Chapter 21:Accounting for Notfor-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

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Not-for-Profits : Objectives
1. Learn about the four main categories of not-forprofit 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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Accounting for Not-for-Profit Organizations

1: Categories of NFPs

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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. 2. 3. 4. Voluntary health and welfare Hospitals and health care Colleges and universities 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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Accounting for Not-for-Profit Organizations

2: Governmental and Nongovernmental NFPs

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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: Notfor-Profit Organizations
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Accounting for Not-for-Profit Organizations

3: Accounting Principles

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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
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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 (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 services These are the activities the NFP provides Examples: Research expense, Educational expense, Food bank expense, Recreational expense Supporting services Management and general expenses Fund-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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Accounting for Not-for-Profit Organizations

4: Voluntary Health and Welfare

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Fund Raising
Expenses - supporting services - fund raising Cash Cash Unrestricted gains special event Unrestricted gains special event Cash 145 145 1,950 1,950 250

250

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
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Cash Donations and Pledges

Cash Contributions receivable Allowance for uncollectibles Unrestricted support contributions Temporarily restricted support contributions 4,000 6,000 600 7,600

1,800

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)
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Collect a Time-Restricted Pledge

Cash 1,800 Contributions receivable 1,800 Temporarily restricted net asset - reclassification out 1,800

Unrestricted net assets - reclassification in

1,800

Two entries Cash collection Reclassification for expiration of time restriction Reclassification accounts are temporary accounts closed to their respective net asset accounts
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Receive Equipment and Use It

Equipment Temporarily restricted net assets contributions Depreciation expense - program services community service Accumulated depreciation equipment Temporarily restricted net asset reclassification out Unrestricted net assets - reclassification in 1,500 1,500 500

500
500 500

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
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Receive Cash with Purpose Restriction

Cash Temporarily restricted support contributions Expenses - program services research Cash Temporarily restricted net asset reclassification out Unrestricted net assets - reclassification in 1,000 1,000 900 900 900 900

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
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Receive Donated Services

Expenses - support services - management and general Unrestricted support - donated services Construction in process

500
500 1,200

Unrestricted support - donated services

1,200

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
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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 Expenses

Expenses as reported on the Statement of Activities

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Accounting for Not-for-Profit Organizations

5: Hospitals and Other Health Care

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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 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
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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
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 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
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Cash Contributions
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 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
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Receive Donated Assets/Services

Inventory of materials and supplies 130 Unrestricted support - donated supplies 130 Nursing services expenses 70 Unrestricted support - donated services 70 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.
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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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Accounting for Not-for-Profit Organizations

6: Colleges and Universities

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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 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"
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College Expenses
Expenses are only in the unrestricted net assets Classify 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
Accounts receivable Unrestricted revenues - tuition and fees Tuition reduction: unrestricted - student aid Accounts receivable Expenses - educational and general institutional support Allowance for uncollectibles 1,000 1,000 50 50

30
30

Tuition is recorded at gross amount Tuition waivers are contra-revenues Bad debts are recorded as for businesses Grouped with institutional support expenses
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Receive Appropriations
Cash Unrestricted support - state appropriation 700 700

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
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Funds Held for Students

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

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.
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Endowments
Cash Permanently restricted support - endowment contribution Cash Temporarily restricted support - endowment income Expenses - unrestricted - student aid Cash Temporarily restricted net assets - reclassifications out Unrestricted net assets - reclassifications in 50 50 4 4 3 3

3
3

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
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Auxiliary Services
Cash Revenues - auxiliary enterprises Expenses - auxiliary enterprises Cash 61 61 28 28

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
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Statement of Activities: College

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State. of Activities: College (cont.)

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