CNC Fund Accounting & GAAP for NPOs 3 — Questions and Answers
Question 1: Under the UPMIFA (Uniform Prudent Management of Institutional Funds Act), what standard governs how nonprofits may spend endowment funds?
- Funds may be spent freely at board discretion regardless of market value
- Prudent spending based on eight enumerated factors, including the fund's purpose, duration, and economic conditions (Correct answer)
- Spending is limited to exactly 5% of fund market value per year
- Only the original gift amount (historical dollar value) may ever be spent
Correct answer: Prudent spending based on eight enumerated factors, including the fund's purpose, duration, and economic conditions
UPMIFA replaced the historical-dollar-value floor with a prudent-investor standard, listing eight factors (purpose, duration, economic conditions, etc.) for determining appropriate spending.
Question 2: How does ASC 958 define 'net assets without donor restrictions'?
- Resources the board has formally set aside for long-term purposes
- The portion of net assets not subject to donor-imposed stipulations (Correct answer)
- Assets held in trust for beneficiaries outside the organization
- Cash and equivalents available for immediate operational use only
Correct answer: The portion of net assets not subject to donor-imposed stipulations
Net assets without donor restrictions are those not subject to donor-imposed stipulations and are available for general use at management and board discretion.
Question 3: A nonprofit receives an in-kind donation of office equipment with a fair market value of $8,000. How should this be recorded under GAAP?
- No entry required; only cash donations are recognized
- Debit fixed assets $8,000, credit contribution revenue $8,000 (Correct answer)
- Debit expense $8,000, credit in-kind contribution $8,000
- Record a memorandum note only, without a journal entry
Correct answer: Debit fixed assets $8,000, credit contribution revenue $8,000
Non-cash (in-kind) contributions of tangible assets are recorded at fair market value as both an asset and contribution revenue per ASC 958-605.
Question 4: Which financial statement replaces the 'balance sheet' in nonprofit GAAP reporting?
- Statement of Cash Flows
- Statement of Financial Position (Correct answer)
- Statement of Functional Expenses
- Statement of Program Services
Correct answer: Statement of Financial Position
Nonprofits use the 'Statement of Financial Position' (rather than 'balance sheet') to present assets, liabilities, and net assets at a point in time.
Question 5: Which method of cash flow presentation do most nonprofits use, and what supplemental disclosure is required when using it?
- Direct method; no supplemental disclosure required
- Indirect method; a reconciliation of change in net assets to net cash from operations is required (Correct answer)
- Direct method; a reconciliation of change in net assets to net cash from operations is required
- Indirect method; a schedule of non-cash investing activities is optional
Correct answer: Indirect method; a reconciliation of change in net assets to net cash from operations is required
Most nonprofits use the indirect method, which requires reconciling the change in net assets to net cash provided by operating activities as a supplemental disclosure.
Question 6: When a nonprofit allocates joint costs (e.g., a fundraising mailing that includes a programmatic message), which standard governs the allocation?
- ASC 720-45, which requires all joint costs to be reported as fundraising expense
- ASC 958-720, which permits allocation among program, management, and fundraising if three criteria are met (Correct answer)
- FASB ASC 606, which applies to revenue recognition only
- OMB Circular A-133, which governs all federal award expenses
Correct answer: ASC 958-720, which permits allocation among program, management, and fundraising if three criteria are met
ASC 958-720 allows joint costs to be allocated among program, management/general, and fundraising functions when the purpose, audience, and content criteria are all met.
Question 7: Under GAAP, how should a nonprofit account for a split-interest agreement such as a charitable remainder trust where the nonprofit is the remainder beneficiary?
- Record the full trust assets as unrestricted revenue when the trust is established
- Record its beneficial interest at the present value of the expected remainder interest when the trust is established (Correct answer)
- Disclose only in notes until the donor passes away and assets are transferred
- Record no entry until cash is received from the trust
Correct answer: Record its beneficial interest at the present value of the expected remainder interest when the trust is established
For charitable remainder trusts, nonprofits recognize a contribution equal to the present value of their remainder interest at the date the trust is established, per ASC 958-605.
CNC Fund Accounting & GAAP for NPOs 3
Under the UPMIFA (Uniform Prudent Management of Institutional Funds Act), what standard governs how nonprofits may spend endowment funds?