486 : : > chapter 21 Problem 21-4, Continued : ‘ Office Buildings : au 650 7 ‘Accuimulated Depreciation ~ Oifice Building 30 go \ GiteeBqubmen ma 29 ethrmised Depreciaton Offs Equipment at 2 Faure md Pires mm. 19 ‘Accumulated Depreciation” FumitwreandFixtires “°° 322 ye io _ ingame nt a ar ‘Accumulated Depron -ITEsuipentand Software 328 2% Oger eT ONS ‘esoun Payable ows DuetoBIR | 42 ee 5D Doctegsts oe ia > DuetoPAG-IBIG . ~ 414 a Doce PoILHEALTE as Oter myles s js Govemment Equity “ ‘SOL Subsidy Income fom National Government 1 ‘Salaries and Wages~Regular nt ‘Personnel Economic Relief Allowances (PERA) Additional Compensation 2 m2 Life and Retirement Insurance Contributions mo PAG-IBIG Contributions PHILHEALTH Contributions “aK ‘Traveling expenses ~Local Office Supplies Expense Electricity Expenses Sata ‘Telephone Expenses~ Landline 72 3 a : = Nonprofit organizations include e; 755 ‘I ™ + Janitorial Services br a 02 ou 2 ed Ezy cultural institutions, ‘organizations, reli «donot Secutity Servi n ‘Repairs and Maintenance — Office Building “ Depreciation - Office Building : Depreciation ~ Office Equipment Depreciation Fumiture and Fixtures IT Equipment and Software wns Garegusessasss ‘Unused Notice of Cash Allocation atthe end ofthe yeat'amounts to P800.. ‘Required: 1,__. Prepare Statement of Incomie and Expenses. 2.’ Prepare Balance Sheet,488 Choprer 22 Finance by the citizenry. Most nonprofit organizations depend on the voluntary contributions ofthe citizenry to support their operations, because revenues derived from their services are not enough to cover their operating expenses. Exceptions are philanthropic foundations established by wealthy individuals or families. 4, Stewardship of resources. Since substantial portion ofthe resources of nonprofit organizations is donated, the organization must account for the resources or a stewardship basis like the governmental entities, Fund accounting is appropriate for this requirement. Among the features of nonprofit organizations that are similar to those of business enterprises are the following: 1. Governance of board of directors. As with business corporations, nonprofit corporations (non-stock) are governed by elected or appointed directors. 2. Use of accrual basis of accounting. Nonprofit organizations adopt the seme accrual basis of accounting used by business enterprises. Thus, revenues and ‘expenses are recorded as eamed and incmred. —* Accounting Standards for Nonrpofit Organizations Upto the writing of this book, the Philippine Institute of Certified Public Accountant (PICPA) has not yet issued a Philippine Accounting Standards (PAS) applicable to nonprofit organizations. The accounting standards to be discussed in this chapter are adopted from the guidelines issued by American Institute of Certified Public Accountant (AICPA) applicable to all nonprofit organizations. Fund Accounting by Nonprofit Organizations Generally like governmental entities, the accounting unit for nonprofit organizations is the fund, as defined in governmental accounting (Chapter 21). Separate funds are necessary to separate assets to be used as authorized by the board of directors and assets that are restricted by donors. Funds usually used by some of the nonprofit organizations to be discussed in this chapter include the following: Unrestricted fund (sometimes called unrestricted current fund or general fund) Restricted fimd (sometimes called restricted current fund) Nonprofit Organitations 4 Unrestricted Fund This fund includes all the assets of'a nonprofit organization that are available for use authorized by the board of directors end not restricted for specific purposes. Revenues and Gains from Unrestricted Fund Revenues and gains of unrestricted fund are derived from a number of sources, Fi example, a hospitad detives unrestricted fund revenues from patient services, unrestricte donations, and unrestricted income from endowment funds College ard university sources of unrestricted fund revenues include student tuition fees; government grant donations and private grants, and unrestricted income from endowment fund. Revenw of unrestricted fund may also include membership dues, interest, dividends, and gaia from investments in debt and equity securities. Revenues from Services. A nonprofit organization’s total revenues are reported the period in which services are rendered, even though part orall of he revenue is tot ‘waived orreduced. To illustrate, assume that the following nonprofit organizations servi records for May 2011 include the following data: Hospital: Gross patient service (before charity care or contractual adjustments) 200,000 Charity care for poor and indigent persons patients 10,000 Contractual adjustment allowed to Medicare patients 30,000 Provision for doubtful aecounts 20,000 ‘The following journal entries are recorded in the unrestricted fiund of the hospital: Accounts Receivable 190,000 . Service Revenue ~ Patients 190,000 To record gross patient revenue exclusive of charity care. Contractual Adjustments 30,000 Accounts Receivable 30,000 Ta record contractual adjustments allowed to Medicare. Doubtfel Accounts 20,000 Allowance for Doubtful Accounts 20,000 {a record provision Jor dowbyful account. Colleges and Universities: Gross tation Fees P5000 ‘Tuition wavers provided under fellowship program 50,000 Provision for doubiful accounts (5%) 25,000490 : Chaptr 22 ‘The following journal entries are appropriate for the college's general fund fe ofMay, 2008: eee Accounts Rectvale 500,000 SensceRevente—Tion Fess 00. ‘To record educational and general tuition fees. i Expentinres for Staton did 0,000 eco reciable so. To record tuition waivers. . Doubyful Accounts 25,000 Allowance for Doubiful Accounts 25,000 To record provision for doubtful Account. ‘The contractual adjustments recorded illustrate the unique feature of nonprofit hospitals, Usually, for hospitals, accounts receivable are collectible from a third-party payor, rather than from the patient. Among the third-party payors are the Philippine Health, Medicare, end private medical insurance companies, For colleges and universities, the comparable tuition adjustment is debited to Expenditures - Student Aid account. Inthe statement of activities, the balances of the Contractual Adjustments account (for hospital) and the Expenditures - Student Aid account (for colleges and universities) are to be deducted from the total service revenues to compute the net service revenue forthe month, The balance of Allowance for Doubtful Accounts account is treated in the usual manner, that is, as a deduction from the accounts receivable in the balance sheet. Write offs of accounts receivable if any, are also recorded in the customary manne. Contributed Materials, Services and Facilities. Aside from cash contributions, nonprofit organizations often receive contributions of materials, services, and facilities. For example, a hospital may receive free drugs, ora university may receive supplies. ‘The contyibuted material is ecorded in the Inventories account at its current fair value, witha corresponding credit to a revenue account in an unrestricted fund, as shown in the following proforma entry: Inventories ax Contributions Revenue ox To record contributed materials at current fair value, Contributed services and facilities are debited to an unrestricted fund as Salary Expense forcontributed services and Rent Expense for contributed facilities, with a corresponding credit to Contributions Revenue account, Nonprofit Organisations 491 Other Operating Revenues. These represent income derived from other relatec activities other than service revenues of nonprofit organizations, examples are proceeds from gift shops, cafeterias, snack bars, newsstands, and parking lots, are all recordec as other operating revenues, These are recorded to unrestricted fund by the following catty Cash (or accounts receivable) x Other Operating Revenue me To record other operating revenue Pledges. A pledge (promise to give) is a commitment by a prospective donor te ‘contribute a specific amount of cash or property toa nonprofit organization ona future date or in installments. Under the acorval basis of accounting, unconditional pledge: are recorded as receivables and revenues in the unrestricted fund, with appropriat provision for doubtful pledges. Pledges due in future accounting periods or having restrictions as to their use are accounted for ina restricted fund. ‘Toillustrate the accounting for pledges, assume that a nonprofit organization, receiver unconditional pledges totaling P500,000 in a fund-raising drive. 10% of the pledge are considered to be doubtful of collection. The required journal entries are shows below: Pledge Receivable 500,000 ‘Contributions Revenue 500,000 To record receivable from pledges. Doubifil Pledges Expenses 50,000 Allowance for Doubtful Pledges 50,000 To record 10% provision for doubifl pledges. Contributions revenue and other operating revennes are presented in the statement c activites, as well as doubtful accounts. Accounts receivables are presented in the balanc sheetnet ofthe allowance for doubtful accounts. Expenses of Unrestricted Fund Anon-profit organization usually recognizes all expense in its unrestricted fund. Expense are classified as program services and supporting services and are reported on functional basis under their classifications. Program services are the organization activities that result in the distribution of goods and services to fulfill the purposes of th organization. Supporting services are all activities of the organization other than prograx services, such as administrative expenses and fund-raising costs. These expenses at recorded by a debit to expense account classified according to functionand a credit cash or accounts payable account.Rist Chaper 22 Seen Depreciation Expense. Depreciation is required on all the property and equipments ‘of nonprofit organizations, except for individual works of art or historical treasures having extraordinary long economic lives. Assets and Lial ies of Unrestricted Fund ‘Mostof the assei> and liabilities of nonprofit organization's unrestricted fund ave similar to the current assets and liabilities ofa business enterprise. Cash, investments, accounts receivable, inventories, an¢ prepaid expenses are typical assets of an unrestricted fund, ‘Nonprofit organizations that use fuzsl accounting generally account for fixed assets in a property and equipment fund. ‘The liabilities of an unrestricted find include payables, accrued expenses, and deferred revenues similar to those ofa business enterprise. Restricted Fund Nonprofit organizations establish restricted fund to account for assets received from donors. These assets are available for current use but expendable only as authorized by the donor of the assets. ‘The assets of restricted funds are not derived from the operations of the nonrofit organization. Instead, the assets are obtained fom (1) restricted gifts or grants from’ individuals or governmental entities, (2) revenues from restricted fund investments, (3) realized and unrealized gains or investments of the restricted funds, and (4) restricted income from endowment funds. Restricted funds are classified into temporarily restricted and permanently restricted. Temporarily restricted fins are (1) specific-purpose funds, (2) time restricted funds, and (3) plant replacement and expansion funds. Permanently restricted funds are assets that arc to be held for an indefinite period of time and generally are included in an endowment fund. Toillustrate, assume that nonprofit organization received the following donations on June 1,2011: Cash, restricted for the acquisition of equipment for special project P 50.000 Securities, at market value for permanently endowment of a special project (any income earned on the securities is restricted to use for the special project) 100000 On July 1,201, thenonprofit organization paid P20,000 for the equipmentand received dividend income from the securities amounting to P4,500. These transactions and 2vents are recorded by the nonprofit organization as shown on the next page: Nonprofit Organtzations Restricted Fund: 2on1 June 1 Cash Contribution Revenue ~ Temporarily resiricted 50,000 To record donation received for the acquisition of equipment. Securities Contribution Revenue ~ Permanently restricted ‘To record receipt of securities permanently restricted. July 1 Net Assets Released from Restrictions Cash ‘To record fiands released from temporary restriction. Cash Investment Income To record dividend income restricted for special project. Unrestricted Fund: July 1 Property and equipment Cash To record purchase of equipment. Cash Net Assets Released from restrictions To recond transfer of temporarily vestricted fand. Other Funds of Nonprofit Organizations Endowment Fund 100,000 20,000 4,500 20,000 20,000 if “A permanent endowment funds one in which the principal mustbemaintained in in revenue-producing investments, Only the revenues from a permanent ent fund’s investment may be expended by the nonprofit organization. On the ot the principal of the endowment fund may be expended after the passage oft occurrence ofan event specified by the donor of the endowment principal. ‘The revenues derived from the endowment funds are accounted for in accord. the instructions of the donor or the board of directors. Ifthere are no restrictic use of the endowment fund income, itis transferred to the unrestricted fund. C the revenues are transferred to an appropriated restricted fund.Chapter 22 Agency Fund ‘Abency find is used to account forassets held by anonprofit organization as acustodian, ‘The assets are disbursed only as instructed by their owner. For example, a nonprofit college or university may acts custodian of cash for students, faculty members and for , their organizations. The nonprofit organization disburses the cash as directed by the officers of the student or faculty organization. The unexpended cash is reported asa liability of the university’s agency fund, rather than as a fund balance, because the university has no equity in the fund. Transactions of agency fund only affect asset and liability accounts and do notresultin revenues and expenditures. Plant Fund “The components ofthe plant finds vary among nonprofit organizations. Normally, plant fund is composed of (1) unexpended funds to be used in the acquisition of physical properties, (2) renewal and replacement funds, (3) retirement of indebtedness funds, and (4) funds previously expended to acquire properties. In addition to plant assets, plant finds may inolude cash and investments earmarked for additions to plant assets and mortgage notes payable and other liabilities collateralized by the plant assets. Revenues and Gains from Pooled Investments Many of the funds of nonprofit organizations have cash available for investments in securities and other money market instruments. To provide efficient management ofthe investment programs, the investments of a nonprofit organization may be pooled toa single portfolio manager, The pooling technique will facilitate proper allocation of investment revenues and realized and unrealized gains and losses to each participating fund. ‘To illustrate the pooling of investments, assume that on January 2, 2011, two funds of PPG Foundation, Ine.,a nonprofit organization, pooled their investments (to be managed by the Unrestricted Fund), as follows: Current Original Cost Fair Value __Equity% Unrestricted Fund P 60,000 54,000 5 Restricted Fund 40,000 Totals Nonprofit Organizations 49 “The original equity percentages in the tabulation are based on current fair value 0 ‘various dates the investments were acquired by the respective funds, not on cost. Realize ‘znd unrealized gains (losses) and inferestand dividendrevenue of the pooled investment during 2011 are to allocated to the two funds in the ratio of the original equit percentages. For example, ifP10,000 net realized gains ofthe investment pool durin 5011 were reinvested, net unrealized gains amounted to P5,000 and interest an dividend income of P7,000 was distributed during 2011, these amounts areallocate as shown below: Original ‘Net Realized Interest and ‘and Unrealized Dividends Income Unrestricted Fund 3,150 Restricted Fund 3.350 Totals 7,000 Oo Fach of the funds participating in the investment pool debits Investments and cred Gains on Investments or Investment Income for its share of the P15,000 net gains. If the interest and dividends income is available for unreStricted use by PPG Foundatic The, the entire P7,000 interest and dividends incom is vecognized as revenue byt Unrestricted Fund. fanother fund of PPG Foundation, Inc., entered the investment pool on December: 2011, the original equity percentages would be revised, based on the December 2011, current fair values of the investment portfolio. Gains (or losses) and interesta dividends income for accounting periods subsequent to December 31, 2011 are alloca {in the revised equity percentages. Therevised equity percentages arc maintained ut the membership of the investment pool changes again. Financial Statements of Nonprofit Organizations Financial statements of nonprofit organizations vary in forms and contents. For unforn ‘n financial reporting, the Financial Accounting Standards Board of the AICPA isst ASB Statement No. 117, “Financial Statements of Not-for-Profit Organizatior ‘Among its provisions were the following: 1. Financial statements of nonprofit organizations shall bea statement of finan position, a statement of activities, a statement of cash flows, and notes to financial statement.496 Chapter 22 49 2, ‘Thestatément of financial position shall report the following: a. Amounts ofthe organization’s total assets, total liabilities, and total netassets, }. Amounts for each of the three classes of the organization’s net assets: permanently restricted, temporacily restricted, and unrestricted. 3. Thestatement of activities shall report the following: a. Amount of the change in the organization’s netassets for the period with caption such as changes in net assets or change in equity. b. Amount of the changes in each of the three classes of the organization’s ne: assets: permanently restricted, temporarily restricted, and unrestricted. cc. ° Gross amounts of revenues and expenses of the organization, except that investment revenues may be reported net of expenses aid gains or losses on disposal of plant assets. 4d. Expenses by fictional classifications such as program services and supporting services. 4, The tatement of cash flows shall be similar in format-direct method or indirect, method-to one that is used by business enterprises. : ‘The financial statements presented below, illustrate a format that complies with th> above standards: Nonprotit Urganzzaton Statementof Activities For Year Ended December 31,2011 (amounts in thousands) E Changes in unrestricted net assets: Revenues and gains ’ : Contributions “ P4500 Fees 3000 Investment income 3.00 Netrealized and unrealized gains on investments 4000 Others iea00 Total unrestricted revenues, and gains 15,500 Net assets released from restrictions 6.000 ‘Total unrestricted revenues, gains, and other support 21,500 “Exponses: cao Programs 14,000 Operating 1500 Fund raising. 1000 ‘Total expenses 16,500 Increase in unrestricted net assets : 5,000 Nonprofit. Organizations Changes in temporarily restricted net assets: Contributions 45 Investment income 156 Net realized and unrealized gains on investments 156 ‘Net assets released from restrictions ug Increase in temporarily restricted net assets 15C Changes in permanently restricted net assets: Contributions Investment income Net realized and unrealized gains on investments Increase in permanently restricted net assets Increase in net assets Net assets, beginning of year Net assets, end of year ‘The following should be noted in the above Statement of Activities: 1. Contributions, investment income, and gains or losses are common to cha all three categories of net assets (unrestricted, temporarily restricte permanently restricted). 2. Feesand other operating revenues and expenses are associated with cha unrestricted net assets only. Nonprofit Organization Statement of Financial Position December 31, 2011 emounts in thousands) Assets Cash and cash equivalents Po Short-term investments in securities, at market value 1 ‘Accounts and interest receivable (net) 4h Pledges receivable (act) ts Inventories 2 Prepaid expenses 1 Long-term investment in securities, at market value 1100 Cash and investment in securities, restricted to acquisition of equipments 26. Property and equipment (net) 30 Total assets PITA498 Chapter 22 and net assets Total liabilities a Net assets: 5a femporarily restricted i ‘otal liabilities and net assets SSS SSE ce sess vee deere ‘The features ofthe Statement of Financial Position may be noted as follows: 1. Restricted cash and investments are presented: a ly. 2. — Allsecurity investments: short t x t crm, and est it freee eis! term, long-term, and restricted are valued at their Rouolt Ogee ——_. ‘Nonprofit Organization ‘Statement of Cash Flows (Indirect met ForearEndedDecsnbersh 20 (amounts in thousands) Cash los fom operating actives ‘Ajustments to reconcile increase in net assets t ae Net cash provided by operating activities: Depiesaion 300 Increase in accounts and interest receivable * Tnerease in pledges receivable £300 Decrease in inventories ‘@ Decrease in prepa expenses % Decrease in accounts payable ‘Net realized and unrealized gains on. eee investments in securities ( 8,500) ‘Net cash provided by operating activi of Cash i flows. from investing activities: dics cquisitions of investment in securities Astuisiton of propery and aauirent Sano Disposal of property and equipment 6300 Cash po ee gish 2sed in investing activities 7 9,206 ‘ash flows from financing activities: eae Contritutions received P Posment of lng tes debt 250) ‘Net eash used in financing activities Net decrease in cash and cash equivalents Cash and cash equivalents, beginning of year Cash and cash equivalents, end of year Nonarafit Organizations Nonoroft Organizations Inthe statement of cash flows (indirect method), the P8,500 ofnetrealized and unt gains on investments is the total of te following in the statement of activities: ‘Net realized and unrealized gains on investments from: Unrestricted net assets P40 ‘Temporarily restricted net assets 15 Permanently restricted net assets 30 P35 Total a For nonprofit organizations that uses fund accounting, unrestricted net assets ust those in the unrestricted (or general) fund. Temporarily restricted net assets gt are those in restricted funds, loan funds, and plant funds. The source of perm restricted net assets is permanent endowment funds. Summary 1. Therequired financial statements for nonprofit organizations include: stat financial position, statement of cash flows, and statement of activity. 2, The statements rust distinguish betwcon assets, liabilities, revenues, and ¢ that are unrestricted, temporarily restricted and permanently restricte restrictions are donor-imposed. Temporarily restricted assets are expec released from restriction due to the passage of time or the performance act by the nonprofit organization. Permanently restricted net assets are ¢ tobe restricted foras longas the organization exists. 3, Expensesshou!d be reported by their functional classification such as maje of program activities, and supporting activities. Program activities are g) services provided to beneficiaries or customers that fulfill the purpo organization. Supporting services are general and administration exper fund-raising costs,