Chapter Eighteen

Accounting and Reporting for

Private Not-for-Profit

Organizations

Copyright © 2013 by The McGraw-Hill Companies, Inc. All rights reserved.McGraw-Hill/Irwin

Not-for-Profit Organizations

General Characteristics They receive contributions from donors who do

not expect a return of equal financial value Their operating purpose is not providing goods

and services for profit They do not have ownership interests as do for-

profitsThey may be governmental or private

Charitable Educational Civic organizations Political parties Trade organizations

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FASB has jurisdiction over private Not-For-Profits, and two basic ideas form the FASB’s framework for not-for-profit standards:

The financial statements should focus on the entity as a whole.

Reporting requirements for not-for-profits should be similar to business entities, unless there are critical differences in the needs of users.

Financial ReportingLO 1LO 1

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A Little History….

Prior to 1993, there was a confusing variety of private not-for-profit accounting practices.In that year, FASB issued guidance to

standardize the reporting, emphasize reporting the

operations and financial position of the entire entity, and

allow the use of many of the same accrual-based techniques

utilized by for-profit entities.18-4

FASB requires three financial statements for not-for-profits.

Financial Reporting

1) Statement of Financial Position

2) Statement of Activities and Changes in Net Assets

3) Statement of Cash Flows

4) Statement of Functional Expenses (required only for voluntary health and welfare organizations).

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Report assets, liabilities, and net

assets. Net assets are presented in

three categories: Unrestricted Temporarily Restricted Permanently Restricted

Use the term “Net assets” rather than

owners’ equity or fund balance.

Statement of Financial Position

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Statement of Financial Position

Restrictions by an outside donor results in an asset that is classified as:Temporarily restricted

For a particular purpose OR For use in a future time period

Permanently restricted Expected to remain restricted for as long as

the organization existsUnrestricted

Board-designated or internally restricted assets

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Statement of Activities and Changes in Net Assets

Change in net assets = difference between revenues and expenses.

The change in net assets is reported instead of net income. Donors’ unconditional promises to give are recognized as both revenue and a receivable in the period of promise.

Revenues and expenses are measured on the accrual basis.

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Statement of Activities and Changes in Net Assets

Expenses are presented in two categories:Program ServicesSupporting Services

Program ServicesActivities relating to social services, research, or other objectives of the organization.

Supporting ServicesAdministrative costs and fund-raising expenses.

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Statement of Functional Expense

Statement of Functional Expenses

A detailed analysis of expenses by both function and object. Allocation of joint fund-raising & program service costs is permitted only when certain criteria are met.

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Accounting for Contributions

Unconditional promises to

give are recognized as revenue when the promise is

made.

Restricted gifts are not the same as

conditional gifts.

Pledges that allow donors to change their minds are

not unconditional.

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Tax-Exempt Status

Section 501(c)(3) Applies to

charitable, educational or

scientific.

Tax-Exempt Status – Not-for-profits may not have to pay federal income taxes under the following

sections of the Internal Revenue Code:

Section 501(c)(4)

Applies to advocacy

groups

Section 501(c)(6) Applies to

business leagues, boards of trade

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Mergers & Acquisitions

Why have mergers and acquisitions become prevalent among Not-for-Profits?

Efficient use of resourcesCommon goalsEfficiencies of sizeRescue suffering charitiesExpand one organization’s scope of

outreach

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Mergers & Acquisitions

The respective Boards of Directors make the decision to acquire another entity, there are no shareholders to buy out or consider.

In an Acquisition, the acquired accounts are added at FMV.

In a Merger, the newly formed not-for-profit records all accounts at their previous book values.

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Accounting for Health Care Organizations

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Health Care expenditures account for 16% of our Gross Domestic Product, much of which is paid by third-party payors.

From a financial reporting perspective, these organizations have no need to compute and report net income.

However, readers of the financial statements need a way to measure the efficiency of the entity’s operations.

FASB requires the reporting of a “performance indicator” to show operational success or failure.

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Amounts that the entity does not intend to collect should not

ultimately be reported as revenues.

In many cases, the patient is not responsible for the entire bill. Third-party payors, such as insurance providers, are an important part of the process.

Accounting for Patient Service Revenues

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