ACCT 403 Week 3 Group Discussion Board Forum 2 Example

Group Discussion Board Forum 2: Private Not-for-Profit Contributions and Expenses

ACCT 403 Fund Accounting for Government and Not for Profits, Group Discussion Board Forum 2

Thread by [Student Name]

The organization, its figures and the classmate are composites; the textbook and the peer-reviewed research cited are real.

Riverbend Community Pantry, a private not-for-profit, had three unusual items this year. A local family made an unconditional written pledge of $250,000, payable within the next twelve months, to build a cold-storage room. The pantry received $40,000 of cash gifts with no restrictions. A retired CPA volunteered 60 hours preparing the pantry's Form 990 and reviewing its books, work the pantry would otherwise have paid a firm about $9,000 to do. Finally, the director wants to report fundraising expense of zero, because the annual gala was staffed by volunteers and its costs were paid from the program budget. The case asks how each item should be reported and whether the director's plan is acceptable.

Hoyle et al. (2018) explain that private not-for-profits classify net assets as with or without donor restrictions, and that an unconditional promise to give is recognized as revenue when the promise is received, measured at net realizable value when, as here, the cash is due within a year. The $250,000 pledge is therefore contribution revenue with donor restrictions this year, even though no cash has arrived yet, and it is released to net assets without restrictions when the cold-storage room is built and placed in service. The $40,000 of cash gifts is revenue without restrictions. The CPA's work qualifies as a contributed service because it requires specialized skills, is provided by someone who has them and would typically be purchased, so the pantry recognizes $9,000 of in-kind revenue and an equal expense. Ordinary volunteer hours at the gala do not meet those criteria and are not recognized. They may be described in the notes, which lets the pantry acknowledge its volunteers without inflating revenue.

The director's proposal is the real issue in the case. The gala's costs, food, rented tables and printing, are fundraising expenses regardless of which budget paid for them, and functional reporting requires them to be classified that way. The temptation is understandable. Tinkelman and Mankaney (2007) found that donors reduced their giving to organizations reporting higher administrative expense ratios when those ratios were relevant and reliable. Krishnan et al. (2006) found that the large number of nonprofits reporting zero fundraising expense was at least partly the result of inappropriate reporting, and that misreporting was associated with managerial incentives. A zero on the fundraising line is more often a classification choice than a fact. Riverbend's auditor and board should insist on the accurate figure, because a misclassification that flatters the program ratio this year undermines the credibility of every number the pantry reports. The gala's costs, perhaps $6,000 for food, rentals and printing, belong in fundraising expense on the statement of functional expenses, and the pantry can report them alongside the gala's net proceeds so donors see the event's real return.

Reply to Daniel

Daniel, you argued that a low overhead ratio is the best sign of a well-run charity and that donors are right to reward it. The research does show that donors respond to these ratios: Tinkelman and Mankaney (2007) found contributions fell as reported administrative ratios rose, at least when the ratios were reliable. But that finding is exactly why the ratio can mislead. If donors reward low overhead, managers have an incentive to report low overhead, and Krishnan et al. (2006) found evidence that some organizations do so by shifting costs into program expense rather than by spending less. The ratio then measures reporting choices as much as efficiency. Two pantries with identical spending could report very different ratios simply because one classifies its executive director's time more aggressively as program work. There is also a substantive problem. Some administrative spending, such as the professional review the volunteer CPA provided Riverbend, improves controls and accountability, which donors should value. A pantry that cuts its accounting function to lower overhead may report a better ratio and run worse. I would suggest that donors read the functional expense statement alongside the program results the organization reports, such as meals distributed or families served, and treat an unusually low fundraising or administrative ratio as a question to ask, not an achievement. For Riverbend, the honest ratio would show a small fundraising cost against a large restricted pledge, which is a story any donor would find reassuring. Hoyle et al. (2018) note that the statement of functional expenses exists to give readers that fuller picture.

References

Hoyle, J. B., Schaefer, T. F., & Doupnik, T. S. (2018). Advanced accounting (13th ed.). McGraw-Hill Education.

Krishnan, R., Yetman, M. H., & Yetman, R. J. (2006). Expense misreporting in nonprofit organizations. The Accounting Review, 81(2), 399-420. https://doi.org/10.2308/accr.2006.81.2.399

Tinkelman, D., & Mankaney, K. (2007). When is administrative efficiency associated with charitable donations? Nonprofit and Voluntary Sector Quarterly, 36(1), 41-64. https://doi.org/10.1177/0899764006293176