beams10e ch21

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Chapter 21:Accounting for Not-for-Profit Organizations

by Jeanne M. David, Ph.D., Univ. of Detroit Mercy

to accompany

Advanced Accounting, 10th editionby Floyd A. Beams, Robin P. Clement,

Joseph H. Anthony, and Suzanne Lowensohn

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Not-for-Profits : Objectives

1. Learn about the four main categories of not-for-profit organizations

2. Differentiate between governmental and nongovernmental not-for-profit organizations.

3. Introduce FASB not-for-profit accounting principles.

4. Apply not-for-profit accounting principles to voluntary health and welfare organizations.

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Objectives (cont.)

5. Apply not-for-profit accounting principles to hospitals and other health care organizations.

6. Apply not-for-profit accounting principles to private not-for-profit colleges and universities.

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1: Categories of NFPs1: Categories of NFPsAccounting for Not-for-Profit Organizations

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Characteristics

Not-for-profit characteristics– Contributions without expected

commensurate returns– Purpose is other than providing goods or

services– Lacks ownership interests

Accounting for not-for-profits– Governmental: follow GASB– Nongovernmental: follow FASB

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Categories of NFPs

1. Voluntary health and welfare2. Hospitals and health care 3. Colleges and universities4. Other not-for-profits

• Churches, museums• Other NFPs are similar to voluntary

health and welfare, without requiring a statement of functional expenses

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2: Governmental and 2: Governmental and Nongovernmental NFPsNongovernmental NFPs

Accounting for Not-for-Profit Organizations

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Governmental NFPs

Governmental not-for-profits are NFPs with– Officers elected or appointed by government– Government can unilaterally dissolve and

assets revert to government– Has power to enact/enforce taxes

Follow GASB

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Nongovernmental NFPs

NFPs that lack the governmental element

Follow FASB

• FASB Statement No. 116– Contributions

• FASB Statement No. 117– Financial statements

• 2007 AICPA Audit and Accounting Guide: Not-for-Profit Organizations

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3: Accounting Principles3: Accounting PrinciplesAccounting for Not-for-Profit Organizations

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Financial Statements

Statement of financial positionStatement of activities

• Replace with "Statement of operations" and "Statement of changes in net assets" for hospitals and health care

Statement of cash flowsStatement of functional expenses

• Required only for voluntary health and welfare organizations

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Net AssetsThree categories

1. Permanently restricted net assets• Asset use is limited• Donor imposed stipulations that do not

expire/ cannot be removed by entity2. Temporarily restricted net assets

• Donor imposed restrictions that expire (time restrictions)

• Can be removed by entity fulfilling stipulations (purpose restrictions)

3. Unrestricted net assets

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Statement of Activities• Changes in net assets shown separately for

– Unrestricted net assets – Temporarily restricted net assets– Permanently restricted net assets

• Revenues and contributions in all three areas• Expenses only in unrestricted net assets• Reclassifications

– Move amounts from temporarily restricted to unrestricted net assets

• Expiration of time restrictions• Fulfillment of purpose restrictions

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Expenses

Expenses are classified into one of two major categories

Program servicesThese are the activities the NFP provides

Examples: Research expense, Educational expense, Food bank expense, Recreational expense

Supporting servicesManagement and general expensesFund-raising expenses

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Contributions

• Contributions of cash • Contribution revenue

• Conditional promise to give • Will be contribution revenue and receivable

when conditions are substantially met• Unconditional promise to give

• Contribution revenue and receivable when pledged, but is temporarily restricted (time)

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Contributions (cont.)• Contributions (cash, pledge, other assets) with

donor imposed restrictions• Contribution revenue as temporarily

restricted (time or purpose) or permanently restricted

• When temporary restriction is met, reclassify temporarily restricted net assets as unrestricted net assets

• Contributions of fixed assets• Temporarily restricted net assets if donor

imposed or board designated as such

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Transfers (Non-contribution)• Exchange transactions: Revenues

– Sales of products or services– "Donations" with gift of same approximate value

• Exchange is unrestricted• Agency transactions

– No revenue or contribution– Increase (decrease) both assets and liabilities

• Gifts in kind– Contribution revenue (restricted or unrestricted)

• Create or enhance nonfinancial assets• Specialized skills that would otherwise have been

purchased

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Other Accounting Issues• Measurement

– Contributions at fair value – Fair value at time of pledge

• Don't recognize increases• Decreases change net assets

• Collections (art work, historical treasures)– Capitalization encouraged

• Contributions are revenues• Fund accounting

– Not required– Fund financial statements may be presented as supplemental

information

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4: Voluntary Health and Welfare4: Voluntary Health and WelfareAccounting for Not-for-Profit Organizations

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Fund Raising

• Pay general fund raising expenses• Special event fund raisers (two entries)

– Receive $1,950 in contributions: gains– Pay fund raising costs of special event $250

• Special events are disclosed net of costs• Therefore, the term "gain," not revenue

Expenses - supporting services - fund raising 145  Cash   145

Cash 1,950

Unrestricted gains – special event 1,950

Unrestricted gains – special event 250

Cash 250

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Cash Donations and Pledges

• Receive cash and pledge (no purpose restrictions)– Cash is unrestricted– $1,800 of $6,000 pledges are to be collected next year: creates a

time restrictionSupport – contributions (restricted or not) is revenue

– Revenue accounts are closed to net assets (temporarily, permanently or unrestricted)

Cash 4,000  Contributions receivable 6,000  

Allowance for uncollectibles   600 Unrestricted support – contributions   7,600 Temporarily restricted support - contributions   1,800

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Collect a Time-Restricted Pledge

• Two entries• Cash collection• Reclassification for expiration of time

restrictionReclassification accounts are temporary accounts

closed to their respective net asset accounts

Cash 1,800  

Contributions receivable   1,800

Temporarily restricted net asset - reclassification out 1,800  

Unrestricted net assets - reclassification in   1,800

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Receive Equipment and Use It

• Contribution of equipment is temporarily restricted (in the sense that it gets used up)

• As depreciation is recorded, net assets are reclassified from temporarily restricted to unrestricted

Equipment 1,500  Temporarily restricted net assets – contributions   1,500

Depreciation expense - program services - community service 500  

Accumulated depreciation – equipment   500 Temporarily restricted net asset - reclassification out 500  

Unrestricted net assets - reclassification in   500

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Receive Cash with Purpose Restriction

• Receive cash for research• Pay research costs – fulfills purpose restriction

– Two entries: record expenses, reclassify net assets

If cash was for buying equipment, reclassify as it is depreciated

Cash 1,000  Temporarily restricted support – contributions   1,000

Expenses - program services – research 900  Cash   900

Temporarily restricted net asset - reclassification out 900  

Unrestricted net assets - reclassification in   900

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• Accounting, specialized services that would have to be purchased: record as both expense and revenue

• Services of general labor (non-specialized) that result in nonfinancial assets: record asset and revenue

Services of other general labor (door-to-door collections): not recorded

Expenses - support services - management and general 500  

Unrestricted support - donated services   500

Construction in process 1,200  

Unrestricted support - donated services   1,200

Receive Donated Services

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Statement of Financial Position

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Statement of Activities

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Statement of Activities (cont.)

• Changes in unrestricted net assets: revenues, increases from reclassifications, and all expenses

• Changes in temporarily restricted net assets: revenues and resources released and reclassified to unrestricted

• Changes in permanently restricted net assets: revenues

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Statement of Cash Flows

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Statement of Functional ExpensesExpenses as reported on

the Statement

of Activities

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5: Hospitals and Other Health Care5: Hospitals and Other Health CareAccounting for Not-for-Profit Organizations

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Hospitals and Health Care

• Applies to nongovernmental, not-for-profit hospitals and health care agencies

• Governmental: GASB• Private, for-profit: FASB as for businesses

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Revenues and Other ReceiptsUnrestricted:• Patient revenues is net of

– Courtesy discounts– Contractual adjustments

• Premium (subscriber or capitation) fees• Other operating revenue, tuition, cafeteria, gift shops, in-

room TV/phone• Non-operating gains, gifts and bequestsTemporarily or Permanently restricted:• "T" or "P" restricted support, donated assets, investments,

gifts, bequests

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Hospital Expenses

Classify by function– Nursing services expense– Other professional expense– General services– Fiscal services– Administrative services– Medical malpractice costs– Provision for bad debts– Depreciation expense

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Patient Revenue

• The full amount is charged to the patient bill• Upon approval, the bill is reduced for courtesy

discounts and contractual adjustments• Contra-revenue accounts

• Uncollectibles are estimated and written off as needed, like businesses

Patient accounts receivable 1,300  Patient service revenues – unrestricted   1,300

Courtesy discounts 9  Contractual adjustments 300  

Patient accounts receivable   309 Provision for bad debts 26  

Allowance for uncollectibles   26

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Cash Contributions

• Cash contributions can be unrestricted, temporarily or permanently restricted

• "Support" accounts are revenues/gains• When cash restricted for nursing services is spent in

that manner• Reclassify net assets as unrestricted

Cash 275  Unrestricted support - nonoperating gains   25 Temporarily restricted support   250

Nursing services expense 250  Cash   250

Temporarily restricted net asset - reclassification out 250  

Unrestricted net assets - reclassification in   250

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• Donated supplies are unrestricted support• Record as inventory and expense as used

• Donated specialized services that would otherwise be purchased

• Record as both expense and revenue

Nursing services expense will be the full cost of running the hospital whether services are donated or purchased. The

donated services are clearly definable.

Inventory of materials and supplies 130  

Unrestricted support - donated supplies   130

Nursing services expenses 70  

Unrestricted support - donated services   70

Receive Donated Assets/Services

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Hospital Statements• Statement of net assets• Statement of operations• Statement of changes in net assets• Statement of cash flows

The NPF "Statement of activities" includes changes to unrestricted, temporarily and permanently restricted net assets

The Hospital's "Statement of Operations" and "Statement of changes in net assets" together, provide that information

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Statement of Operations: Hospital

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Statement of Changes in Net Assets: Hospital

• Shows the net changes in unrestricted net assets from the Statement of operations

• Shows the details on temporarily and permanently restricted net assets

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6: Colleges and Universities6: Colleges and UniversitiesAccounting for Not-for-Profit Organizations

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Colleges and Universities

• Applies to nongovernmental, not-for-profit colleges and universities

• Governmental: GASB• Private, for-profit: FASB as for businesses

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Tuition and ScholarshipsTuition and fees: revenue at gross amount• Tuition waivers: contra revenueReported tuition revenue is reduced by employee

discounts and non-employment fellowships

Scholarships• From outside sources: collect the account

receivable from the donor• Awarded by the college itself: reduce accounts

receivable and record "Expenses – Educational and general – student aid"

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College Expenses

Expenses are only in the unrestricted net assetsClassify by function:

– Instruction expense– Research expense– Public service expense– Academic support– Student services– Institutional support– Operation and maintenance of plant– Student aid

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Tuition Revenues

• Tuition is recorded at gross amount• Tuition waivers are contra-revenues

• Bad debts are recorded as for businesses• Grouped with institutional support expenses

Accounts receivable 1,000  Unrestricted revenues - tuition and fees   1,000

Tuition reduction: unrestricted - student aid 50  Accounts receivable   50

Expenses - educational and general - institutional support 30  

Allowance for uncollectibles   30

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Receive Appropriations

• Appropriations received from governments and other sources are support revenue– Unrestricted

• For general operations• College board has ability to designate as

unrestricted– Restricted

• Temporary or permanently restricted

Cash 700  

Unrestricted support - state appropriation   700

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Funds Held for Students

• Receive cash that is to be distributed to students– Grant funds held for students is a liability

• Distribute cash to appropriate students

If some of those funds are applied to student accounts, the second entry would credit accounts receivable rather than cash.

Cash 150  

Grant funds held for students   150

Grant funds held for students 150  

Cash   150

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Endowments

• Receive cash for permanent endowment, with income restricted to student aid

• Receive income on endowment• Classify as temporarily restricted

• Spend cash on student aid• Reclassify net assets

Cash 50  Permanently restricted support - endowment contribution   50

Cash 4  Temporarily restricted support - endowment income   4

Expenses - unrestricted - student aid 3  Cash   3

Temporarily restricted net assets - reclassifications out 3  Unrestricted net assets - reclassifications in   3

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Auxiliary Services

• Auxiliary services: residence halls, food services, intercollegiate athletics

• Unrestricted revenues and expenses• Statement of activities: total revenues and total

expenses for auxiliary services• Subsidiary records are maintained

Cash 61  

Revenues - auxiliary enterprises   61

Expenses - auxiliary enterprises 28  

Cash   28

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Statement of Activities: College

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State. of Activities: College (cont.)

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