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Non-Profit Accounting Question


JohnH

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I'm having a discussion regarding the handling of a transaction for a non-profit organization. In 2016 it sponsored an overseas tour which several people signed up for.  The participants paid deposits during 2016 to reserve a spot on the tour, which took place in early 2017.  At the end of 2016, the organization was holding these deposits, which were paid to the tour operator just prior to the trip in 2017.  These were NOT contributions or gifts, but simply payments which the non-profit organization consolidated and passed through as a convenience to the participants & the tour operator.

My approach was to book the deposits as a liability on the records of the non-profit.  Then the liability was netted out to zero when the tour operator was paid in 2017.  A question arose recently concerning whether the deposits should have been recorded as "Temporarily Restricted Net Assets" in the equity section of the B/S.  My understanding is that  "Temporarily Restricted Net Assets" is used to recognize donor contributions,  gifts, or grants which are earmarked to be used in specific ways in furtherance of the purposes of the non-profit organization.   Therefore, it would not have been the appropriate account for the pass-through of the tour deposits and the liability account was more appropriate. 

Can any of you non-profit experts give me some guidance (or correction/criticism) in either direction?  Thanks.

 

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Your reasoning is sound. The monies paid were not contributions nor donations based upon your description. That would be a requirement for parking stuff in temporarily restricted funds under the non profit accounting rules, At least that is the way it was when I took that course eons ago. The only taint to your reasoning would be if the payers were taking a charitable contribution deduction on their tax returns - which they should not be doing according to your dialog.

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Most likely the external auditors are looking at it more of the organization acting as a fiscal agent, you mention it appears under the liabilities and therefore it appears as a liability of the organization when its not.  If it's being questioned by the board, you might want to ask the external auditors about it.

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Thanks for the quick responses.  Just to clarify Ron's question, the payers were not taking a charitable contribution deduction on their returns.

My reasoning for it being a liability is along the lines of Evan's response.   The organization assumed a responsibility to forward the funds to the tour operator when it accepted the funds.  (or to return the money to the participants if the trip failed to materialize).  Therefore, the cash in the bank account needed to be offset by the recognition of a corresponding liability. 

I'm still getting up to speed on non-profits, but in my way of reasoning, the "Temporarily Restricted Net Assets" is in reality a proxy for a liability account.  Fund accounting is weird.  

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May not agree.  Or I may.  It could depend on whether the organization is obligated to repay the contributors in the event that the trip doesn't happen.

I assume this is an accounting question, not necessarily a tax question.  And it has been a long time since I had exposure to fund accounting and things may have changed.  So I'll spew out my rationale, and anyone who knows better is welcome to correct me.  Fund accounting has always been goofy.

Fund accounting recognizes Revenue and Expenditures as they naturally occur, without respect to whether revenue/expenditures are prepaid or deferred.  So the money collected for the trip is recorded as revenue upon receipt.  The net difference between revenue and expenditures becomes part of the fund balance, i.e. "equity" of sorts.

Once the current difference becomes amalgamated with the existing fund balance it is indistinguishable unless there are bylaws committing current activity.  Think of the fund balance as totally comingled at this point.  Once the final fund balance is calculated, the organization may commit chunks of it to any purpose.  The purpose may or may not be dedicated to the forthcoming trip.  The equity accounts should consist of any number of "restricted" funds, and finally "unrestricted" funds.  A $75,000 total fund may consist of a $50,000 amount restricted for building remodeling, and $25,000 unrestricted, for example.  There is no special compunction to restrict the fund for a forthcoming travel trip unless the trustees deem it to be the case.

The complexion may change somewhat if the organization is required to refund the money if the trip does not occur as planned.  My recommendation is that there is indeed a reserve for a "Temporarily Restricted Net Assets", but the character is changed to a true liability and not part of equity.  For accounting purposes the revenue is indeed deferred until the obligation is consummated.

For what it's worth, I believe John's treatment is far more noble, with the foresight to treat things right.  But I believe in general, fund accounting is "everything in" and "everything out" prior to designation of any reserves or restrictions.

OK, the Tennessee Ron has spoken.  Y'all tell me where I'm wrong.

 

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Fund accounting is normally used when discussing the government accounting. It has other uses as well, but it's most commonly used when public tax money financial planning is involved.

The discussion on this thread refers to the collection of funds for a specific purpose for a future event. When funds are collected in advance and the event for which the funds are collected takes place beyond the balance sheet date for financial reporting - it's considered a deferred liability and is properly reported in the liability section of the balance sheet distinguished by the timing of the event - whether short term (under a year), or long-term (over a year).

The concept of "Restricted Net Assets" refers to income that has already been recognized by the entity for it's reporting period, where the income and its related costs are reported, but where there's been a restriction on the use of the money - ie - to be set aside for a future specific event or specific purpose. But the money has to be recorded as income on the profit and loss statement first, since its use has been predetermined. Then when the contingency occurs, then the monies spent are charged against the Restricted Net Asset account.

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