In this video, we walk through 5 FAR practice questions teaching about preparing the statement of activities. These questions are from FAR content area 1 on the AICPA CPA exam blueprints: Financial Reporting.
The best way to use this video is to pause each time we get to a new question in the video, and then make your own attempt at the question before watching us go through it.
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Preparing the Statement of Activities for a Nongovernmental, Not-for-Profit Entity
The statement of activities is a financial statement for a nongovernmental, not-for-profit entity. It provides a detailed account of how the organization’s net assets have changed over a specific period, reflecting its financial performance and the effectiveness of its operations. This guide will walk you through the key steps in preparing the statement of activities, including handling donor restrictions, releases from restrictions, and other important considerations.
Understanding the Basics
The statement of activities is similar to the income statement used by for-profit entities. However, in a not-for-profit context, the focus is on changes in net assets rather than profit or loss. Net assets are classified into three categories:
- Net Assets Without Donor Restrictions: These are funds that the organization can use for any purpose, with no donor-imposed restrictions.
- Net Assets With Donor Restrictions: These funds are subject to donor-imposed stipulations, which may be time-based, purpose-based, or permanent (such as endowments).
- Net Assets Released from Restrictions: This category reflects funds that were previously restricted but have been released and reclassified to net assets without donor restrictions because the donor’s stipulations have been met.
Step-by-Step Preparation
- Start with the Trial Balance: Begin by analyzing the organization’s trial balance, which provides a snapshot of all accounts. Identify revenues, expenses, and changes in net assets. The trial balance will also highlight which funds are restricted by donors and which are unrestricted.
- Classify Revenues and Gains:
- Without Donor Restrictions: Include donations, grants, and revenues from activities that are unrestricted. For example, if an organization receives $75,000 in general donations with no donor stipulations, this amount is classified under net assets without donor restrictions.
- With Donor Restrictions: Record donations and grants that come with specific donor-imposed restrictions. For instance, if the organization receives $100,000 for a scholarship fund, this amount should be classified under net assets with donor restrictions.
- Account for Expenses:
- Program Expenses: These are directly tied to the organization’s mission. For example, salaries for program staff and costs associated with delivering services should be classified as program expenses.
- Support Expenses: These include management and general, membership development, and fundraising expenses. For example, if the Executive Director’s salary is $150,000 and is split between management (50%), programs (40%), and fundraising (10%), the appropriate portions should be allocated to each category.
- Record Donor-Imposed Restrictions:
- Permanent Endowments: Funds restricted for long-term investment purposes should be recorded as net assets with donor restrictions. For example, a $300,000 endowment meant to support environmental initiatives would be recorded as an increase in net assets with donor restrictions.
- Temporary Restrictions: If a donation is restricted for a specific purpose, such as $70,000 for a reforestation project, it should also be recorded under net assets with donor restrictions.
- Calculate Releases from Restrictions: When donor-imposed restrictions are satisfied, the funds are reclassified from net assets with donor restrictions to net assets without donor restrictions. For instance, if $40,000 is spent on a community garden project, fulfilling the donor’s stipulation, this amount is released from restrictions and increases net assets without donor restrictions.
- Calculate the Change in Net Assets:
- Without Donor Restrictions: Add up all unrestricted revenues and subtract all expenses (excluding investment expenses). For example, if the organization starts with an unadjusted decrease of $20,000 and then adds unrestricted donations, releases from restrictions, and expenses, the net change might result in an increase of $70,000.
- With Donor Restrictions: Add all restricted revenues and gains, subtract any losses (such as investment losses), and account for any amounts released from restrictions. In a scenario where an organization receives a $300,000 endowment, earns $15,000 in income, incurs a $50,000 loss, and releases $25,000, the net increase in net assets with donor restrictions would be $240,000.
Example:
Let’s consider an example to bring these concepts together:
The Evergreen Conservation Trust received a $300,000 permanent endowment restricted for long-term investment. The endowment earned $15,000 in income, but the investment incurred a $50,000 loss due to market fluctuations. Additionally, the Trust received a $70,000 donation for a reforestation project and incurred $40,000 in expenses for that project, fulfilling the donor’s restrictions. The Trust also released $25,000 from donor restrictions for expenses related to an educational outreach program from the previous period.
Net Assets With Donor Restrictions:
- Increase: $300,000 (endowment)
- Increase: $15,000 (investment income)
- Decrease: -$50,000 (investment loss)
- Increase: $70,000 (donation for reforestation project)
- Decrease: -$40,000 (release from donor restrictions to cover expenses for the reforestation project)
- Decrease: -$25,000 (release from donor restrictions for the educational outreach program)
Net Increase in Net Assets With Donor Restrictions:
$300,000 + $15,000 – $50,000 + $70,000 – $40,000 – $25,000 = $270,000 increase
Net Assets Without Donor Restrictions:
- Increase: +$40,000 (release from donor restrictions for reforestation project)
- Decrease: -$40,000 (expenses related to the reforestation project)
- Increase: +$25,000 (release from donor restrictions for educational outreach program)
Net Increase in Net Assets Without Donor Restrictions:
$40,000 – $40,000 + $25,000 = $25,000 increase
Conclusion
Preparing a statement of activities for a nongovernmental, not-for-profit entity requires careful attention to detail, particularly when managing donor restrictions and releases. By following these steps and understanding the flow of funds, organizations can accurately reflect their financial performance and ensure transparency in their operations. This, in turn, helps maintain donor trust and supports the organization’s mission to serve the community.
