conditions are satisfied, thus no revenue or receivable should be recognized at the time the promise is received. Only when the conditions are met would revenue and receivable be recognized. Any assets contributed before the conditions are substantially met would be accounted for as a refundable advance (liability). In the case of ambiguous donor stipulations, a promise containing stipulations that are not clearly unconditional shall be presumed to be a conditional promise.

SFAS No. 116 distinguishes conditions from restrictions as follows:

A donor-imposed restriction limits the use of donated assets; however, a condition creates a barrier that must be overcome before assets transferred or promised become contributions received or made.

There may be instances in which a donor may impose a condition that is virtually certain to be met, such as "I will give you $100, if the sun rises next January 1," or "I will give you $1 million, provided you give me a report as to how you spend it." SFAS No. 116 states that a conditional promise is to be considered unconditional if the probability that the condition will not be met is remote. Since the probability is remote that the sun will not rise next January 1, or that the organization would risk $1 million by not giving the donor a report, both of these promises would be considered unconditional, and would result in immediate recognition of revenues and receivables.

Donated Services. SFAS No. 116 establishes new criteria for recognizing donated services. Services must be recognized as contributions if either of the following criteria is met:

    the services create or enhance nonfinancial assets (such as volunteers erecting a building), or

    the services require specialized skills, are provided by individuals possessing those skills, and would typically need to be purchased if not provided by donation.

SFAS No. 116 lists examples of services requiring specialized skills: accountants, architects, carpenters, doctors, electricians, lawyers, nurses, plumbers, teachers and other professionals and craftsmen.

Disclosure Requirements. SFAS No. 116 has several specific financial statement disclosure requirements. They are as follows:

  • Recipients of unconditional promises to give should disclose the following:
    • The amount 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.


  • Recipients of conditional promises to give should disclose the following:
    • The total of the amounts promised.
    • A description and amount for each group of promises having similar characteristics, such as promises conditioned on establishing new programs, completing a new building, or raising matching gifts by a specified date.
  • Organizations must disclose their accounting policy or gifts of long-lived assets.

SFAS 117

SFAS No. 117, Financial Statements of Not-for-Profit Organizations establishes what comprises a complete set of financial statements and sets the minimum level of basic information required in each statement. While requiring certain basic information, the Statement does not require any specific format for any of the financial statements, but does require that all statements, at a minimum, focus on the entity as a whole. The Statement also renders unacceptable any specialized accounting and reporting principles or practices provided in AICPA Guides that are inconsistent with this Statement.

Statement of Financial Position. The statement of financial position should provide information about an organization's assets, liabilities, and net assets (the term "net assets" should be used instead of "fund balance") and should focus on the organization as a whole. These amounts should be further subdivided into unrestricted net assets, temporarily restricted net assets, and permanently restricted net assets. The totals of each class of assets should agree with the statement of activities.

It is permissible to present amounts for different types (subcategories) of permanent or temporarily restricted net assets either on the face of the statement of financial position or in the notes to the financial statements. For example, amounts of board designations of unrestricted net assets (subcategories) may be shown either on the face of the statement of financial position or in the notes.

In order to provide relevant information about liquidity, financial flexibility, and the interrelationship of an organization's assets and liabilities, the assets and liabilities should be aggregated into reasonably homogeneous groups (such as cash and cash equivalents, accounts and notes receivable from service recipients, etc.). Information about liquidity must be provided by one or more of the following three methods:

    sequencing assets according to their nearness of conversion to cash and sequencing liabilities according to the nearness of their maturity (and resulting use of cash), or

    classifying assets and liabilities as current and noncurrent, as defined by Accounting Research Bulletin No. 43, Restatement and Revision of Accounting Research Bulletins, or

    disclosing (in notes to financial statements) relevant information about the liquidity or maturity of assets and liabilities, including restrictions on the use of particular assets.

Statement of Activities. The statement of activities should report the change in net assets, as well as the changes in each class of net assets (unrestricted, temporarily restricted, and permanently restricted).

All unrestricted revenue should be reported as increases in the unrestricted class of net assets. Contributions that carry donor-imposed restrictions should be reported as increasing either the temporarily restricted class of net assets or the permanently restricted class of net assets.

There is one exception to the requirement that contributions with donor-imposed restrictions be reported as increases in either the temporarily or permanently restricted classes of net assets: contributions whose restrictions are met within the same reporting period may be reported as unrestricted, provided the organization discloses that policy and follows it consistently from period to period.

All expenses should be reported as decreases in the unrestricted class of net assets. This is a significant change from current practice, in which many organizations report expenses that fulfill donor restrictions as decreases in the appropriate restricted fund. Under the new guidance, expirations of restrictions on temporarily restricted net assets will be reported as reclassifications, which simultaneously increase the unrestricted class of net assets. These reclassifications in effect reimburse the unrestricted class of net assets for expenses that (a) are charged against the unrestricted class of net assets, and (b) fulfill donor-imposed restrictions and thus should decrease temporarily restricted net assets.

An organization must provide, either in the statement of activities or in the notes to the financial statements, information about expenses reported by their functional classification, such as major classes of program services or supporting activities. Organizations are encouraged, but not required, to provide information about expenses by their natural classifications as well. Only voluntary health and welfare organizations are required to report both functional and natural classifications of expense information in a matrix format in a separate statement of functional expenses.

SFAS No. 117 states that revenues and expenses are to be reported at gross amounts in the statement of activities. The only guidance given on how to apply this requirement is that transactions that are peripheral, incidental, or beyond the control of the organization may be reported at net amounts. For example, an organization that sells land and a building it no longer uses would be able to present the gain or loss associated with the sale on a net basis in the statement of activity. This sale is considered peripheral to the ongoing operations of the organization. It is presumed that the user of the financial statements would be able to derive information related to the sale based on this presentation in the statement of activities, together with relevant information provided in the statement of cash flows.

Statement of Cash Flows. SFAS No. 117 makes a statement of cash flows a required statement for not-for-profit organizations and amends SFAS No. 95, Statement of Cash Flows as follows:

    requires not-for-profit organizations to present a statement of cash flows as part of a complete set of financial statements, and

    redefines "financing activities" to include any contributions or investment income restricted by a donor for purchasing, constructing or improving long-lived assets, or for long-term investment.

SFAS 124

Under SFAS 124, Accounting for Certain Investments Held by Not-for-Profit Corporations, nonprofits must:

    Report at current fair value any such investments in equity securities that have readily determinable fair values; and

    Reflect any gains or losses in a statement of activities.

Equity Securities Affected. SFAS 124 affects the reporting of two kinds of equity securities: "debt securities," such as U.S. Treasury bills or corporate bonds, and "all equity securities with readily determinable fair values," such as stock or stock options traded on open markets.

Reporting Gains and Losses. Under SFAS 124, gains and losses on investments are reported in a statement of activities as increases or decreases in unrestricted net assets, unless their use was restricted by donor stipulation or law.

Losses on Donor-Stipulated Investments. SFAS 124 also establishes standards for reporting losses on investments a nonprofit holds under a donor's stipulation to invest a gift in perpetuity or for a specific term.