Richard F. Larkin’s scientific contributions

Long‐term debt represents future sacrifices of economic benefits to be repaid over a period of more than one year or, if longer, the operating cycle. Financial Accounting Standards Board Accounting Standards Codification 420‐10 requires that a liability for a cost associated with an exit or disposal activity be recognized when the liability is incurred. Notes represent debt issued to a single investor without intending for the debt to be broken up among many investors. Their maturity, usually lasting one to seven years, tends to be shorter than that of a bond. Bonds also result from a single agreement. When a note is issued solely for cash, its present value is assumed to be equal to the cash proceeds. The interest rate is that rate which equates the cash proceeds to the amounts to be paid in the future (i.e., no interest rate is to be imputed).

This chapter addresses the problems of recording and reporting the principal resource many not‐for‐profit organizations depend on—contributions. It also covers revenue recognition for government grants as well as exchange transactions, particularly revenue contracts with customers. Some contributions are made in the form of pledges that will be paid off over a period of time or at some future date. An organization can receive a variety of noncash contributions ranging from marketable securities, buildings, and equipment to contributed services of volunteers and the use of fixed assets. All of these types of contributions present accounting and reporting problems for the organization. GAAP provides that all contributions, whether having donor restrictions or not, and in whatever form (cash, gifts‐in‐kind, securities, pledges, or other forms) are revenue in full immediately upon receipt of the gift or an unconditional pledge.

Intangible assets are those assets that provide an organization with future economic benefits but have no physical substance. Examples of intangible assets include patents, copyrights, and goodwill. This chapter discusses only those intangible assets acquired by a not‐for‐profit organization in a transaction or transactions that are not business combinations. Generally accepted accounting principles (GAAP) provides specific guidance about capitalizing costs of internally developed intangible assets. The useful life of an intangible asset is the period over which the asset is expected to contribute directly or indirectly to the cash flows of the organization. Under GAAP, impairment is the condition that exists when the carrying amount of goodwill exceeds its implied fair value. The chapter describes a two‐step impairment test that is used to identify potential goodwill impairment and then measure the amount of a goodwill impairment loss to be recognized.

This chapter addresses issues often considered by not‐for‐profit organizations in presenting financial statements in accordance with generally accepted accounting principles (GAAP). Comparative financial statements help readers understand the trends of current changes affecting an organization. Not‐for‐profit organizations sometimes present comparative information for a prior year or years only in total rather than by net asset class. Not‐for‐profit organizations are sometimes torn between presenting information in financial statements about funds and meeting the requirements of GAAP relating to net asset presentation. The chapter illustrates an example of how these two financial statement objectives may be met. Interim reporting is financial reporting for periods of less than a year, generally for a period of three months (quarterly reporting). The purpose of quarterly reports is to provide financial statement users with more timely information for investment and credit decisions.

Long‐lived assets are primarily operational assets, and they are broken down into two basic types: tangible and intangible. Tangible assets have physical substance and are categorized as follows: depreciable; depletable; and other tangible assets. The cost of a long‐lived asset should be stated at acquisition cost, including all costs necessary to configure and position the asset at the location at which it will be used. Contributions of property, plant and equipment, or other long‐lived assets should be recognized at fair value at the date of contribution. In accordance with the matching principle, the costs of fixed assets are allocated to the periods they benefit through a depreciation method. The chapter also discusses partial‐year depreciation by presenting two simplified conventions as an alternative to proration. FASB ASC 410‐20 provides guidance for accounting for liabilities incurred when assets are retired.

Generally accepted accounting principles (GAAP) do not require not‐for‐profit organizations to use fund accounting in the presentation of financial statements. This chapter explains the concept of fund accounting which reflects an accountability or stewardship concept, used principally by not‐for‐profit and governmental organizations that are legally responsible for seeing that certain resources are used only for specified purposes or during specified time periods. The chapter discusses the five most commonly encountered categories of fund: current unrestricted fund, board‐designated fund, current restricted fund, restricted endowment fund, and fixed asset fund. The current unrestricted fund and current restricted fund are classified as expendable funds based on their availability for current expenditure, and the restricted endowment fund and fixed asset fund are classified as nonexpendable funds based on the organization's objectives. GAAP specifically requires the reporting of certain financial information by net asset classifications rather than funds.

The cost of an asset should include all of the costs necessary to get the asset set up and functioning properly for its intended use. Financial Accounting Standards Board (FASB) ASC 835‐20 provides the generally accepted accounting principles (GAAP) requirements concerning the capitalization of interest. The principal purposes to be accomplished by the capitalization of interest costs are: achieve a more accurate original asset investment cost and achieve a better matching of costs deferred to future periods with revenues of those future periods. All assets that require a time period to get ready for their intended use should include a capitalized amount of interest costs. However, accomplishing this level of capitalization would usually violate a reasonable cost/benefit test because of the added accounting and administrative costs generated. Three conditions must be met before the capitalization period begins: necessary activities are in progress to get the asset ready to function as intended, qualifying asset expenditures have been made, and interest costs are being incurred.

This chapter discusses two aspects of not‐for‐profit organizations’ relations with the federal government: qualification for tax‐exempt status under the Internal Revenue Code, and reporting requirements applicable to organizations that receive support in the form of federal grants, contracts, loans, loan guarantees, and similar awards. Private inurement is prohibited for many organizations. The term encompasses transactions that confer preferential treatment upon private shareholders or individuals. Private foundations are charitable organizations that are subject to specific rules and taxes that do not apply to publicly supported organizations. Virtually every exempt organization, including churches and clubs, is subject to normal corporate taxes on its unrelated business income. The chapter also discusses state compliance requirements for not‐for‐profit organizations. A number of states have laws requiring not‐for‐profit organizations to register with a regulatory agency (or obtain operating licenses or permits) prior to soliciting any funds within the state.

This chapter discusses the concepts for the calculation of the present value of a capital lease. These concepts are the same as those that would be used by a not‐for‐profit organization to calculate the present value of a long‐term pledge of the use of property. FASB ASC 840 is the primary repository for promulgated GAAP for lease accounting. ASU 2016‐02 provides that a lessee should recognize the assets and liabilities that arise from leases. All leases create an asset and a liability for the lessee and recognition of those lease assets and lease liabilities that ASU 2016‐02 represents is an improvement over current GAAP, which did not require lease assets and lease liabilities to be recognized for most leases. The chapter presents illustrative disclosures that might be used as the basis of a lessee's lease disclosures for both operating and capital leases.