The Simplified Guide to Not-for-Profit Accounting, Formation, and Reporting

276 Pages·2010·3.679 MB·English

by  Laurence Scot(auth.)

AdditionalPraisefor
TheSimplifiedGuideto
Not-for-ProfitAccounting,Formation,andReporting
‘‘This book is fantastic! Not-for-profit accounting can be quite complex at
times,butthisbookcutsrighttothepointandprovideseasy-to-understand
answers to difficult questions. I would recommend it to anyone and
everyonewhoworksinafinancialcapacityatanot-for-profitorganization.’’
—AlinaYavorovskaya,
EVPofFinanceandAdministrationandCFO,
SeedsofPeace
‘‘Laurence Scot has created an extremely practical, useful, and easy-to-use
guide that is a must read for anyone and everyone who is interested in
not-for-profits. Whether you are starting a not-for-profit or are a board
member, an officer, or a current or future staff accountant, you will greatly
benefitfromthisvaluableandcomprehensivebook.’’
—EceA.J.Yilmaz,MBA,CMA,CBM,PMP,
ExecutiveDirector,
AmericanCollegeNutrition
‘‘This is a definite read for anyone involved in the not-for-profit industry,
regardless of your level of prior knowledge. The not-for-profit world has its
own rules, and it is your responsibility to know them. Thankfully, Laurence
Scothasmanagedtoexplainallthebasicneed-to-knowsinveryclearwords.’’
—FilipJohansson,DirectorofFinanceandOperations,
Swedish-AmericanChamberofCommerce,Inc.
‘‘Accounting can’t be made too simple for me. If you want to start a
not-for-profit company or serve on a board, Laurence Scot’s simplified
guidewillbringthemystifyingworldofnot-for-profitaccountingintofocus.
Clearandstraightforward,thisguideisthebestanswertoallmyquestions.’’
—PiaLindstro¨m,TVandradiobroadcasting
‘‘As a trustee and treasurer of a private day school, this book equipped me
with all of the concepts associated with not-for-profit accounting to allow
metoexcelatperformingmyresponsibilitiesasafiduciary.’’
—SusanLevitt,privateschooltrusteeandtreasurer
‘‘Whilethereisnothingparticularlysimpleaboutnot-for-profitaccounting,
this book provides a veritable to-do list for organizations of any size. Larry
Scot’sbookisanexcellentresource.’’
—EricJorgensen,FinanceAssociate,
Me´decinsSansFrontie`res/DoctorsWithoutBordersUSA
‘‘Laurence Scot successfully integrates extensive professional, educational,
and practical experience to produce a highly relevant, clearly written, and
insightful book. In my opinion, The Simplified Guide to Not-for-Profit
Accounting, Formation, and Reporting is the most concise, complete, and
important resource for everyone considering and practicing not-for-profit
accounting.’’
—MarkCarmichael,FinanceDirector,
WorldMonumentsFund
‘‘The only not-for-profit accounting guide of its kind, this book provides a
comprehensiveguidetostartingupanot-for-profitorganization,aswellthe
accounting requirements necessary for producing GAAP financial
statements for an NFP organization. I’m recommending this book to those
looking for a user-friendly desktop reference to answer all your
industry-relatedquestions.’’
—KimChadourne,DirectorofManagementReporting,
ColumbiaUniversity
‘‘A marvelous introduction to NFP accounting—it’s like having the great
teacher there in the office with me! Mr. Scot’s book is a must read for
anyoneworkinginthenot-for-profitsector.’’
—JoshuaPowers,DirectorofAdministration,
AssociationofBlackFoundationExecutives
‘‘Scot’s book is the Baedeker of not-for-profit accounting and reporting
practices—guiding the reader through the organization of a NFP—
responsibilities of its board of directors and critical government reports to
file. Itsucceedsadmirably in its goal tosteer readersaroundthe hazardsof
organizing,managingandoverseeinganot-for-profitorganization.’’
—KarenRockey,Treasurer,
FinancialWomen’sAssociationofNewYork
The Simplified Guide to
Not-for-Profit Accounting,
Formation, and Reporting
The Simplified Guide to
Not-for-Profit Accounting,
Formation, and Reporting
Laurence Scot
JohnWiley&Sons,Inc.
Copyright#2010byLaurenceScot.Allrightsreserved.
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LibraryofCongressCataloging-in-PublicationData:
Scot,Laurence.
Thesimplifiedguidetonot-for-profitaccounting,formation&reporting/LaurenceScot.
p.cm.
Includesindex.
ISBN978-0-470-57544-4(pbk.)
1. Nonprofitorganizations(cid:2)Accounting. 2. Nonprofitorganizations(cid:2)Finance. I. Title.
HF5686.N56S362010
6570.98(cid:2)dc22
2009048436
PrintedintheUnitedStatesofAmerica
10 9 8 7 6 5 4 3 2 1
Contents
Preface vii
CHAPTER 1 INTRODUCTION 1
CHAPTER 2 NFP ORGANIZATION FORMATION 7
CHAPTER 3 NFP ORGANIZATIONAL STRUCTURE 29
CHAPTER 4 INTRODUCTION TO NFP ACCOUNTING
AND REPORTING 41
CHAPTER 5 NFP ACCOUNTING SYSTEM AND
FINANCIAL STATEMENTS 63
CHAPTER 6 ASSETS—CONCEPTS AND DATA FLOW 87
CHAPTER 7 LIABILITIES AND NET ASSETS—
CONCEPTS AND DATA FLOW 123
CHAPTER 8 ACCOUNTING FOR SUPPORT AND REVENUE 139
CHAPTER 9 ACCOUNTING FOR PERSONNEL
COSTS, AND OTHER EXPENSES 155
CHAPTER 10 INVESTMENTS, POOLING, AND
SPLIT-INTEREST AGREEMENTS 173
CHAPTER 11 SUBSIDIARIES AND INTERRELATED ENTITIES 183
CHAPTER 12 BUDGET DEVELOPMENT AND APPLICATIONS 189
CHAPTER 13 SPECIAL TYPES OF NFP ORGANIZATIONS 199
CHAPTER 14 REGULATORY REPORTING (990, 990-T,
AND 990-PF) 205
CHAPTER 15 CONTRIBUTION/GRANT APPLICATIONS
AND REPORTING 227
CHAPTER 16 AUDITS—PREPARATION AND RESPONSE 235
CHAPTER 17 CONCLUSION 243
v
vi Contents
APPENDIX A TAX-EXEMPT ORGANIZATION REFERENCE CHART 245
APPENDIX B SAMPLE NFP CHART OF ACCOUNTS 253
APPENDIX C ABBREVIATIONS 257
Glossary 259
AbouttheAuthor 269
Index 271
Preface
T
here are very few studies showing the exact number of not-for-profit
(NFP)organizationsinexistenceintheUnitedStates.Thereasonforthisis
the enormous diversity in legal structure, type of activities performed, and
level of tax exemption and reporting that NFP organizations encompass.
The few studies that have been performed show the number of NFP
organizations has grown almost exponentially in 30 years. In 2005 the
NonProfit Times reported that the total number of nonprofit organizations
intheUnitedStatesstoodatabout1.5million.Brokendown,thiswouldbe
about 850,000 public charities, 100,000 private foundations, and the bal-
ance,allothertypes(chambersofcommerce,civicleagues,etc.)In2009,the
number is probably closer to over 2 million. The Internal Revenue Service
has approximately 1.5 million organizations classified as fully exempt from
taxes and another 400,000 that have partial exemption, such as churches
thatfileannualinformationreturns(i.e.,Form990s)butneverappliedfor
tax exemption and certain pension trusts and political organizations. If all
churches,includingthosethatdonotfileanyreturnsareincluded,aswellas
very small community, sports, and other groups, the number of NFP
organizations could be between 2 and 2.5 million.
AccordingtoareportbytheNonprofitEmploymentDataProjectatThe
JohnsHopkinsCenterforCivilSocietyStudies,employmentintheU.S.NFP
sectorhasgrownfasterthanoverallemploymentin46ofthe50states.Some
statessuchasNewYorkandCaliforniahaveanexceedinglyhighconcentra-
tion of NFP organizations. In New York alone, there are over 100,000
registered NFPs, and some published reports state that if combined, these
organizationswouldconstituteoneofthetopthreeindustriesinNewYork.
So, one would think, with so many NFP organizations requiring qualified
technicalstaff, therewould beanabundanceof trainingmaterial available.
Surprisingly though, there isn’t. As with any industry, specific knowledge is
mandatory in order to function properly. In the area of accounting and
finance,thisisalso atruism.However,despitethefactthatNFPsconstitute
oneofthelargestsegmentsofoureconomy,thereisadearthofbooksand
otherliteratureandevenfewerprogramsgearedspecificallytotrainingNFP
accountants and financial employees. Hence, the reason for this book.
vii
viii Preface
AccountingIsMoreThanNumbers
Inordertoaccountforsomething,onemustfirstunderstandwhattheyare
accounting for. Unfortunately, many financial staff hired at NFPs do not
have a good understanding of what an NFP organization is, the rules they
must follow, and who they have to report to. There are also a lot of
misconceptions about what an NFP can and cannot do. For example,
one common misconception is that all NFP organizations can receive
tax-deductible contributions. Other misconceptions include the following:
all NFPs are exempt from paying all income taxes, NFPs are not allowed to
haveprofits(i.e.,haveincomeinexcessofexpenses),andNFPscannotown
other entities. All falsehoods.
After servicing the NFP industry for more than 20 years, the author
believesthatthereshouldbemoreplaceswhererecentgraduates,newhires,
existingemployees,management,officers,andboardmemberscangotoget
abasicunderstandingofhowatypicalNFPoperatesandtheaccountingand
reportingrulestheymustfollow.Whetherit’saccountingforgovernmentor
foundation grants or assessments; unrestricted or restricted contributions;
fund-raising events, trade shows or auctions; membership fees or dues;
journals or programmatic services/activities; cash control or investment
strategies and returns; or the numerous other unique NFP activities,
accountants need to be adequately trained and knowledgeable to perform
their duties at a level sufficient to support the proper functioning of the
organization.
The author believes that this book will provide the reader with a
fundamental understanding of how NFP organizations are formed, their
structure, and the unique accounting and reporting issues they face.
Although not all encompassing, the information provided here should
be sufficient in assisting with maintaining the financial books of a typical
NFP entity and complying with most reporting requirements. The author
wishes to point out that information in this book does NOT apply to each
and every organization or situation, nor will it contain every conceivable
transaction, activity, or disclosure. Rather, the goal is to provide enough
fundamental information to be useful in a practical way and act as a desk
reference for future questions. Because the author is located in and most
familiarwithNewYorkstaterules,theexamplesusedinthisbookwillapply
to that state and not necessarily be applicable to all other states or
jurisdictions.
Iwanttothankanumberofpeoplewithoutwhomthisbookwouldnot
havebecome a reality. Firstand foremost Susan McDermott,senioreditor
at John Wiley & Sons, and her staff, who saw the need for publishing this
type of book. Special thanks to Gail Rizick and my wife Mindy Scot for
spendingasignificantamountoftimeprovidingeditorialsuggestions,and
Preface ix
to Gail Donovan and numerous others for prodding me over the years to
write a book on a subject near and dear to me. I also want to thank my
young son, Jason Scot, for allowing me the time to write this book at the
loss of many fun and enjoyable joint activities, and last, my partners
William Skody and Alfred Jacob, for assisting me in providing the highest
level of professional service to my NFP clients for over 20 years.