ACCOUNTING FOR NON-PROFIT ORGANIZATIONS

A non-profit organization is a non-stock corporation that is organized for the benefit of the public
as a whole, rather than for the benefit of an individual proprietor, or a group of partners or
stockholders.

Non-profit organizations include civic organizations, colleges and universities, cultural

institutions, hospitals, labor unions, private foundations, professional organizations, religious
organizations, cooperatives, and social and country clubs. They do not include governmental
units.

Introduction

Although the IFRSs/PFRSs are designed to apply to business entities, they can also be applied
to nonprofit organizations. This is evidenced by the following excerpt from the IFRSs/PFRSs:

● IFRSs are designed to apply to the general purpose financial statements and other
financial reporting of profit-oriented entities. Although the IFRSs are not designed to
apply to not-for-profit activities, entities with such activities may find them appropriate.
● PAS 1 Presentation of Financial Statements uses terminology that is suitable for
profit-oriented entities. If entities with not-for-profit activities apply PAS 1, they may need
to amend the descriptions used for particular line items in the financial statements and
for the financial statements themselves.
● IFRSs generally do not have scope limitations for not-for-profit activities. Although IFRS
are developed for profit-oriented entities, not-for-profit entities might be required, or
choose, to apply IFRSs.

Characteristics of a Non-profit Organization

Non-profit organization (NPO) - also called not-for-profit entity (NFP) or non-commercial

organization (NCO) - is one that carries out some socially desirable needs of the community or
its members and his activities are not directed towards making profit.

The main objective of NPOs may be educational, religious, social, cultural or charitable. NPOs
may be in the form of educational institutions, hospitals and other healthcare providers, religious
institutions, professional bodies, sports, social or literary clubs, and other forms of charitable
institutions.

Because NPOs carry out their activities in the interest of the society and without the intention of
making profit, NPOs are usually exempt from income taxation.
Some of the characteristics of nonprofit organizations are similar to those of governmental
entities and business enterprises. Among the features of non-profit organizations that are similar
to governmental entities are the following:
 1. Public service. Nonprofit organizations usually run their services to society as a whole.
The members of this society may range from a limited number of citizens. Like
governmental entities, the services of non-profit organizations are for the benefit of the
many rather than the few.

2. No profit motives. The objective of nonprofit organizations is not to earn profit.

Therefore, nonprofit organizations are exempt from income taxes, but not from business
taxes.

3. Finance by citizenry. Most nonprofit organizations depend on the voluntary contributions

of the citizenry to support their operations, because revenues derived from their services
are not enough to cover their operating expenses. Exceptions are philanthropic
foundations established by wealthy individuals or families.

4. Stewardship of resources. Since a substantial portion of the resources of nonprofit

organizations are donated, the organization must account for the resources on a
stewardship basis like the governmental entities. Fund accounting is appropriate for this
requirement.

Among the features of non-profit organizations that are similar to those of business enterprises
are the following:

1. Governance of Board of Directors. As with business corporations, non-profit

corporations or non-stock corporations are governed by elected or appointed directors.

2. Use of accrual basis of accounting. Non-profit organizations adopt the same accrual
basis of accounting used by business enterprises. Thus, revenues and expenses are
recorded as earned and incurred.

PFRS Principles applicable to NPOs

● Recognition criteria for assets and liabilities:

○ Meets the definition of an asset reliability;
○ Probable inflow or outflow of resources; and
○ Reliable measurement of cost or other value (e.g., fair value)

● Measurement of asset or liability:

○ Initial measurement at cost except when a relevant PFRS requires measurement
at fair value or some other value.
○ Subsequent measurement at amortized cost, under the cost model, or some other
measurement model required by a relevant PFRS.
 ● Derecognition of asset or liability:
○ An asset or liability is derecognized when it ceases to provide inflow or require
outflow of resources embodying economic benefits. The difference between the
carrying amount in the net proceeds or net settlement, if any, is recognized in
change in net assets.

● Presentation of financial statements:

○ General features: for presentation in compliance with the PFRS, going concern,
accrual basis, materiality and aggregation, upsetting, frequency of reporting,
comparative information, and consistency of presentation.
ACCOUNTING FOR NON-PROFIT ORGANIZATIONS

Fund theory vs. Fund accounting

The financial statements of most and NPOs are based on the fund theory. The fund theory
stresses great importance on the custody and administration of funds. Accordingly, the source,
nature and purpose of the funds held by the nonprofit organization are disclosed in order to give
information necessary for users to access the organization’s stewardship over those funds.

Also fund accounting is an offshoot of the fund theory. SFAS and PFRS do not require the use
of fund accounting. However, entities are not prohibited from using it.

Under fund accounting, the main accounting you need is the fund. Accordingly, transactions
are accounted for in the books and presented in the financial statements strictly based on their
classification as either (1) Unrestricted, (2) Temporarily Restricted, or (3) Permanently
Restricted.

Fund theory-based financial statementsFund accounting-based financial

statements

Focuses on the reporting entity concepts;

We use the entity as being made up of
thus, the accounting you need is the
component parts; thus, the accounting units
organization as a whole.
are the various funds held.

Adheres to the accounting point of view of

Adheres to the bookkeeping point of view of
providing useful information to external users.
providing useful information to managers.
 The term “funds” is more commonly used to
The term “funds” is used to refer to specific
refer to the net assets.
ones consisting of cash and other non-cash
assets

Provides disclosures on the type of and changes in them strictly in accordance

restrictions on net assets and revenues (i.e., with their fund classifications (i.e.,
Unrestricted, Temporarily Restricted or Unrestricted, Temporarily Restricted or
Permanently Restricted). Permanently Restricted).
Focuses on classifying assets, net assets,

Current trend Traditional

Contributions

A majority of the Revenues of the nonprofit organizations come from charitable contributions or
donations. Contributions refer to the resources received in non-reciprocal transactions.
Contributions exclude those that result from exchange transactions (i.e., resources received in
exchange for other resources are obligations)

Contributions are classified as follows:

1. Unrestricted - Available for immediate use for any purpose.

2. Temporarily restricted - restricted by the donor in such a way that availability Of the
contribution for the non-profit organization’s use Is dependent upon:
a. The performance of a specific task;
b. the happening of a future event; or
c. the passage of time
3. Permanently restricted - restricted by the donor in such a way that the organization will
never be able to use the contribution itself; however, the organizations may be able to
use the income therefrom.

Recognition and Measurement

1. Cash and other Non-cash assets

Cash and other non-cash assets received as contributions are recognized as revenues in the
period received and as assets, decreases of liabilities, or expenses depending on the form of
the benefits received.

Contributions are measured at fair value at the date of contribution and are reported as either:
 a. Unrestricted support - revenue from unrestricted contributions; or
b. Restricted support - revenue from temporarily restricted or permanently restricted
contributions.

Temporarily restricted contributions whose restrictions are met in the same reporting period may
be reported as unrestricted support provided that the nonprofit organization discloses this
accounting policy and applies it from period to period.

Unrestricted support increases unrestricted net assets when restricted support increases either
temporarily restricted net assets are permanently restricted net assets.
Illustration 1: Unrestricted support
A nonprofit organization receives cash of P200,000 and land with fair value of P1,000,000 to be
used at the entity’s discretion.

Cash 200,000
Land 1,000,000
Contributions revenue - unrestricted support 1,200,000
to record receipt of unrestricted donations of cash and land

Illustration 2: Restricted support

On January 1, Entity A, a non-profit organization, receives the following donations:

● Cash of P2,000,000 to be used to acquire a truck. The truck will be used in Entity A’s
outreach programs.
● Investment in equity securities with fair value of P500,000 to be held indefinitely. Only the
investment income shall be used by Entity A in its operations.

On December 31, Entity A acquired a truck for P2,200,000 and received cash dividends of
P60,000 from the equity securities.

01/01 - Cash 2,000,000

Contributions revenue -
temporarily restricted support 2,000,000
to record receipt of temporarily restricted donations of cash

01/01 -Investment in equity securities 500,000

Contributions revenue -
permanently restricted support 500,000
to record receipt of permanently restricted donations

12/31 - Transportation equipment - Truck 2,200,000

 Cash 2,200,000

12/31 Cash 60,000

Dividend Income 60,000
Unconditional promises

Unconditional promise to give cash or other non-cash assets in the future period is recognized
when the unconditional promise to give is received from the donor. Generally, such unconditional
promise is classified as a temporarily restricted contribution because of the time restriction (i.e.,
to be received in the future). In the event that the promised contribution becomes doubtful of
collection, and allowance for uncollectibility is recognized.

Conditional promises

Conditional promises to give, which depend on the occurrence of a specified future and
uncertain event to bind the promisor, recognize only when the attached conditions are
substantially met (i.e., promise becomes unconditional). A conditional promise to give is
considered unconditional if the possibility that the condition will not be made is remote (that is,
the possibility that the condition will be met is reasonably certain).

Illustration 3: Unconditional and Conditional Promise

On January 1, Entity A receives a formal promise from Donor X to donate P1,000,000.

Case 1. The donation is unconditional and is to be received on February 14.

01/01 - Donations Receivable 1,000,000

Contributions revenue -
temporarily restricted support 1,000,000

02/14 - Cash 1,000,000

Donations Receivable 1,000,000

When the effect of time value of money is material, receivables shall be measured at present
value.

Case 2. The donation is conditioned on the submission of a detailed formal plan for a proposed
project. As of January 1, the plan is not yet substantially complete.

01/01 - No entry
Case 3. Using the information in Case 2, on February 1, Entity A receives the promised
contribution before the attached condition is substantially met.

02/01 - Cash 1,000,000

Liability for refundable advance 1,000,000

2. Services

Contributions of services are recognized if the services received

a. create or enhance not financial assets; or
b. Require specialized skills, are provided by individuals processing those skills, and would
typically need to be purchased if not provided by donation.

Services requiring specialized skills are provided by accountants, architects, carpenters,

doctors, electricians, lawyers, nurses, plumbers, teachers, and other professionals and
craftsmen.

Contributed services and promises to give services that do not meet the above criteria are not
recognized.

Illustration 4: Services

Entity A, a non-profit organization, received the following services:

a. Carpenters repaired the ceiling of Entity A’s office for free. The fair value of the services is
P20,000.
b. JPIA members from various universities helped in a tree planting activity initiated by entity
eat for free. The fair value of the services might be P50.

Entries:

a. Repair and Maintenance Expense 20,000

Contributions Revenue-unrestricted support 20,000

b. No entry

3. Works of art and similar items

An entity need not recognize contributions of works of art, historical treasures, and similar
assets if the donated items are added to collections that meet all of the following conditions:
a. Held for public exhibition, education or research in furtherance of public Service rather
than financial gain;
 b. Protected, kept unencumbered, cared for, and preserved; and
c. Proceeds from the sale of collection items are to be used to acquire other items for
collections.

The reason for the non-recognition as an asset Our revenue is that, when all of the conditions
above are made, the work of art or similar item does not meet the PFRS asset recognition
criteria of probable economic benefits. Moreover, the financial value of some works of art may
be difficult to measure reliably.

In cases, however, where a work of art or similar item meets all of the recognition criteria for an
asset, the work of art is recognized as an asset and revenue measured at fair value.

Illustration 5: Fund Accounting

Entity A receives the following donations:

a. Unrestricted donation of P1 million cash.
b. Cash of P2 million restricted for the acquisition of a building
c. Investment in stocks of P3 million. Entity A can only use the investment income.

Entity A acquires a building for P2 million and receives dividends of P100,000 from the
investment at the end of the period.

Required: Record the transactions above under a fund accounting

system. Solution:

Under fund accounting, transactions are recorded in a manner that as if the organization is
divided into its component parts i.e., the funds. Accordingly, transfers between the funds are
viewed as accountable events that are recorded through journal entries.

Unrestricted Fund

Cash 1,000,000
Contribution Revenue 1,000,000

Cash 2,000,000
Net Assets Released from Restrictions 2,000,000
To record funds released from temporary restriction

Building 2,000,000
Cash 2,000,000
Cash 100,000
Dividend Income 100,000
Temporarily Restricted Fund

Cash 2,000,000
Contribution Revenue 2,000,000

Net Assets Released from Restrictions 2,000,000

Cash 2,000,000
To record funds released from temporary restriction

Permanently Restricted Fund

Investment in Stocks 3,000,000

Contribution Revenue 3,000,000

The net assets released from restrictions is shown in the statement of activities as a decrease in
temporarily restricted net assets and an increase in unrestricted net assets. The balances of net
assets are determined as follows:

Other funds held by NPOs

1. Endowment fund
a. Term endowment fund – under the donor’s restrictions, the NPO can use a portion of
the principal each period. This is classified as temporarily restricted.
b. Regular endowment fund - under the donor’s restrictions, the NPO cannot spend any
of the principal. This is classified as permanently restricted.
2. Agency fund – funds held by the NPO acting as a custodian. Agency funds are recognized
as liabilities. For example, an educational institution may receive funds from the Commission
on Higher Education (CHED) to be disbursed as student loans. 3. Plant fund
a. Unexpected funds for the acquisition of plant assets;
b. Funds for the renewal and replacement of plant assets;
c. Funds for the retirement of indebtedness; and
d. Investment in plant assets
4. Board-designated fund (quasi-endowment) – funds which are restricted at the sole discretion
of the NPO’s governing board. Funds that are internally restricted are classified as
unrestricted. Only contributions with donor-imposed restrictions are classified as restricted.

Treating the various funds held by an NPO as separate accounting units can make accounting
cumbersome. Thus, SFAS and PFRS do not require fund accounting. NPOs normally use fund
accounting as a managerial tool rather than a system for providing general purpose financial
statements.

References:
Millan, Z. V. (2020). Government Accounting and Accounting for Non-profit Organizations.