FAR 1B2 SoA

Question 1

💰 How is a promise to contribute next year classified in the current year?

Answer 1

✅ Restricted contribution revenue
✅ Recognized immediately upon receipt of the promise
✅ Measured at net realizable value (NRV) if expected to be collected within a year

Question 2

⚖️ How should contributed legal or outside services be classified?

Answer 2

✅ Unrestricted revenue
✅ Must be expensed at the same time

Question 3

🎓 What are primary/program services in an NFP?

Answer 3

✅ Expenses directly related to the primary mission
✅ Examples: Education, research, healthcare

Question 4

🏛️ What are supporting services in an NFP?

Answer 4

✅ Expenses not directly related to the mission
✅ Examples: Management & general expenses, fundraising costs

Question 5

📈 What does “Changes in Net Assets” include?

Answer 5

✅ Original donation
✅ Increases from investment income
✅ Net appreciation of investments
✅ Less maintenance costs

Question 6

🛠️ When are donated services recorded as revenue?

Answer 6

1️⃣ Create or enhance nonfinancial assets
2️⃣ Require specialized skills and are provided by professionals (e.g., doctors, accountants, engineers)
❌ Other donated services are NOT recognized
📑 Disclosure of non-recognized donated services is encouraged but not required

Question 7

Is netting allowed for major ongoing NFP activities?

Answer 7

❌ No, netting revenues and expenditures from fundraising is not allowed

Question 8

🔄 What is the difference between contribution revenue and exchange transactions?

Answer 8

✅ Contribution revenue: No direct value received in return
✅ Exchange transactions: Member dues that include services must be partially deducted from contribution revenue

Question 9

📅 What is restricted support in an NFP?

Answer 9

✅ Pledged contributions for a specific purpose in future years
✅ If used in the current year, it is unrestricted support

Question 10

📊 How are investment gains and losses recorded in an NFP?

Answer 10

✅ As unrestricted revenue, unless the donor specifies restrictions on the principal investment

Question 11

📏 How should contribution revenues be measured?

Answer 11

✅ Present value (PV) or net realizable value (NRV) if collected within a year

Question 12

🏦 How are grants to other organizations classified?

Answer 12

✅ As an expense in the statement of activities

Question 13

📉 How are expenses reported in an NFP

Answer 13

✅ As decreases in net assets without donor restrictions

Question 14

🎁 How are donated supplies recorded in an NFP?

Answer 14

✅ Initially as an asset
✅ Expensed at fair value as they are consumed

Question 15

📜 When are unconditional promises recorded?

Answer 15

✅ In the period they are promised or received, whichever is earlier
✅ Timing of cash receipts (installments) does NOT affect recognition

Question 16

🔄 What are split-interest agreements?

Answer 16

✅ Trusts where resources are shared with another beneficiary

Question 17

🏦 What are the five types of split-interest agreements?

Answer 17

1️⃣ Perpetual trusts held by third parties
2️⃣ Charitable gift annuities
3️⃣ Charitable lead trusts
4️⃣ Pooled income funds
5️⃣ Charitable remainder trusts

Question 18

⚖️ What defines a governmental entity?

Answer 18

✅ Bodies corporate and politic
✅ Entities with tax-levying power

Question 19

🏛️ Are nongovernmental not-for-profits subject to federal taxation?

Answer 19

✅ No, they are tax-exempt

Question 20

🔎 What are the three conditions for an NFP to classify joint activities outside of fundraising?

Answer 20

1️⃣ The activity serves a program function or management purpose
2️⃣ The audience was chosen based on criteria other than ability to donate
3️⃣ The activity motivates action beyond just contributing

Question 21

🏗️ Must nongovernmental NFPs depreciate fixed assets?

Answer 21

✅ Yes, all fixed assets must be depreciated, except for land

Question 22

🎁 How are donated assets recorded?

Answer 22

✅ At fair value on the donation date

Question 23

📊 How must NFP expenses be reported?

Answer 23

✅ As changes in net assets without donor restrictions

Question 24

When are conditional promises recognized as revenue?

Answer 24

✅ Only when all conditions are met

Question 25

💰 When are contributions recognized as revenue in an NFP?

Answer 25

✅ In the period in which the unconditional promise to give is received ❌ Timing of cash collection does NOT affect recognition

Question 26

🔄 Does the distinction between restricted and unrestricted pledges impact revenue recognition?

Answer 26

❌ No, both are recognized in full when the unconditional promise is made ✅ The distinction only impacts net assets (equity) in the financial statements

Question 27

🔒 What is an example of restricted support?

Answer 27

✅ Contributions designated by donors for use next year to support operations

Question 28

🏛️ What are the two expense categories in an NFP Statement of Activities?

Answer 28

✅ Program Services: Directly related to the mission ✅ Support Services: Administrative or fundraising-related ❌ No other categories exist

Question 29

🎓 What are examples of Program Services expenses?

Answer 29

✅ Education (school, museum) ✅ Research (scientific foundation) ✅ Healthcare services (hospital) ✅ Environmental programs (conservation group) ✅ Food distribution (food bank)

Question 30

🏦 What are examples of Support Services expenses?

Answer 30

✅ Fundraising (development, donor relations) ✅ Management & General (executive salaries, accounting, HR, office expenses) ✅ Administrative expenses (legal fees, board meetings, audit costs, insurance)

Question 31

🔄 Examples of Program vs. Support Services

Answer 31

✅ Salaries: Teacher's salary in a nonprofit school → Program Service CEO’s salary in a nonprofit school → Support Service (Management & General) ✅ Facility Costs: Classroom rent for a nonprofit school → Program Service Headquarters office rent → Support Service (Management & General) ✅ Marketing & Events: Educational campaign about public health (if the NFP’s mission is public health awareness) → Program Service Fundraising gala for donors → Support Service (Fundraising)

Question 32

🏗️ How does depreciation impact an NFP's financials?

Answer 32

✅ Reduces net assets (instead of net income like in for-profits)

Question 33

📊 How is net income reported in an NFP?

Answer 33

✅ It is classified as “Net Assets” ✅ Divided into two categories: with donor restrictions & without donor restrictions

Question 34

📝 How does the Statement of Activities (SoA) compare to a for-profit income statement?

Answer 34

✅ NFPs do not report net income; they report changes in net assets ✅ The SoA is split into two sections: Revenue & Expenses (with and without donor restrictions) ✅ Essentially, it is two full P&Ls in one statement

Question 35

📉 How are expenses, including depreciation, classified in the SoA?

Answer 35

✅ Always reported under net assets without donor restrictions

Question 36

💰 How are contribution revenues (support) recognized?

Answer 36

✅ Reported in the period they are unconditionally promised or received, whichever is earlier

Question 37

📏 How are revenues measured in an NFP?

Answer 37

✅ At present value (PV) or net realizable value (NRV) for contributions expected to be received within a year

Question 38

🔄 What does a change in net assets with donor restrictions include?

Answer 38

✅ Original donation ✅ Investment income & appreciation that is donor-restricted ✅ Decreases from resources spent for the restricted purpose

Question 39

🏢 How do businesses classify contributions made to an NFP?

Answer 39

✅ As an expense of the period ✅ NFPs recognize expenses the same way, so contributions are treated as an expense

Question 40

How should a nongovernmental NFP report donated supplies & services?

Answer 40

Donated services are recorded as revenue & expense if they: ✅ Create/enhance a nonfinancial asset 🏗️ ✅ Require specialized skills that would otherwise need to be purchased 🎓⚖️ Consumed donated supplies are recorded as an expense 🏥📦

Question 41

How is total expense calculated?

Answer 41

✅ Total Expenditures + Recognized Donated Services + Consumed Donated Supplies 📊 Example Calculation: $630,000 (incurred expenses) + $40,000 (legal services) + $15,000 (supplies) = $685,000 total expenses

Question 42

How do NFPs recognize promises to give and account for uncollectibility?

Answer 42

📥 Recognition: Unconditional promises to give are recognized as contribution revenue when made. 📉 No Bad Debt Expense: NFPs do not record a bad debt expense; instead, they recognize revenue at net realizable value, using an allowance for uncollectible promises

Question 43

How are long-term promises to give valued by NFPs?

Answer 43

💰 Non-cash Contributions: Fair value is used at the date the promise is made, even if the contribution occurs later 📉 Long-term Cash Promises: If the cash is to be received in future years, it is recorded at the present value of estimated future cash flows

Question 44

Why are volunteer services by high school students at Leer Hospital not recognized in the statement of activities?

Answer 44

🧒 Non-Specialized Services: Activities like reading to patients and wheeling them in the park do not require specialized skills. 💵 Would Not Be Purchased: These services are above-and-beyond care that the hospital would not have otherwise paid for. 🧾 Result: $0 reported for donated services in the financial statements. The $1,500 for the recognition banquet is an expense, not related to donated service valuation. 📘 FASB Reference: ASC 958-605-25-16 – Services must meet all three criteria to be recognized: Require specialized skills Performed by those with those skills Would be purchased if not donated

Question 45

A donor gives $150 and receives theater tickets worth $100. How much is recorded as contribution revenue?

Answer 45

🎟️ FMV of benefit received = $100 (theater tickets) 💵 Donation given = $150 🧾 Contribution revenue = $150 – $100 = $50 📘 Rule (FASB ASC 958-605): - When a donor receives something of measurable value in return, the donation is part contribution and part exchange transaction. - Only the amount in excess of the fair value of the benefit is reported as contribution revenue

Question 46

How do NFPs differ from private companies in investment accounting?

Answer 46

🏦 NFPs must use fair value and classify changes under net assets with or without restrictions. 🏛️ Private companies may use different methods (FV, cost, equity method) depending on investment type. 🔁 NFPs reclassify net assets when restrictions are met — not needed for private firms. 📊 Gains for NFP endowments are restricted until used; in private firms, they go straight to retained earnings or OCI.

Question 47

Why do donor-restricted endowments increase by both income and unrealized gains?

Answer 47

📘 FASB ASC 958-320 requires reporting investments at fair value. 🔄 Endowment funds reflect total return (income + unrealized gains). 🧾 Both types of return are with donor restrictions unless released for use.

Question 48

In NFP accounting, how are donor-restricted contributions and the related expenses reported across periods when the gift is received in one year and spent in the next?

Answer 48

⬆️ Contribution revenue is recognized in the year received (as with donor restrictions) • ⬇️ Expense is recognized in the year incurred (as a decrease in unrestricted net assets) • 🔁 In the spending year, a release from restriction increases unrestricted net assets ➡️ No matching principle applies; revenue and expense may occur in different periods

Question 49

How does PP&E valuation differ between not-for-profits (NFPs) and for-profit entities?

Answer 49

• 🛒 Purchased assets → Valued at historical cost in both NFPs and for-profits • 🎁 Donated assets → • NFPs: Valued at fair value on date of donation (FASB ASC 958-360) • For-profits: Rarely receive donations, so this generally doesn’t apply • 🛠️ Both depreciate PP&E over useful life using a systematic method