Not-For-Profit External Financial Reporting - Part Three

Winter 2018

by Elise Zuleger, CPA

In this third of a five part series, we will focus on the statement of activities and its components.

Statement of Activities
The second statement that must be reported (the first being the statement of financial position), if the not-for-profit organization (NFP) has an external reporting requirement, is the statement of activities. The statement of activities resembles a for-profit company's income statement. The purpose of the statement of activities is to report the change in net assets of the NFP. The organization has some flexibility in how it chooses to report this, but it must report the changes in net assets according to the three classes of net assets - unrestricted, temporarily restricted, and permanently restricted.

Revenue and Support
Proper classification of revenue and support is vital to the statement of activities, especially contributions. How contributions are recorded is dependent on the donors' intent. The following are descriptions of the three classes of contributions:

Donor makes a contribution without any restriction on how or when it is used.

Temporarily Restricted:
Purpose Stipulation: Donor makes a contribution indicating that the money must be used for a specific purpose.
Time Stipulation: Donor makes a contribution for a certain time in the future.

Permanently Restricted: 
Donor makes a contribution indicating that the corpus must be invested in perpetuity and only the income is available for use in accordance with donor restrictions.

Expenses of a NFP are broadly categorized as either program service expenses or supporting service expenses. Expenses may also be classified by their natural or functional classification. Program service expenses are the costs that are directly or indirectly related to providing a NFP's programs, whereas supporting service expenses are expenses for activities not directly related to purpose for which the NFP exists. Supporting service expenses include management & general expenses and fundraising expenses.

Net Assets
Once the revenue & support and expenses have all been accounted for, the last lines on the statement of activities reconcile the change in net assets for each category. The change in net assets is the revenue & support less expenses. The difference, whether positive or negative, is then added to the net assets at the beginning of the year, to get the end of year net assets total. These amounts must equal what is on the statement of financial position.

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