NON-PROFIT

ORGANIZATIONS

ACCT 1133
INTRO TO NPO’S
WHAT ARE NPOS, EXACTLY?
What makes them “not-for-profit?”

NPOs carry out some socially desirable needs of the community and its members, and whose
activities are not directed towards making profits.
Main objectives may be EDUCATIONAL, RELIGIOUS, SOCIO-CIVIC, CULTURAL, CHARITABLE.
Different forms: Educational Institutions (i.e. USL), Hospitals, Free Healthcare Providers (Bayanihan E-
Konsulta), Religious Institutions (Archdioceses, Parishes), Professional Bodies (PICPA, FINEX), Sports,
Social or Literary Clubs.

Expenses of the NPO

This is the reason why
REVENUES of the
NPOs are generally
NPOs
TAX EXEMPT, especially
Furtherance of the on related activities.
organizational mission
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COMPLIANCE TO ACCOUNTING STANDARDS
How do they comply with financial reporting?

ALTHOUGH the PFRS is designed to apply to business entities that make profit, it is NOT
PRECLUDED from being used by NPOs. Some of the PFRSs made a specific and explicit statement
that NPOs “MAY USE” PFRSs, such as, but are not limited to, the following:
- IFRS 9 (Financial Instruments)
- IAS 1 (Presentation of Financial Statements)
- IFRS 3 (Business Combinations)

Accordingly, provisions regarding the reporting for ASSETS and LIABILITIES likewise apply for an
NPO. The only difference, as always, lies on the accounting for the EQUITY of the NPO (hereinafter
called “net assets”)

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COMPLIANCE TO ACCOUNTING STANDARDS
How do they comply with financial reporting?

As NPOs are usually registered under the SEC as partnerships or corporations, NPOs are usually
required to disclose audited financial statements in accordance with PFRSs, with accompanying
auditor’s report, and a MODIFIED statement of compliance to PFRS, which makes a reserved
statement regarding the fact that PFRS does not contain specific guidelines in accounting for NPOs,
but can likewise be applied for NPOs with similar transactions and for similar accounting issues.

For purposes of discussion, we shall adhere with SFAS 116 and SFAS 117, from the US GAAP, in
accounting for the NPO’s Net Assets and Financial Reporting, these are used for the boards, and are
patterned after the PFRSs.
For our subsequent discussions, these NPOs are PRIVATE ENTITIES only.

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FUND THEORY
The basis of NPO Financial Reporting

FUND THEORY – stressed great emphasis on SOURCES and ADMINISTRATION of funds. ONE FUND
is the CENTER of NPO financial reporting, as opposed to FUND ACCOUNTING, dealing with
numerous funds.
Implications of the Fund Theory:
1. Entity Theory – financial reporting is focused on the organization as a WHOLE
2. External Usefulness – focal point is external reporting
3. “Fund” is synonymous to NPO Net Assets or Equity
4. Disclosures of NET ASSETS, REVENUES and CONTRIBUTION on the basis of level and type of
RESTRICTIONS.

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ACCOUNTING FOR NPO’S, PART 1
CONTRIBUTIONS
Where majority of NPO revenues come from

Contributions – resources received in “non-reciprocal” transactions (i.e. gratuitous transfers).

Classified based on DONOR RESTRICTIONS, as follows:
1. UNRESTRICTED – available for immediate use and for any purposes.
2. TEMPORARILY RESTRICTED – restricted on a temporary basis until either of the following
happens (to which it transfers from TR to Unrestricted):
• Specific tasks are performed
• A future event as specified in the contribution happens
• Passage of Time

3. PERMANENTLY RESTRICTED – indefinite restriction, can never be used by the NPO, but the
income thereof can be used (i.e. rent, interest, etc.)

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CONTRIBUTIONS
Recognition and Measurement

Cash and other NCAs received – recognized as REVENUES during the period RECEIVED.
Measurement: Face Value, Fair Value, whichever applies.

Rule on BOARD-IMPOSED restrictions – If restrictions are provided by the board of

directors/trustees of the NPO, the contribution will likewise still form part of UNRESTRICTED fund.

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CONTRIBUTIONS
Illustration
A NPO located in the heart of Tuguegarao, was established to
provide free school supplies to marginalized students. It had initial net
assets of 450,000 from unrestricted contributions, and no other net
assets. The following transpired during the year:
1. Received P 200,000 cash and land at a fair value of P
1,000,000, to be used at the entity’s discretion.
2. Received cash of P 2,000,000 to be used to acquire a truck. The
truck will be used to deliver goods and school supplies.
3. Received investments in ABC Company stocks, with FV of
500,000. The donor specified that it cannot be touched in any
manner nor sold, during the lifetime of the NPO. However, any
dividends shall be unrestricted.
During the year, NPO purchased the truck, and then received
dividends from ABC Company of 60,000.
Compute for UNRESTRICTED NET ASSETS, TEMPORARY RESTRICTED
NET ASSETS, and PERMANENTLY RESTRICTED NET ASSETS.
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CONTRIBUTIONS
How about promises?

Promises – commitments from various donors and stakeholders to contribute cash or NCA at a future
date.
Promises are recorded in accordance with the rules as to whether such promises are
UNCONDITIONAL or CONDITIONAL:
1. For UNCONDITIONAL Promises – recognize when the promise was communicated to the entity.
Generally presented as TEMPORARILY RESTRICTED as a result of “time restriction.” Reclassified
as UNRESTRICTED once received in full, and no conditions or any reasons for temporary
restrictions apply.
2. For CONDITIONAL Promises – no recognition is made the moment the promise was
communicated, applying the principle of PRUDENCE.

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CONTRIBUTIONS
Recognition rules for conditional promises

1. Conditional promise was made, no transfer of assets – NO ENTRY.

2. Conditional promise was made, no transfer of assets, conditions SUBSTANTIALLY MET, or if
probability of non-compliance with condition is REMOTE – recognize as if “unconditional
promise”
3. Conditional promise was made, conditions were not substantially met yet, there is transfer of
assets – Recognize the asset and a corresponding “Refundable Advances” liability.

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CONTRIBUTIONS
Illustration
The Dave and Jo Foundation, a NPO, had the following
transactions for the year 2021:
1. Received a formal promise on January 23, no strings
attached, promising to contribute 750,000 on March
15.
2. Received a formal promise on February 14, with the
condition that the Foundation build a lung center in
one of the poorest areas of central Cagayan. The
promise amounted to 300,000, and was not yet
transferred to the Foundation. The foundation is yet to
meet the attached conditions.
3. Received a formal promise on April 27, with a
condition to provide scholarships to 300 students. An
amount of 650,000 was received by the Foundation.
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CONTRIBUTIONS
Illustration
The Dave and Jo Foundation, a NPO, had the following
transactions for the year 2021:
1. Received a formal promise on January 23, no strings
attached, promising to contribute 750,000 on March
15.
2. Received a formal promise on February 14, with the
condition that the Foundation build a lung center in
one of the poorest areas of central Cagayan. The
promise amounted to 300,000, and was not yet
transferred to the Foundation. The foundation is yet to
meet the attached conditions.
3. Received a formal promise on April 27, with a
condition to provide scholarships to 300 students. An
amount of 650,000 was received by the Foundation.
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SERVICES
Recognition Criteria for Services

SERVICES – are contributions made by donors and stakeholders in the form of labor and/or human
effort.
TWO-STEP criteria in recognizing services (both must be met)
1. If the service requires a “specialized skill” to be done by an expert/professional (such as that
of an accountant, doctor, lawyer, electricians, carpenter, architect, engineers, plumbers, etc.),
AND
2. The service created or enhanced a non-financial asset.

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SERVICES
Such that…

a. A bookkeeping service rendered by an accountant is not recognized as it does not create or

enhance an underlying asset,
b. A clean-up drive done by donors in the vicinity of the NPOs building is not recognized as it
failed to meet both criteria,
c. An expert scientist who, in the process of providing research and development services to an
NPO, generated a patentable asset with substantial fair value is recognized as it meets both
criteria.

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COMPREHENSIVE PRACTICE PROBLEM
You may answer this on your own homes.
Kilos Kalikasan, Inc., is a duly created and certified NPO engaged in environmental initiatives. It began
on January 1, 2020, with initial stakeholder contributions of 750,000, one-third of which were restricted
by the board of trustees for use at a specified future. The following transcribed during the year:
1. The one-third board-restricted fund was released by the board on February 25, 2020, with the
intention to invest in a materials sorting and recovery facility, to convert plastics and other materials
into useful by-products.
2. ABC Company, an independent business corporation, took notice of KKs initiatives, and has given a
cash grant of 250,000 for use by KK on any initiatives.
3. Taylor Swift, a renowned singer, also took notice of the initiatives, and on April 9, and has given a
sum of 1,313,130, which Taylor specified that it be used for investing in renewable energy sources
for local communities. As of December 31, 80% of the funds were utilized for solar and wind
energy sources now being used by 60% of households in Southern Cagayan.
4. Ariana Grande, also a renowned singer, pledged a sum of 340,000, 35% of which have attached
conditions which have not yet been met but has already been received.
5. JPIA-USL, a student body, also took part in KKs initiatives by conducting a tree-planting activity on
behalf of KK. The perceived fair value of the services is at 80,000.
6. Red Velvet Group, a talented group of IT professionals, helped KK in creating their secure software
and website. The fair value of the system bundle is at 155,000.
Required: Compute for the ending balance of the fund under different levels of restrictions.

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