Advanced accounting 10th by a beams athony ch21

Financial StatementsStatement of financial position Statement of activities • Replace with "Statement of operations" and "Statement of changes in net assets" for hospitals and health ca

Chapter 21:Accounting for

Not-for-Profit Organizations

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

to accompany

Advanced Accounting , 10th edition

by Floyd A Beams, Robin P Clement, Joseph H Anthony, and Suzanne Lowensohn

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.

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.

1: Categories of NFPs

Accounting for Not-for-Profit Organizations

– Lacks ownership interests

Accounting for not-for-profits

– Governmental: follow GASB

– Nongovernmental: follow FASB

Categories of NFPs

1 Voluntary health and welfare

2 Hospitals and health care

3 Colleges and universities

4 Other not-for-profits

• Churches, museums

• Other NFPs are similar to voluntary health and

welfare, without requiring a statement of functional expenses

2: Governmental and

Nongovernmental NFPs

Accounting for Not-for-Profit Organizations

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

3: Accounting Principles

Accounting for Not-for-Profit Organizations

Financial Statements

Statement of financial position

Statement of activities

• Replace with "Statement of operations" and

"Statement of changes in net assets" for hospitals and health care

Statement of cash flows

Statement of functional expenses

• Required only for voluntary health and welfare

organizations

Net Assets

Three categories

1 Permanently restricted net assets

• Asset use is limited

• Donor imposed stipulations that do not expire/

cannot be removed by entity

2 Temporarily restricted net assets

• Donor imposed restrictions that expire (time

restrictions)

• Can be removed by entity fulfilling stipulations

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

• 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)

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

Transfers (Non-contribution)

• Exchange transactions: Revenues

– Sales of products or services

– "Donations" with gift of same approximate value

– Contribution revenue (restricted or unrestricted)

• Create or enhance nonfinancial assets

• Specialized skills that would otherwise have been

purchased

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)

4: Voluntary Health and Welfare

Accounting for Not-for-Profit Organizations

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

Expenses - supporting services - fund raising 145  

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

restriction

Support – contributions (restricted or not) is revenue

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

or unrestricted)

Unrestricted support – contributions   7,600 Temporarily restricted support -

Collect a Time-Restricted Pledge

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

Receive Cash with Purpose

Restriction

• Receive cash for research

• Pay research costs – fulfills purpose restriction

– Two entries: record expenses, reclassify net

• 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

Unrestricted support - donated services   500

Unrestricted support - donated services   1,200

Receive Donated Services

Statement of Financial Position

Statement of Activities

Statement of Activities (cont.)

• Changes in unrestricted net assets: revenues, increases

Statement of Cash Flows

Statement of Functional Expenses

5: Hospitals and Other Health Care

Accounting for Not-for-Profit Organizations

Hospitals and Health Care

• Applies to nongovernmental, not-for-profit

hospitals and health care agencies

• Governmental: GASB

• Private, for-profit: FASB as for businesses

Revenues and Other Receipts

Unrestricted:

• 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 bequests

Temporarily or Permanently restricted:

• "T" or "P" restricted support, donated assets, investments,

gifts, bequests

Hospital Expenses

Classify by function

– Nursing services expense

– Other professional expense

– General services

– Fiscal services

– Administrative services

– Medical malpractice costs

– Provision for bad debts

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

• 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

Inventory of materials and supplies 130  

Unrestricted support - donated supplies   130

Unrestricted support - donated services   70

Receive Donated Assets/Services

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 Operations: Hospital

Statement of Changes in Net

Assets: Hospital

• Shows the net changes in unrestricted net assets

from the Statement of operations

6: Colleges and Universities

Accounting for Not-for-Profit Organizations

Colleges and Universities

• Applies to nongovernmental, not-for-profit colleges

and universities

• Governmental: GASB

• Private, for-profit: FASB as for businesses

Tuition and Scholarships

Tuition and fees: revenue at gross amount

• Tuition waivers: contra revenue

Reported 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"

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

Receive Appropriations

• Appropriations received from governments and

other sources are support revenue

– Unrestricted

• For general operations

• College board has ability to designate as

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.

Grant funds held for students   150 Grant funds held for students 150  

• Receive cash for permanent endowment, with

income restricted to student aid

• Receive income on endowment

Temporarily restricted net assets - reclassifications out 3  

Unrestricted net assets - reclassifications in   3

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

Revenues - auxiliary enterprises   61 Expenses - auxiliary enterprises 28  

Statement

of

Activities:

College

State of Activities: College (cont.)

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