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.
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 genera 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
1. Educational;
2. Religious;
3. Social;
4. Cultural; or
5. Charitable.
POs may be in the form of:
1. Educational institutions;
2. Hospitals and other healthcare providers;
3. Religious institutions;
4. Professional bodies;
5. Sports;
6. Social or Literary clubs; and
7. 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.

Fund theory vs. Fund accounting

The financial statements (FS) 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 FS Fund Accounting-based FS
Focuses on the reporting entity concepts; Views 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 refer to The term “funds” is used to refer to specific
the net assets. funds consisting of cash and other non-cash
assets
Provides disclosures on the type of Focuses on classifying assets, net assets,
restrictions on net assets and revenues (i.e., and changes in them strictly in accordance
Unrestricted, Temporarily Restricted or with their fund classifications (i.e.,
Permanently Restricted). Unrestricted, Temporarily Restricted or
Permanently Restricted).
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.
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).
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.
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.
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.