AICPA Guide Chapter-by-Chapter: Starting with 1

AICPA guideAs a member of the task force that drove the overhaul of the recently-released AICPA Not-for-Profit Entities Audit and Accounting Guide, I am providing weekly, chapter-by-chapter summaries to help users preview the guide.

Chapter 1

Establishes that the Guide covers entities that meet the definition of a Not-for-Profit entity (NFP), which is an entity that possesses the following characteristics, in varying degrees, that distinguish it from a business entity:

a. Contributions of significant amounts of resources from resource providers who do not expect commensurate or proportionate pecuniary return
b. Operating purposes other than to provide goods or services at a profit
c. Absence of ownership interests like those of business entities.

Entities that clearly fall outside this definition include the following:

a. All investor-owned entities
b. Entities that provide dividends, lower costs, or other economic benefits directly and proportionately to their owners, members, or participants, such as mutual insurance entities, credit unions, farm and rural electric cooperatives, and employee benefit plans.

The Guide specifically applies to the following nongovernmental NFPs:

• Animal protection and humane organizations
• Cemetery organizations
• Civic and community organizations
• Colleges and universities
• Elementary and secondary schools
• Federated fund-raising organizations
• Fraternal organizations
• Labor unions
• Libraries
• Museums
• Other cultural organizations
• Performing arts organizations
• Political action committees
• Political parties
• Private and community foundations
• Professional associations
• Public broadcasting stations
• Religious organizations
• Research and scientific organizations
• Social and country clubs
• Trade associations
• Voluntary health and welfare entities
• Zoological and botanical societies

Providers of health care services follow the AICPA Audit and Accounting Guide, Health Care Entities.
The Guide applies to financial statements prepared in accordance with accounting principles generally accepted in the United States of America, and does not include guidance on special purpose frameworks such as cash and tax-basis financial statements, or IFRS.

NFPs should follow the guidance in the FASB Accounting Standards Codification (ASC) unless specifically exempted, even if the application of certain provisions may be unclear because elements or items are included in the ASC without considering the net asset reporting model included in ASC 958, Not-for-Profit Entities.

NFPs are specifically exempted from ASC guidance on:

a. Earnings per share
b. Reporting comprehensive income
c. Segment disclosure
d. Variable interest entities

Certain other provisions of the ASC simply do not apply to NFPs because they do not have ownership interests similar to business entities:

a. Common stock
b. Convertible debt
c. Stock purchase warrants
d. Share-based payments
e. Certain hybrid financial instruments convertible to equity

NFPs are permitted to utilize fund accounting as long as the required aggregated amount for each of the three net asset classes of net assets and total nets assets are displayed in the statements of financial position and activities as required by the ASC.

Chapter 1 concludes by referring the reader to sources of example financial statements.

Up Next: Chapter 2 – Auditing Considerations

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