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Auditing and Accounting Guide: Not-for-Profit Entities, 2017


Table of Contents xvii

Chapter Paragraph

1 Introduction 01-27

Scope 01-12

Entities 01-06

Basis of Accounting 07-10

Level of Service 11-12

GAAP for NFPs 13-19

Fund Accounting and Net Asset Classes 20-25

Other Resources for Financial Reporting by NFPs 26-27

2 General Auditing Considerations 01-150

Overview 01-02

Purpose of an Audit of Financial Statements 03-08

Audit Risk 05-08

Terms of Engagement 09-11

Audit Planning Considerations 12-59

Group Audits 14-18

Using the Work of an Auditor’s Specialist 19-24

Materiality 25-33

Related-Party Transactions 34-37

Consideration of Errors and Fraud 38-41

Compliance With Laws and Regulations 42-56

Processing of Transactions by Service Organizations 57-59

Use of Assertions in Assessment of Risks of Material Misstatement 60-64

Risk Assessment Procedures 65-88

Risk Assessment Procedures and Related Activities 67-69

Analytical Procedures 70-72

Discussion Among the Audit Team 73

Understanding of the Entity and Its Environment, Including the Entity’s Internal Control 74-88

Using Risk Assessment to Design Further Audit Procedures 89-111

Identifying and Assessing the Risks of Material Misstatement 90-92

Risks That Require Special Audit Consideration 93-94

Designing and Performing Further Audit Procedures 95-110

Evaluating the Sufficiency and Appropriateness of Audit Evidence 111

Evaluation of Misstatements Identified During the Audit 112-114

Communication With Those Charged With Governance 115-121

Completing the Audit 122-149

Going-Concern Considerations 122-132

Written Representations 133-141

Audit Documentation 142-149

Appendix A--Consideration of Fraud in a Financial Statement Audit 150

3 Financial Statements, the Reporting Entity, and General Financial

Reporting Matters 01-193

Introduction 01-05

Statement of Financial Position 06-27

Effects of Restrictions, Designations, and Other Limitations on Liquidity 09-23

Classification of Net Assets 24-27

Statement of Activities 28-45

Reporting Expenses, Including in a Statement of Functional Expenses 40-45

Statement of Cash Flows 46-54

Comparative Financial Information 55-57

Reporting of Related Entities, Including Consolidation 58-121

Relationships With Another NFP 63-71

Relationships With a For-Profit Entity 72-99

Consolidation of a Special-Purpose Leasing Entity 100-101

Consolidated Financial Statements 102-119

Parent-Only and Subsidiary-Only Financial Statements 120

Combined Financial Statements 121

Mergers and Acquisitions 122-135

Merger of Not-for-Profit Entities 124-125

Acquisition by a Not-for-Profit Entity 126-135

Collaborative Arrangements 136-137

The Use of Fair Value Measures 138-171

Definition of Fair Value 141-147

Valuation Approaches and Techniques 148-154

The Fair Value Hierarchy 155-158

Additional Guidance for Fair Value Measurement in Special Circumstances 159-167

Disclosures 168

Fair Value Option 169-171

Financial Statement Disclosures Not Considered Elsewhere 172-184

Noncompliance With Donor-Imposed Restrictions 173-175

Risks and Uncertainties 176

Subsequent Events 177-180

Related Party Transactions 181-184

Auditing 185-192

Financial Statement Close Process 186-187

Operating and Nonoperating Classifications in the Statement of Activities 188

Consolidation 189

Liquidity 190

Mergers and Acquisitions 191

Noncompliance With Donor-Imposed Restrictions 192

Supplement A--Flowcharts 193

Table of Contents xix

4 Cash, Cash Equivalents, and Investments 01-117

Cash and Cash Equivalents 01-04

Investments Discussed in This Chapter 05-10

Initial Recognition and Measurement of Investments 11-12

Valuation of Investments Subsequent to Acquisition 13-43

Equity Securities With Readily Determinable Fair Value (Other Than Consolidated Subsidiaries and Equity Securities Reported Under the Equity Method) and All Debt Securities 17

Investments That Are Accounted for Under the Equity Method or a Fair Value Election 18-27

Derivative Instruments 28-36

Other Investments 37

Decline in Fair Value After the Date of the Financial Statements 38

Fair Value Measurements 39-43

Investment Income and Expenses 44-52

Unrealized and Realized Gains and Losses 53-55

Investments Held as an Agent 56

Investment Pools 57-63

Self-Managed Investment Pools 57

Investment Pools Managed by a Financially Interrelated Entity 58

Investment Pools Managed by Third Parties 59-63

Endowment Funds 64-78

Financial Statement Presentation 79-88

Cash and Cash Equivalents 79-82

Investments 83-88

Disclosures 89-101

Auditing 102-117

Endowment Funds 107

Investment Pools 108-113

Audit Objectives and Procedures 114-116

Appendix A--Determining Fair Value of Alternative Investments 117

5 Contributions Received and Agency Transactions 01-242

Introduction 01-04

Distinguishing Contributions From Other Transactions 05-57

Agency Transactions 07-22

Variance Power 23-27

Financially Interrelated Entities 28-32

Similar Transactions That Are Revocable, Repayable, or Reciprocal 33-38

Exchange Transactions 39-57

Core Recognition and Measurement Principles for Contributions 58-88

Recognition Principles 59-66

Measurement Principles 67-70

Recognition If a Donor Imposes a Condition 71-74

Recognition If a Donor Imposes a Restriction 75-88

Additional Accounting Considerations for Certain Contributions 89-179

Promises to Give 89-111

Contributed Services 112-117

Special Events 118-122

Gifts in Kind 123-149

Contributed Items to Be Sold at Fund-raising Events 150-151

Contributed Fund-raising Material, Informational Material, or Advertising, Including Media Time or Space 152-163

Contributed Utilities and Use of Long-Lived Assets 164-166

Guarantees 167-171

Below-Market Interest Rate Loans 172-174

Contributed Collection Items 175

Split-Interest Agreements 176

Administrative Costs of Restricted Contributions 177-179

Measurement Principles for Contributions Receivable 180-212

Present Value Techniques 183-186

Organization of the Measurement Guidance 187

Initial Measurement 188-196

Subsequent Measurement 197-212

Financial Statement Presentation 213-215

Disclosures 216-222

Illustrative Disclosures 222

Auditing 223-240

Contributions Receivable 237-239

Agency Transactions 240

Appendix A--Excerpt From AICPA Financial Reporting White Paper Measurement of Fair Value for Certain Transactions of Not-for-Profit Entities 241

Appendix B--Technical Questions and Answers About Financially Interrelated Entities 242

6 Split-Interest Agreements and Beneficial Interests in Trusts 01-96

Introduction 01

Types of Split-Interest Agreements 02-03

Recognition and Measurement Principles 04-45

Use of Fair Value Measures 05-06

Recognition of Revocable Agreements 07

Recognition of Irrevocable Agreements 08-12

Initial Recognition and Measurement of Unconditional Irrevocable Agreements Other Than Pooled Income Funds or Net Income Unitrusts 13-27

Initial Recognition and Measurement of Pooled Income Funds and Net Income Unitrusts 28

Recognition and Measurement During the Agreement’s Term for Unconditional Irrevocable Agreements Other Than Pooled Income Funds or Net Income Unitrusts 29-40

Recognition and Measurement During the Agreement’s Term for Pooled Income Funds and Net Income Unitrusts 41

Recognition Upon Termination of Agreement 42

Purchase of Annuity Contracts to Make Distributions to the Beneficiaries 43-45

Financial Statement Presentation 46-53

Statement of Financial Position 46

Statement of Activities 47

Disclosures 48-53

Examples of Split-Interest Agreements 54-88

Charitable Lead Trust 55-61

Perpetual Trust Held by a Third Party 62-66

Charitable Remainder Trust 67-73

Charitable Gift Annuity 74-78

Pooled (Life) Income Fund 79-83

Life Interest in Real Estate 84-88

Auditing 89-94

Appendix A--Excerpt From AICPA White Paper Measurement of Fair Value for Certain Transactions of Not-for-Profit Entities 95

Appendix B--Journal Entries 96

7 Other Assets 01-45

Introduction 01

Inventory 02-10

Acting as an Agent in a Sale of Commodities 10

Prepaid Expenses, Deferred Costs, and Similar Items 11-15

Collections and Works of Art, Historical Treasures, or Similar Assets 16-28

Financial Statement Presentation of Collections 25-27

Illustrative Disclosures About Collections 28

Goodwill 29-31

Intangible Assets Other Than Goodwill 32-35

Auditing 36-45

Inventory 37

Goodwill 38-39

Collection Items 40-45

8 Programmatic Investments 01-71

Introduction 01-07

Core Considerations for Accounting and Reporting 08

Loans 09-52

Effective Interest Rate Approach 11-17

Inherent Contribution Approach 18-33

Loans That Contain a Right to Profit From the Sale or Refinancing of Property 34

Forgiveness of Programmatic Loans 35-37

Impairment of Programmatic Loans 38-50

Disclosures About Programmatic Loans 51-52

Equity Instruments 53-61

Programmatic Equity Investments That Are Consolidated 55

Programmatic Equity Investments Reported Using the Equity Method 56-58

Programmatic Equity Investments Reported Using Fair Value 59

Programmatic Equity Investments Reported Using a Cost Method 60

Disclosures About Programmatic Equity Instruments 61

Guarantees 62

Concentrations of Risk 63

Presentation of Programmatic Investments 64-69

Contributed Resources for Making Programmatic Investments 64-66

Agency Resources for Making Programmatic Investments 67-69

Program-Related Investments of Private Foundations 70

Auditing 71

9 Property and Equipment 01-49

Introduction 01-02

Recognition and Measurement Principles 03-33

Contributed Property and Equipment 04-07

Use of Property and Equipment Owned by Others 08-13

Capitalized Interest 14-19

Depreciation and Amortization 20-23

Expiration of Restrictions on Property and Equipment 24

Impairment or Disposal of Long-Lived Assets 25-29

Asset Retirement Obligations 30-32

Gains and Losses 33

Financial Statement Presentation 34-40

Auditing 41-49

Property and Equipment Additions 43-46

Account Balances 47-49

10 Debt and Other Liabilities 01-117

Introduction 01

Fair Value Measurement 02-08

Municipal Bond Financing and Other Long-Term Debt 09-87

Joint and Several Liability Arrangements 14-17

Conduit Bonds That Trade in Public Markets 18-20

Credit Enhancement 21-23

Issuance of Municipal Bonds 24-25

Extinguishment and Modification Transactions 26-53

IRS Considerations 54-58

Financial Statement Presentation and Disclosure 59-86

Annual Filing Requirements 87

Tax Liabilities 88

Deferred Revenue 89

Refunds Due to and Advances From Third Parties 90

Promises to Give 91-95

Split-Interest Obligations 96

Amounts Held for Others Under Agency Transactions 97

Revenue Sharing and Other Agreements 98

Exit or Disposal Activities 99

Guarantees 100-101

Contingencies 102

Pension and Other Defined Benefit Postretirement Plan Obligations 103-110

Single-Employer Plans 103-105

Multiemployer Plans 106-110

Auditing 111-115

General 111-113

Debt 114-115

Appendix A--Municipal Securities Regulation 116

Appendix B--Auditor Involvement With Municipal Securities Filings 117

11 Net Assets and Reclassifications of Net Assets 01-63

Introduction 01-02

Fiduciary Responsibilities to Meet Donor Restrictions 03-08

Failure to Meet a Donor’s Restriction 08

Net Asset Classes 09-25

Permanently Restricted Net Assets 12-14

Temporarily Restricted Net Assets 15-17

Unrestricted Net Assets 18-25

Noncontrolling Interests 26-28

Reclassifications 29

Expiration of Donor-imposed Restrictions 30-52

Using Restricted Contributions First 33-36

Expiration of Restrictions on Promises to Give 37-45

Expiration of Restrictions on Gifts of Long-Lived Assets or Gifts for Their Purchase 46-49

Expiration of Restrictions on Donor Restricted Endowment Funds 50-51

Restrictions That Are Met in the Same Year as the Contribution Was Received 52

Disclosures 53-59

Changing Net Asset Classifications Reported in a Prior Year 60

Auditing 61-63

12 Revenues and Receivables From Exchange Transactions 01-24

Introduction 01-02

Difference Between Revenues and Gains 03-05

Recognition, Measurement, and Display of Revenue 06-14

Discounts 12

Membership Dues 13-14

Receivables From Exchange Transactions 15-17

Auditing 18-24

13 Expenses, Gains, and Losses 01-134

Introduction 01

Expenses 02-06

Expense Recognition Issues 07-34

Fund-raising Costs 08-14

Financial Aid and Other Reductions in Amounts Charged for Goods and Services 15

Advertising Costs 16-18

Services Received From an Affiliate 19-23

Start-Up Costs 24-26

Internal Use Computer Software Costs 27

Contributions Made 28-34

Gains and Losses 35-50

Reporting Costs Related to Sales of Goods and Services 42-44

Reporting the Cost of Special Events and Other Fund-raising Activities 45-49

Investment Revenues, Expenses, Gains, and Losses 50

Functional Reporting of Expenses 51-124

Program Services 53-64

Supporting Services 65-70

Classification of Expenses Related to More Than One Function 71-118

Support to Related Local and National NFPs 119-120

Distributions From Financially Interrelated Fund-raising Foundations to Specified Beneficiaries 121-123

Expenses of Federated Fund-raising Entities 124

Income Taxes 125

Auditing 126-130

Expense Recognition Issues 128

Gains and Losses 129

Functional Reporting of Expenses 130

Supplement A--Accounting for Joint Activities 131

Supplement B--Examples of Applying the Criteria of

Purpose, Audience, and Content to Determine Whether a Program or Management and General Activity Has Been Conducted 132

Supplement C--Allocation Methods 133

Supplement D--Examples of Disclosures 134

14 Reports of Independent Auditors 01-30

Reports on Financial Statements 01-02

Reports on Comparative Financial Statements and Presentation of Comparative Information 03-08

Unmodified Opinions 09

Modified Reports and Departures From Unmodified Opinions 10

Going Concern 11

Reporting on Supplementary Information 12-14

Special Considerations 15-16

Reporting Under Other Technical Standards 17-21

Reporting on Prescribed Forms 22-25

Reports Required by Government Auditing Standards, the Single Audit Act Amendments of 1996, and the Uniform Guidance 26-30

15 Tax and Regulatory Considerations 01-74

Introduction 01-03

Internal Revenue Service 04-38

Basis of Exemption 04-23

IRS Filing Requirements 24-27

Unrelated Business Income 28-31

Alternative Investments 32

Tax Shelters 33

Employment Taxes 34-36

Private Foundations 37-38

Income Tax Positions 39-43

Deferred Tax Assets and Liabilities 44-45

State and Local Regulations 46-56

State Charitable Solicitation Laws 46-49

State and Local Gaming Regulations 50

Uniform Prudent Management of Institutional Funds Act 51-56

Securities Regulation 57-60

Sarbanes Oxley and Governance Policies 61-63

Executive Compensation 64-67

Other Regulatory Activities 68-70

US Department of the Treasury Anti-Terrorist Financing

Guidelines: Voluntary Best Practices for US-Based

Charities 68-70

Auditing 71-74

16 Fund Accounting 01-25

Introduction 01

Fund Accounting and External Financial Reporting 02-05

Unrestricted Current (or Unrestricted Operating or General) Funds 06-07

Restricted Current (or Restricted Operating or Specific-Purpose) Funds 08-09

Plant (or Land, Building, and Equipment) Funds 10-15

Loan Funds 16-17

Endowment Funds 18-21

Annuity and Life-Income (Split-Interest) Funds 22-23

Agency (Or Custodian) Funds 24

Summary 25


A The New Not-for-Profit Financial Reporting Model Standards: FASB ASU No 2016-14

B The New Revenue Recognition Standard: FASB ASU No 2014-09

C FASB Accounting Standards Codification 958, Not-For-Profit Entities, Topic Hierarchy

D Information Sources

E Overview of Statements on Quality Control Standards

F Schedule of Changes Made to the Text From the Previous Edition


Index of Pronouncements and Other Technical Guidance