advanced accounting 6e by jeter chaney chapter 19

Accounting for Current Funds• Current Unrestricted Funds 9 Financial resources that may be expended at the discretion of the governing board Current Restricted Funds Resources restricted

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Jeter ● Chaney

Advanced Accounting

Accounting For Nongovernment

Nonbusiness Organizations: Colleges

And Universities, Hospitals And Other

Health Care Organizations

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Learning Objectives

• Describe the source of accounting standards for nongovernment nonbusiness organizations (NNOs)

• Identify the three basic statements for NNOs

• Describe the basic funds used by nongovernment nonbusiness organizations

• Distinguish between a current restricted fund and an unrestricted fund

• Explain the term “assets whose use is limited.”

• Distinguish between a mandatory and a nonmandatory transfer

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Learning Objectives

• Understand how donated services are recorded

• Describe the funds used to account for property, plant and equipment

• Explain the basic accounting used by endowment funds

• Indicate how equity investments are reported in the financial statements

• Explain the change in accounting for loan funds brought about by new standards

• Understand the use of an annuity or life income fund

• Discuss the special reporting issues of hospitals

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Nongovernment Nonbusiness Organizations (NNOs)

– Nonprofit institutions of higher education

– Hospitals and other health care providers

– Voluntary health and welfare organizations (VHWOs)

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Hierarchy of Reporting Standards (NNOs)

• The hierarchy used to establish generally accepted reporting standards for NNOs other than government-owned special entities

– is the same as that for profit oriented business organizations

– and included in the FASB Codification

• FASB standards for nonprofits are found in FASB ASC Topic 958, Not-for-Profit Entities

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LO 1 The source of accounting standards.

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Financial Reporting for Not-for-Profit

• Three basic financial statements required:

1) Statement of financial position (balance sheet)

– Temporarily restricted net assets – resources that must be used for a specific

purpose or in a specific time period (restriction is donor imposed)

– Permanently restricted net assets – endowments: interest might be spend but

not the principal

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Fund Accounting

• Most NNOs use fund accounting for recordkeeping and reporting purposes

– Current Fund (restricted and unrestricted)

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LO 3 Basic funds used by NNOs.

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Accrual Basis of Accounting

• Financial statements for NNOs (accrual basis)

– Revenues are reported when earned and realized or realizable, and

– Expenditures are reported when materials or services are received,

– Expenses incurred before the reporting date are accrued,

– Expenses applicable to future periods are deferred

• For external reporting purposes,

– Revenues are classified by source, and

– Expenses and expenditures are classified by function or activity

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Accounting for Current Funds

• Current Unrestricted Funds

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Financial resources that may be expended at the discretion of the governing board

Current Restricted Funds

Resources restricted because of legal, contractual, or external restrictions on their use.

Current unrestricted resources may be expended at the discretion of the governing board, whereas current restricted resources may be expended only in accordance with externally imposed restrictions.

LO 4 Distinguish between restricted and unrestricted funds.

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Accounting for Board Designated Funds

– Part of current unrestricted fund

– Resources designated by governing board for specific purposes, projects, or investments

– Aid in planning and control of expenditures and limit discretion of management

– Governing board can reverse or modify designations

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Do not confuse these designations with donor or external restrictions on the use of resources

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Assets Whose Use is Limited

• Hospitals = classified as assets whose use is limited

• Assets set aside by the governing board of a hospital for board-designated purposes.

– Assets whose use is limited under terms of debt indentures, trust agreements, third-party

reimbursement arrangements, or similar arrangements are also presented as assets whose use is limited

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LO 5 Assets whose use is limited.

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• Colleges and Universities

– Board designated funds for specific current operating purposes are accounted for by

footnote or by reclassification of the Unrestricted Current Fund Balance

– Some board-restricted current resources can be transferred to other funds

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Mandatory and Nonmandatory Transfers

• Unique to colleges and universities

• Mandatory transfers

– Transfers from Current Funds group to other fund groups arising from

• binding legal agreements

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• All NNOs under FASB jurisdiction are required to recognize contributions as revenue in the period received

– This includes unconditional promises to give

– The standard does not apply to tax exemptions, abatements or incentives, or to transfers of assets from a government to a business enterprise

• Contributions include gifts of cash, pledges, donated services, and gifts of noncash assets

• Conditional promises to give are recognized when they become unconditional (when the

conditions are substantially met)

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LO 7 How contributions are recorded.

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• Pledges are recorded as revenues when a promise to give is nonrevocable and unconditional, at

present value of expected receipts.

– Pledges are signed commitments to contribute specific amounts of money to an

organization on a future date or in installments

– Although resembling promissory notes, pledges generally are not enforceable contracts

– All NNOs should establish an allowance for uncollectible pledges

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• Exercise 19-6: A well-known celebrity sponsored a telethon for the Help for the Blind

Foundation on November 1, 2015 Pledges in the amount of $1,000,000 were called in Using similar telethon campaigns as a basis, it is estimated that 25% of the pledges will be

uncollectible During 2016, $700,000 of contributions from these pledges were collected The remainder were uncollectible

and 2016 to record these transactions

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Exercise 19-6: Prepare the journal entries necessary in 2015

Contributions

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Current Unrestricted Fund

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Exercise 19-6: Prepare the journal entries necessary in 2016

Contributions

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Cash 700,000

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Donated Services

• Recognized only if the services received:

– Create or enhance nonfinancial assets, or

b Are provided by individuals possessing those skills, and

19 Recorded as revenue or support with an amount equal to the revenue recognized as an expense in the appropriate expense account.

LO 8 How donated services are recorded.

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Exercise 19-2: During 2015 volunteer pinstripers donated their services to General Hospital at no cost The staff at

General Hospital was in control of the pinstripers’ duties If regular employees had provided the services rendered by the volunteers, their salaries would have totaled $6,000 While working for the hospital, the pinstripers received complimentary

meals from the cafeteria, which normally would have cost $500 Required: Prepare the journal entry necessary in the

General Fund to record the donated services on the books of General Hospital.

Contributions

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Donor-Imposed Restricted Contributions

• Recorded as contribution revenues in period received, thus increasing either temporarily or permanently restricted net assets

• When expenditures are made, or restriction expires, net assets are released from temporarily (or permanently) restricted net assets and are reported as unrestricted net assets on the Statement of Activities

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• Exercise 19-3: The Franklin Public Library received a restricted contribution of $300,000 in

2015 The donor specified that the money must be used to acquire books of poetry written in the sixteenth century As of December 31, 2015, only $100,000 of the restricted resources had been expended

the fund in which each journal entry is recorded

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Exercise 19-3: Prepare the journal entries necessary to record these events during 2015

Contributions

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Restricted Current Fund

Cash 300,000

Unrestricted Current Fund

Cash 100,000

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Accounting for Plant Funds

The plant fund is used to account for

– property, plant and equipment (PP&E) owned by the organization and the net investment,

– accumulation of financial resources for acquisition or replacement of PP&E,

– acquisition and disposal of PP&E,

– liabilities relating to acquisition of PP&E, and

– depreciation expense and accumulated depreciation

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LO 9 Funds used to account for PP&E.

All types of NNOs are required by GAAP to record depreciation expense.

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College and Universities

• Divided into four separate self-balancing subgroups:

– Funds for Retirement of Indebtedness

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• Exercise 19-8: After the election of a prominent political figure, the principal from a term

endowment fund was expendable by Crandall University The official was elected this year The fund was restricted to the construction of a Political Science building annex The following

transactions occurred because of this event

fund or fund subgroup in which each entry is recorded

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1 A transfer of $3,000,000 is made from the Endowment Fund (Term) to the Unexpended Plant Fund.

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Exercise 19-8:

2 Construction is begun on the Political Science annex Costs of construction during the year amounted to $1,000,000, of

which $30,000 remained unpaid at the end of the year (The financial controller does not record transfers to the Investment

in Plant subgroup until a project has been completed.)

Unexpended Plant Fund

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Exercise 19-8:

3 By the end of the following year, the annex is completed at an additional cost of $2,100,000 All costs have been paid.

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Exercise 19-8:

3 By the end of the following year, the annex is completed at an additional cost of $2,100,000 All costs have been paid.

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Exercise 19-8:

4 The completed building is recorded in the Investment in Plant subgroup.

Net Investment in Plant Fund

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Hospitals

• Property, plant and equipment (PP&E) transactions are accounted for in the General Fund

• Contributed resources restricted to acquire PP&E are accounted for in a plant replacement and expansion (restricted) fund

– Upon expenditure, the assets acquired and the related fund balance are transferred to the General Fund

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Voluntary Health and Welfare and ONNOs

• Single Plant Fund and report the fund balance in two classifications:

– Expended Fund Balance is equal to the organization’s net investment in PP&E

• Net Investment = Gross assets less related liabilities and accumulated depreciation

– Unexpended Fund Balance represents the amount of resources available to replace or acquire additional PP&E

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Accounting for Endowment Funds

• Pure Endowment Fund - donated funds have been given in perpetuity

• Term Endowment Fund - donor has specified a particular date or event after which the

principal of the endowment fund may be expended

• Income from endowment funds generally may be expended as earned either for specified

purposes or at the discretion of the governing board

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LO 10 Basic accounting by Endowment Funds.

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• Exercise 19-7 (partial): Jefferson Hospital received money from a donor to set up an

endowment fund The following information pertains to this contribution Prepare the journal entries necessary to record the events in the endowment fund

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Exercise 19-7 (partial): During 2015

1 $2,000,000 was received to establish the fund The requirements were (a) $100,000 of the endowment fund’s income must

be used for research grants each year (b) The remainder of income is under the discretion of the governing board (c) The

principal is expendable after the donor’s death It shall be used to purchase equipment.

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Cash 2,000,000

Endowment Fund

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Exercise 19-7 (partial): During 2015

2 The cash received was invested in a number of securities.

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Exercise 19-7 (partial): During 2016

3 Dividends of $100,000 and interest of $300,000 were received.

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Cash 400,000

Endowment Fund

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Exercise 19-7 (partial):During 2016

4 The income was transferred to the appropriate funds.

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Endowment Fund

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Exercise 19-7 (partial):During 2017

8 The hospital was notified of the donor death.

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Endowment Fund

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Accounting for Investments

• FASB ASC paragraph 958-320-35-1 requires NPOs to report investments in equity securities with readily determinable fair values and all debt securities at fair value in unrestricted,

temporarily restricted, or permanently restricted net asset categories

• Unrealized and realized gains and losses are to be recognized in the Statement of Activities

• To improve effectiveness and flexibility, NNOs often pool investments of different funds into a single portfolio

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LO 11 Equity Investments.

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Accounting for Loan Funds

– Students and staff of colleges and universities,

– Employees of hospitals, and

– Beneficiaries of the interests of certain ONNOs

• Example: Loans to music students by symphony orchestra societies

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LO 12 Accounting for loan funds.

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Exercise 19-4: The following events relate to Grearson University Loan Fund:

1 $100,000 is received from an estate to establish a faculty and student loan fund Annual interest rates range from 8% for students to

10% for faculty.

2 Loans to students totaled $60,000, and $40,000 was disbursed to faculty members (of the total loans made, 10% are estimated to be

uncollectible).

3 Grearson wrote off a $1,000 student loan as uncollectible.

4 The following loans were repaid.

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Exercise 19-4: Prepare the journal entries necessary to record these transactions in the Loan Fund.

1 $100,000 is received from an estate to establish a faculty and student loan fund Annual interest rates range from 8% for

students to 10% for faculty.

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Cash 100,000

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Exercise 19-4: Prepare the journal entries necessary to record these transactions.

2 Loans to students totaled $60,000, and $40,000 was disbursed to faculty members (of the total loans made, 10% are

estimated to be uncollectible).

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