1. $2.0 million in cash contributions specifically designated for construction and maintenance of the facilities — Confidence Private high school historic city Jeanville engages

Confidence Private is a high school in the historic city of Jeanville. It engages students in a dynamic learning environment and inspires them to become intellectually vibrant, compassionate, and responsible citizens. The private school has been run as an NFPO since its inception 20 years ago.

In an effort to attract sports-minded students from a variety of economic backgrounds, Confidence initiated a fundraising program in July Year 8, to raise

$5 million to build a new gymnasium, swimming pool, and fitness centre and to create an endowment fund for scholarships. The fundraising campaign was a huge success. By May 31, Year 9, the school had received the following contributions:

1. $2.0 million in cash contributions specifically designated for construction and maintenance of the facilities.

2. $3.1 million in cash contributions specifically designated for the scholarship fund.

3. Fitness equipment valued at $0.2 million.

On June 15, Year 9, at the graduation ceremony, the headmaster thanked the parents, students, alumni, and staff for all their support, and officially closed the capital campaign. He provided the following details of the campaign:

• The construction of the facility was nearing completion and would be ready for classes in September Year 9. The final cost for the facility would be approximately $1.9 million.

• The contribution of fitness equipment would more than adequately equip the fitness centre.

• $3.1 million in cash would be invested and managed by a professional investment adviser.

The income earned on the endowment fund would be used to provide scholarships to students. Five students would receive full or partial scholarships in the fall of Year 10. Each year thereafter, it was expected that 25 to 30 students would receive full or partial scholarships to offset the annual tuition fee of $15,000.

You are proud to be an alumnus of Confidence. You attended the graduation ceremony. At the garden reception after the ceremony, you accepted the headmaster's request to help out with the accounting for the capital campaign and related events. He was unsure of whether the school should use the restricted fund or deferral method of accounting for contributions. You agreed to provide a memo in which you would provide recommendations for accounting policies to be applied for the year ended June 30, Year 9, and for future years when the facilities are being used and the scholarships are disbursed.

Required:

Prepare a memo for the headmaster. Explain the rationale for your recommendations and state your assumptions.

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SOLUTION

MEMORANDUM

To: Headmaster, Confidence Private

Re: Accounting Policies for Confidence Private

I am pleased to provide my recommendations on accounting policies for the sports facilities of Confidence Private.

The CICA Handbook allows not-for-profit organizations to choose between the restricted fund method and deferral method of accounting for contributions. If the restricted fund method is used, you have to use fund accounting for at least one restricted fund and for an endowment fund since you have received endowment contributions. The method used depends on your information needs and how you want to monitor the cost of your operations for the sports facilities. If you feel that the sports facilities are an integral part of your operations and do not want to set up a separate fund to account for these facilities, then you should use the deferral method. On the other hand, if you feel that the sports facilities are ancillary to your normal operations and want to segregate the cost of running these facilities in a separate fund, then you should use the restricted fund method. The accounting for the contributions is quite different under the two different methods as indicated below.

Restricted fund method

Fund accounting will be used to account for two separate funds - an endowment fund for the contributions for the scholarships and a capital fund for the fitness facilities. In this way, it will be clear to the users that these funds have been used for their intended purposes and that the funds are not available for operating purposes.

The contributions to the scholarship fund will be shown as revenues of the sports scholarship fund when the contributions are received. Income on the funds invested will be shown as revenue of the scholarship fund when the income is earned. The scholarships will be expensed in the scholarship fund when they are paid to the students. When the students pay their tuition fees to Confidence, the fees will be reported as revenue of the general fund.

The donation of $2.0 million in cash and the $0.2 million of fitness equipment should be reported as revenue of the capital fund. The donated equipment and the cost of the new facilities should be capitalized and shown as capital assets on the statement of financial position of the capital fund. These capitalized costs will be amortized over the useful lives of these assets. Amortization should begin in September Year 9, once the facilities are put into use.

All other costs and receipts are regular operating activities. Accordingly, these other costs and receipts should be processed through the general fund.

Deferral method

Fund accounting can be used but does not have to be used with the deferral method. If you adopt the deferral method, I recommend that fund accounting not be used. You would report all activity in one set of financial statements. This would provide an overall picture of your entire operation.

The contributions to the scholarship fund will be reported as a direct increase to net assets and will never be reported as revenue. Income earned on the funds invested will be shown as deferred revenue. The scholarships will be expensed when they are paid to the students. A portion of the deferred revenue will be amortized into revenue to match against the scholarship expense. When the students pay their tuition fees to Confidence, the fees will be reported as revenue.

The donation of $2.0 million in cash and the $0.2 million of fitness equipment should be reported as deferred contributions. The deferred contributions will be brought into income over the life of these assets to match against the amortization expense of these assets. The donated equipment and the cost of the new facilities should be capitalized and shown as capital assets on the statement of financial position. These capitalized costs will be amortized over the useful lives of these assets. The amortization expense is a cost of running your school on an annual basis. Therefore, it is appropriate to show this expense on your statement of operations. Amortization should begin in September Year 9, once the facilities are put into use.