Copyright © 2014 by The McGraw-Hill Companies, Inc. All rights reserved.McGraw-Hill/Irwin
Chapter 19
Not-for-Profit Entities
19-2
Learning Objective 19-1
Understand financial reporting rules and make basic journal entries for
private, not-for-profit entities.
19-3
Types of Not-for-Profit Organizations
Colleges and Universities Health Care Organizations Voluntary Health and Welfare
Organizations Certain (or “all other”) Nonprofit
Organizations
19-4
Excluded Entities
The following entities are not NPOs because they solely serve the economic interests of their owners, members, participants, or trust beneficiaries: Credit unions and mutual banks Employee benefit and pension plans Mutual insurance companies Farms and rural cooperatives Trusts
19-5
Characteristics of NPOs
No outside ownership interest A mission to provide services
To their users, patients, society as a whole, or members
But NOT at a profit A dependence on significant levels of
contributions A significant level of assets that are
restricted as to use because of donor stipulations
Tax-exempt status. IRS Form 990, 990A, or 990PF
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Dependence on Contributions and Federal Funding
Nonprofit religious, charitable, and educational groups receive roughly $40 billion annually in federal government grants.
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Tax-Exempt Status
Advantages to Tax-Exempt Status for U.S. Income Tax Reporting Purposes (in most states): No state income tax No local property taxes No sales taxes on purchases
19-8
Tax-Exempt Status
Private NPOs are exempt from U.S. income taxes if the NPO: Serves some common good. Does not make an accounting profit. Does not primarily benefit its own executives. Does not function for political purposes.
19-9
Tax-Exempt Status
IRS Audits of Tax-Exempt Groups: Annually, the IRS audits approximately 11,000
of the 1.2 million tax-exempt groups. The IRS assesses taxes & penalties
of over $100 million per year. Such taxes are on business-related income
(which is taxable at the highest corporate rate).
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Differences between NPOs and Businesses
Revenues and support are often compared to expenses. However, remember that Expenses are incurred to provide services
(rather than to generate revenues as in commercial accounting).
The purpose of NPOs is not to maximize return on an ownership interest.
ROE = Not Applicable
19-11
The Reporting Model: Private NPOs
The reporting model Focuses on the flow of all economic resources Uses the accrual basis of accounting Recognizes depreciation expense in the
operating statement
The use of this reporting model reveals The improvement or deterioration in the NPO’s
financial condition for the period, and Is similar to the model used in the commercial
sector.
19-12
Who Makes the Rules for Not-for-Profits Entities?
The accounting and financial reporting for
governmental nonprofit entities
GASB
FASBAccounting and
financial reporting for nongovernmental nonprofit entities
19-13
Financial Reporting for Private,Not-for-Profit Entities
Private, not-for-profit entities must report their net assets in accordance with FAC 6.
FAC 6 specifies three mutually exclusive classes of net assets: Unrestricted net assets Temporarily restricted net assets Permanently restricted net assets
19-14
Financial Reporting for Not-for-Profit Entities
ASC 958, “Accounting for Contributions Received and Contributions Made,” provides guidance specific to not-for-profit entities. It covers five important accounting issues:
(1) depreciation,
(2) accounting for contributions,
(3) accounting for investments,
(4) financial display
(5) accounting for transfers of assets to a not-for-profit organization that raises or holds contributions for others.
19-15
Financial Reporting for Not-for-Profit Entities
Some not-for-profit entities use a fund structure to account for each type of net asset class.
Other not-for-profit entities maintain only an accounting record to show the amounts in each net asset class. The specific identification of any restricted
asset must be made when the asset comes into the entity, generally by donation or bequest.
19-16
Financial Reporting for Not-for-Profit Entities
Mergers and acquisitions—Exposure drafts The proposed standards
Require the recognition of identifiable assets acquired and liabilities assumed at their fair values at the date of the acquisition
Require that intangible assets other than goodwill and goodwill be assigned to reporting units that are acquired
Approaches to evaluating goodwill impairment Qualitative Evaluation Method
Fair-Value-Based Evaluation
19-17
Contributions: Scope of ASC 958
ASC 958 guidance on contributions applies to ALL 4 types of Private NPOs.
Health Care Organizations
Colleges and Universities
Voluntary Health and Welfare Organizations
Certain Nonprofit Organizations
ASC958
19-18
Contributions: Defined
Contribution An unconditional (no strings attached) transfer
of
1. Cash or
2. Other Assets In a voluntary, nonreciprocal transfer. By a person or entity acting other than as an
owner of the NPO
Examples of Other Assets: Equipment, vehicles, land, and promises of cash.
19-19
Contributions: “Promises, Promises”
“Unconditional transfers” include “unconditional promises” to give cash or other assets in the future.
Promises may be Oral or Written
Unconditional promises result in reporting “Contributions Receivable” in the balance sheet (subject to an allowance for uncollectibles).
19-20
Contributions: Recognizing Unconditional Promises
Recognizing unconditional promises in the financial statements requires having sufficient evidence in the form of verifiable documentation that a promise was made
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Contributions: “Conditional” Promises to Give
Conditional promises The conceptual opposite of unconditional
promises to give Not contributions (as defined by ASC 958) Depend on the occurrence of a specified future
and uncertain event that Must occur to bind the promissor, and
Thus transform the promise from conditional to unconditional status.
19-22
Contributions: “Conditional” Promises That May Be Deemed “Unconditional”
A conditional promise may be deemed unconditional if: “The possibility that the future event will not
be met [occur] is remote.”
Event not likely to occur = Conditional Event likely to occur = Unconditional
19-23
Contributions: “Conditional” Use of Assets Received
If assets have been received and the retention and use of such assets is conditional upon a future event that is not likely to occur, The offsetting credit is to a Refundable
Advance account (a liability) Until the conditional event occurs.
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Contributions: Manner of Reporting By Category
Contributions are reported in the Statement of Activities (the operating statement) by category Unrestricted Temporarily restricted Permanently restricted
19-25
Contributions: Manner of Reporting By Category
Donor-restricted contributions whose conditions are fulfilled in the same period in which the contribution is recognized May be reported in the unrestricted category of
the operating statement (O/S) if the entity: Consistently follows this policy, and
Discloses this policy.
Note: This option negates the need to show transfers between categories in the Operating Statement.
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Contributions: Endowments
Endowments A contribution that cannot be spent. The unspendable amount is called the
principal—it is invested in perpetuity.
Income on Endowments Donor stipulations dictate the reporting
classification (unrestricted, temporarily restricted or permanently restricted).
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Contributions: Temporary Restrictions
Contributed Assetsthat are restricted as to either
or
Temporarily Restricted
Assets
are classified as
Purpose Time Period
19-28
Contributions: Expirations of Restrictions
Manner of Reporting Expirationsof Restrictions: Where: In the statement of activities. How: As a separate line item reclassification as
shown below.
Temporarily UnrestrictedRestricted
Expirations of restrictions $77,000$(77,000)
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Financial Statements: Scope of ASC 958
ASC 958 guidance on financial statements applies to ALL 4 types of Private NPOs.
Health Care Organizations
Colleges and Universities
Voluntary Health and Welfare Organizations
Certain Nonprofit Organizations
ASC 958
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Financial Statements: ASC 958—The Basic Requirements
ASC 958 specifies: What financial statements are to be presented. What specific information, as a minimum, is to
be shown.
19-31
Financial Statements: Which Financial Statements
ASC 958 requires for the NPO as a whole: A Statement of Financial Position A Statement of Activities A Statement of Cash Flows.
VH&WOs must also report In a separate statement Expenses by Natural Classification in a matrix
format.
19-32
Financial Statements: The Three Classifications of Net Assets
The three mandated classifications of net assets are: Unrestricted. Temporarily restricted. Permanently restricted.
Note that these are the same three classifications used for reporting contributions.
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Contributions: Additional Issues
Contributions of monetary and nonmonetary assets are valued at the fair value of the assets received.
Determining the fair value may require Obtaining quoted market prices. Using independent appraisals. Using other appropriate methods.
19-34
Contributions: Additional Issues
Use of Present Value Procedures: Can use for estimated future cash flows on
unconditional promises to contribute that are expected to be collected over a period of longer than one year.
If used, subsequent recognition of the interest element is reported as contribution income—not as interest income.
19-35
Contributions: Additional Issues
Contributed Services Recognize as revenues only if:
Nonfinancial assets are created or enhanced.
Specialized skills are provided by individuals possessing these skills (e.g., carpenters, electricians, plumbers, lawyers, CPAs).
Required Disclosures for Contributed Services: A description of the nature and extent The amounts recognized as revenues The programs or activities in which the services were
used
19-36
Contributions: Additional Issues
Contributed Services: Recognizable contributed services are usually
recorded as revenues at the fair value of the services contributed.
Allowed alternative valuation method for the creation or enhancement of nonfinancial assets: May value at the fair value of
the asset created or asset enhancement
19-37
“Collection items” (the exception): Consist of contributed works of art, historical
treasures, and similar assets. Need not be recognized in the financial
statements if three conditions are satisfied [how used, how cared for, and use of proceeds upon sale].
Cannot be capitalized on a selective or arbitrary basis.
Contributions: Additional Issues
19-38
Practice Quiz Question #1
How do not-for-profit entities differ from for-profit businesses:
a. Not for profit entities are prohibited from charging more than cost for goods or services provided while for-profit businesses may include a mark up.
b. Both for-profit businesses and not-for-profit organizations are tax exempt.
c. Not-for-profit entities rely heavily on contributions and grants while for-profit businesses rely on profitable operations for survival.
19-39
Learning Objective 19-2
Understand financial reporting rules and make basic journal entries for
not-for-profit colleges and universities.
19-40
Colleges and Universities
Special conventions of revenue and expenditure recognition Tuition and fee remissions/waivers and
uncollectible accounts The full amount of the standard rate for tuition and
fees is recognized as revenue
Accounting for university-sponsored scholarships, fellowships, tuition and fee remissions or waivers depends on whether the recipient provides any services to the university
19-41
Colleges and Universities
Special conventions of revenue and expenditure recognition Tuition and fee reimbursements for
withdrawals from coursework Accounted for as a reduction of revenue
Academic terms that span two fiscal periods Accounted for as revenue in the fiscal year in which
the term is predominantly conducted, along with all expenses incurred
NACUBO recommended the use of the accrual basis of accounting
19-42
Colleges and Universities
Board-designated funds The board may designate unrestricted current
fund resources for specific purposes. ASC 958 specifies that these funds may not be
reported as restricted net assets because only external, donor-imposed restrictions can result in restricted net assets.
19-43
Colleges and Universities
Public colleges and universities Accounting and reporting is specified by the
GASB. GASB 35 requires that they follow the standards
for governmental entities as specified in GASB 34. Most public institutions will be special-purpose
government entities engaged in only business-type activities.
These entities present only the financial statements required for enterprise funds and then are included as component units of the state government.
19-44
Colleges and Universities
Private colleges and universities The FASB specifies the accounting and financial
reporting standards. The three financial statements required are:
The Statement of Financial Position
The Statement of Activities
The Statement of Cash Flows
They are free to select any account structure that best serves their management and financial reporting needs.
19-45
Colleges and Universities
Overview of the Accounting and Reporting of Colleges and Universities
19-46
Colleges and UniversitiesOverview of the Accounting and Reporting of Colleges and Universities
19-47
Practice Quiz Question #2
Which of the following statements accurately describes differences between the accounting public and private universities?
a. Both public and private universities follow FASB rules.
b. Both public and private universities follow GASB rules.
c. Public universities follow GASB rules while private universities follow FASB rules.
d. Public universities follow FASB rules while private universities follow GASB rules.
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Learning Objective 19-3
Understand financial reporting rules and make basic journal entries for
not-for-profit health care providers.
19-49
Health Care Providers
Hospital accounting Investor-owned hospitals provide the same
types of financial reports as commercial entities. Not-for-profit hospitals present their financial
results using a specific format required by the FASB.
Governmental hospitals follow the GASB’s accounting and reporting requirements and are considered special-purpose entities engaged in business-type activities.
19-50
Health Care Providers
Hospital fund structure Although not required to do so, many hospitals
have used a fund accounting structure for accounting purposes.
Operating activities are carried on in the general fund, and a series of restricted funds can be used to account for assets whose use has been restricted by the donor.
19-51
Health Care Providers
Overview of the Hospital Accounting and Reporting
19-52
Health Care Providers
Financial statements for a not-for-profit hospital Separate, not-for-profit hospitals issue four basic
financial statements The Balance Sheet
The Statement of Operations
The Statement of Changes in Net Assets
The Statement of Cash Flows
19-53
Health Care Providers
Not-for-profit hospital: The Balance Sheet Presents the total assets, liabilities, and net
assets of the organization as a whole Major accounts
Receivables Investments
Initially recorded at cost if purchased or at fair value at the date of receipt if received as a gift
Plant assets Property, plant, and equipment reported with any
accumulated depreciation
19-54
Health Care Providers
Not-for-profit hospital: The Balance Sheet Assets whose use is limited
Separate disclosure should be made for assets that have restrictions placed on their use
Long-term debt The hospital must also account for its long-term debt
and pay the principal and interest as it becomes due Net Assets
1. Unrestricted net assets available
2. Temporarily restricted net assets available for use
3. Permanently restricted net assets
19-55
Health Care Providers
Not-for-profit hospital: The Statement of Operations Also often termed “the statement of activities” Includes the revenues, expenses, gains and
losses, and other transactions affecting the unrestricted net assets during the period
Only general fund transactions are reported Should report an operating performance
indicator
19-56
Health Care Providers
Not-for-profit hospital: Major accounts in The Statement of Operations Net patient service revenue Contractual adjustments Income from ancillary programs Interfund transfers General fund expenses Donations
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Health Care Providers
Not-for-profit hospital: The Statement of Changes in Net Assets It presents the changes in all three categories of
net assets Unrestricted Temporarily restricted Permanently restricted
Statement of Cash Flows Its format is similar to that for commercial
entities
19-58
Health Care Providers
Summary of hospital accounting and financial reporting Major operating activities take place in the
general fund. The restricted funds are holding funds that
transfer resources to the general fund for expenditures upon satisfaction of their respective restrictions.
General fund uses the accrual basis of accounting.
Patient services revenue is reported at gross amounts measured at standard billing rates.
19-59
Health Care Providers
Summary of hospital accounting and financial reporting A deduction for contractual adjustments is then
made to arrive at net patient services revenue. Other revenue is recognized for ongoing
nonpatient services. Charity care services are presented only in the
footnotes; no revenue is recognized for them.
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Health Care Providers
Summary of hospital accounting and financial reporting Operating expenses in the general fund include
depreciation, bad debts, and the value of recognized donated services that are in support of the basic services of the hospital.
Not all donated services are recognized. Donated property and equipment are typically recorded
in a restricted fund until placed into service, at which time they are transferred to the general fund.
Donated assets are recorded at fair values at the date of gift.
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Practice Quiz Question #3
Which of the following is false with respect to not-for-profit hospital accounting?
a. Not-for-profit hospitals follow FASB rules.b. Not-for-profit hospitals usually use fund
accounting.c. Not-for-profit hospitals do not prepare a
statement of cash flows.d. The general fund of not-for-profit
hospitals uses the accrual basis of accounting.
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Learning Objective 19-4
Understand financial reporting rules and make basic journal
entries for not-for-profit voluntary health and welfare
organizations.
19-63
Voluntary Health and Welfare Organizations
Voluntary health and welfare organizations (VH&WOs) provide a variety of social services They solicit funds from the community at large
and typically provide their services for no fee. VH&WOs are typically audited. The federal government normally provides them
tax-exempt status.
19-64
Voluntary Health and Welfare Organizations
Accounting for a VH&WO Similar to other not-for-profit organizations
except for special financial statements that report on the important aspects of VH&WOs.
The accrual basis of accounting is required. VH&WOs have been free to use fund accounting
in their accounting and reporting processes.
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Voluntary Health and Welfare Organizations
Financial statements for a VH&WO Statement of Financial Position Statement of Activities Statement of Cash Flows Statement of Functional Expenses
The statements are designed primarily for those who are interested in the organization as “outsiders.”
19-66
Voluntary Health and Welfare Organizations
The Statement of financial position for a VH&WO Major balance sheet accounts:
Pledges from donors
Investments
Land, buildings, and equipment
Liabilities
Net assets
19-67
Voluntary Health and Welfare Organizations
Statement of activities The overall structure of the statement of
activities for voluntary health and welfare organizations and other not-for-profit entities should be very similar as a result of ASC 958.
19-68
Voluntary Health and Welfare Organizations
Statement of activities Public support
The primary source of funds is likely to be contributions from individuals or organizations that do not derive any direct benefit from the VH&WO for their gifts.
Revenues Funds received in exchange for services provided or
other activities
Gains Gain or loss on sale of investments and other assets
19-69
Voluntary Health and Welfare Organizations
Statement of activities Donated materials and services
Should be recorded at fair value when received
Expenses Information about the major costs of providing
services to the public, fund-raising, and general and administrative costs
Costs of informational materials that include a fund-raising appeal Many VH&WOs prefer to classify such costs as
program rather than fund-raising
19-70
Voluntary Health and Welfare Organizations
Statement of Cash Flows The format of this statement is similar to that for
hospitals.
Statement of Functional Expenses Details the items reported in the expenses
section of the statement of activities
19-71
Voluntary Health and Welfare Organizations
Summary of Accounting and Financial Reporting for VH&WOs Reporting requirements are specified in ASC 958
and the AICPA Audit and Accounting Guide for Not-for-Profit Organizations.
The accrual basis of accounting is used. Primary activities are reported in the
unrestricted asset class.
19-72
Voluntary Health and Welfare Organizations
Summary of Accounting and Financial Reporting for VH&WOs Resources restricted by the donor for specific
operating purposes or future periods are reported as temporarily restricted assets.
Assets contributed by the donor with permanent restrictions are reported as permanently restricted assets.
19-73
Practice Quiz Question #4
Which of the following is false with respect to the accounting for voluntary health and welfare organizations?
a. VH&WOs solicit funds from the community and typically provide their services for no fee.
b. VH&WOs use the modified accrual basis of accounting.
c. VH&WOs must provide a statement of cash flows.
d. VH&WOs primary activities are reported in the unrestricted asset class.
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Learning Objective 19-5
Understand financial reporting rules and make basic journal
entries for othernot-for-profit organizations.
19-75
Other Not-for-Profit Entities
Examples of other not-for-profit organizations (ONPOs):
Private elementary and secondary schools
Professional associations Public broadcasting stations Religious organizations Research and scientific
organizations Social and country clubs Trade associations Zoological and botanical
societies
Cemetery organizations Civic organizations Fraternal organizations Labor unions Libraries Museums Other cultural institutions Performing arts
organizations Political parties Private and community
foundations
19-76
Other Not-for-Profit Entities
Accounting for ONPOs In addition to ASC 958, the AICPA Audit Guide for
Not-for-Profit Organizations provides guidance for accounting and financial reporting standards.
While accrual accounting is required for all ONPOs, some small organizations operate on a cash basis during the year and convert to an accrual basis at year-end.
19-77
Other Not-for-Profit Entities
Accounting for ONPOs With the adoption of ASC 958, the procedures
used by ONPOs and VH&WOs may move away from the traditional funds used.
They may account for all transactions in a single entity or by establishing separate accounts for unrestricted, temporarily restricted, and permanently restricted net assets.
19-78
Other Not-for-Profit Entities
Financial Statements of ONPOs Explains how the available resources have been used to
carry out activities. They should disclose the nature and source of the
resources acquired, any restrictions on the resources, and the principal programs and their costs.
They should also provide information on the ability to continue to carry out objectives.
ASC 958 requires
1. A Statement of Financial Position2. A Statement of Activities, and
3. A Statement of Cash Flows
19-79
Other Not-for-Profit Entities
Summary of Accounting and Financial Reporting Accounting is similar to that for VH&WOs. The accrual basis of accounting is used when a large
number of programs or a number of very different types of programs are part of the operations.
It may be desirable to prepare a statement of expenses by functional area or major program as well.
As a result of ASC 958, the reporting requirements of ONPOs are substantially the same as VH&WOs.
19-80
Practice Quiz Question #5
Which of the following is false with respect to the accounting other not-for-profit organizations?
a. While accrual accounting is required for all ONPOs, some small organizations operate on a cash basis during the year and convert to an accrual basis at year-end.
b. Accounting is similar to that for VH&WOs.c. ONPOs may account for all transactions in a
single entity or by establishing separate accounts for unrestricted, temporarily, and permanently restricted net assets
d. ONPOs follow GASB rules.
Conclusion
The End
19-81