FASB Standards Overview - Essay Example

FASB Standards The FASB, in ment No. 116, over the vociferous objections of many of its constituent not-for-profit organizations, decided that unrestricted pledges should be reported as revenue in the period received; organizations need not wait until pledges are fulfilled. They should measure the pledges at "the present value of estimated future cash flows using a discount rate commensurate with the risks involved". That is, they should take into account both anticipated bad debts and the time value of money. If they establish an allowance for uncollectible(s), then they should use a risk-free discount. If not, then they should use a higher rate-one that takes into account the risk of being unable to collect the pledge. They should not both establish an allowance for uncollectible(s) and adjust the discount rate for risk. That would cause the default risk to be accounted for twice. Entities need not discount pledges to be collected within one year. To avoid recognizing contributions as revenue before they are available for expenditure, not-for-profits should consider pledges of cash to be received in future period as subject to time restrictions. The FASB concluded that by promising to make payments in the future, donors implicitly restrict the donated resources to support of future, not current, activities. Hence, the recipient organizations should classify them as temporarily restricted. When the cash is received and available for expenditure, they should release resources from the temporarily restricted category and transfer them to the unrestricted category. The standard allows an option to recognize pledges that are restricted, either as to time or use, as unrestricted if the restriction has been met in same period as the donation is made. Contributions, a mainstay means of support for many not-for-profits, encompass all nonreciprocal receipts of assets or services. A nonreciprocal receipt is one for which the recipient gives nothing in exchange. As defined by the FASB in its 1993 pronouncement "Accounting for Contributions Received and Contributions Made" (Statement No. 116), contributions include gifts of cash, marketable securities, property and equipment, utilities, supplies, intangible assets (such as patents and copyrights), and the services of professionals and skilled workers. Contributions also include unconditional promises-that is, pledges- to give those items in the future. Thus, pledges are regarded as contributions, although they exclude conditional promises to give these items in the future. A conditional promise depends on a specified future and uncertain event to bind the donor. For example, a university alumnus may pledge funds to construct a new physics laboratory if the university is successful in winning a government research grant. Contributions must be distinguished from exchange transactions. A contribution is a transfer of assets in which the donor does not expect to receive equal value in return. An exchange transaction is a reciprocal transfer in which each party receives and gives up resources of commensurate value. For example, if a private corporation were to give a not-for-profit research foundation funds to study the cause of a disease with the expectation that the results would be published in a scientific journal, the transaction would be considered a contribution. If, on the other hand, it gave the funds with the contractual agreement that it would have the rights to resultant patents, then the transaction would be an exchange transaction. The difference between the two is not always obvious. When people join the local Friends of the Library Association, do they do so to support the library's scholarly activities or to benefit for the right to attend member-only lectures Do they join the American Automobile Association to promote auto safety and good roads or to obtain emergency road service and travel directions Do they join the AARP to advance the interests of senior citizens or to take advantage of low-cost life and auto insurance offers Distinguishing between asset transfers and exchange transactions and contribution requires the exercise of judgment. Factors to be taken into account should include the recipient's intent in soliciting the resources, the party that establishes the amount of resources transferred.(Example: the transferor or the transferee), and the penalties assessed if either party fails to deliver what has been promised. Essay Questions: 1. A not-for-profit organization receives a restricted gift. When, and in which type of fund, should it recognize the revenue When and in which type of fund, should it recognize the related expense What is the reason for the apparent inconsistency between the fund types in which revenues and expenses are reported The gift shall be recognized as a contribution revenue as per advised through the guidelines of FASB 116. Since the organization is non-profit, recognition of the contribution received is necessary. Although the contribution has been connoted as restricted, it is still a financial gift that could be well utilized by the organization for the projects or at least other programs that they are aiming to prepare for those whom they ought to serve in the society. As the FASB 116 states: "A contribution is an unconditional transfer of cash or other assets to an entity or a settlement or cancellation of its liabilities in a voluntary nonreciprocal transfer by another entity acting other than as an owner" Yes, through this statement, it could be observed that every monetary or non-monetary contribution made to receive by any non-profit organization deserved to be recognized and noted as contribution resources at the end of the fiscal year. However, considering this particular case, the organization must be able to understand if the given gift is already available for expenditure. In case the amount ha not been set for further expenses yet, the amount of financial resource given could be simply recognized as pledge which could later on be used for the financing needs of the organization once approved as contribution. 2. A foundation promises to donate $1 million to a local public broadcasting station (a not-for-profit organization) in one year. When, and in what amount, should the station recognize revenue The station applies a discount rate of 10 percent to all pledges. Would your response be the same if the foundation pledged to donate the funds only if and when the station agreed to carry a particular program Why do many not-for-profits object to the standards pertaining to revenue recognition of pledges One thing is clear in this situation, a non-profit organization runs through contributions and they are not paid to run certain programs or movements and other aspects the like. It could then be noted that even though the foundation promised to donate $1M to the local broadcasting station, the administrators are not at all to be subjected to force airing of the program required of them by the contributors. It could be noted that once a donation is given, a non-profit organization could certainly do what it pleases to the finances given. Besides, the 10% of the donation goes back to contributor as a token of appreciation, hence living the responsibility and the freedom to spend the money to the organization alone. It should be remembered that the given amount is donated and does not stand as a payment for anything or for anyone in the organization. Hence, it could then be observed that non-profit organizations stand as individual entities that could decide to either accept or deny a contribution offer depending on the motive of the ones contributing the amount of money given. On the other hand, contributors to the organization must realize of their stand as they give the donations to improve the system of the organization and not to imply their personal demands on the administrators of the group due to the financial support they willingly give no matter what the amount of the donation is. Read More