BAKER LEMBKE KING advanced financial accounting 8e chapter 019

Colleges and Universities• Private colleges and universities – The FASB specifies the accounting and financial reporting standards– The three financial statements required are: • The sta

Not-for-Profit

Entities

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Not-for-Profit Entities

• The accounting and financial reporting for

governmental, nonprofit entities is controlled

by the Governmental Accounting Standards Board (GASB)

• Accounting and financial reporting for

nongovernmental, nonprofit entities is

controlled by the Financial Accounting

Standards Board (FASB)

– Important to determine the role the

government has in the organization

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

Financial Reporting for Private,

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

Financial Reporting for Private,

Not-for-Profit Entities

– FASB 93 guides depreciation

– FASB 116 guides accounting for contributions – FASB 117 establishes financial display

requirements– FASB 124 establishes the accounting for

investments– FASB 136 guides the accounting for transfers

of assets to a not-for-profit organization that raises or holds contributions for others

Financial Reporting for Private,

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

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

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

Colleges and Universities

– The board may designate unrestricted current

fund resources for specific purposes– FASB 117 specifies that these funds may not

be reported as restricted net assets because only external, donor-imposed restrictions can result in restricted net assets

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

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

Colleges and Universities

Colleges and Universities

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

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

Health Care Providers

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

Health Care Providers

• Not-for-profit hospital - The balance sheet

– Presents the total assets, liabilities, and net

assets of the organization as a whole

– 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 is reported with

any accumulated depreciation

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, and (3) permanently restricted net assets

Health Care Providers

• Not-for-profit hospital - The statement of

– Only general fund transactions are reported

– Should report an operating performance

indicator

Health Care Providers

• Not-for-profit hospital – Major accounts in

the statement of operations

– Net patient service revenue

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, and permanently restricted

• Statement of cash flows

– Its format is similar to that for commercial

entities

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

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

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

Voluntary Health and Welfare

Organizations

• Voluntary health and welfare organizations

(VHWOs) provide a variety of social

services

– They solicit funds from the community at large

and typically provide their services for no fee– VHWOs are typically audited

– The federal government normally provides

them tax-exempt status

Voluntary Health and Welfare

Organizations

– Similar to other not-for-profit organizations

except for special financial statements that report on the important aspects of VHWOs– The accrual basis of accounting is required

– VHWOs have been free to use fund

accounting in their accounting and reporting processes

Voluntary Health and Welfare

Organizations

• Financial statements for a VHWO:

– 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”

Voluntary Health and Welfare

Organizations

• Statement of financial position for a VHWO

– Major balance sheet accounts are as follows:

• Pledges from donors

• Investments

• Land, buildings, and equipment

• Liabilities

• Net assets

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 FASB 117

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 VHWO 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

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 VHWOs prefer to classify such costs as

program rather than fund-raising

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

Voluntary Health and Welfare

Organizations

• Summary of Accounting and Financial

Reporting for VHWOs

– Reporting requirements are specified in FASB

116, FASB 117, 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

Voluntary Health and Welfare

Organizations

• Summary of Accounting and Financial

Reporting for VHWOs

– 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

Other Not-for-Profit Entities

• Examples of other not-for-profit

organizations (ONPOs):

Other Not-for-Profit Entities

– In addition to FASB 116 and FASB 117, 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

Other Not-for-Profit Entities

– With the adoption of FASB 116 and FASB 117,

the procedures used by ONPOs and VHWOs 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

Other Not-for-Profit Entities

– Purpose: Explain 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– FASB 117 requires: (1) a statement of

financial position, (2) a statement of activities,

Other Not-for-Profit Entities

• Summary of Accounting and Financial

Reporting

– Accounting is similar to that for VHWOs

– 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 FASB 116 and FASB 117, the

reporting requirements of ONPOs are substantially the same as VHWOs