PART VII

NON-PROFIT ORGANIZATION

IAS 20 — Accounting for Government Grants and Disclosure of

Government Assistance

Overview
IAS 20 Accounting for Government Grants and Disclosure of Government Assistance outlines how to account for government grants and other assistance. Government grants are recognised in profit or loss on a systematic basis over the periods in which the entity recognises expenses for the related costs for which the grants are intended to compensate, which in the case of grants related to assets requires setting up the grant as deferred income or deducting it from the carrying amount of the asset.
IAS 20 Accounting for Government Grants and Disclosure of Government Assistance outlines how to account for government grants and other assistance. Government grants are recognised in profit or loss on a systematic basis over the periods in which the entity recognises expenses for the related costs for which the grants are intended to compensate, which in the case of grants related to assets requires setting up the grant as deferred income or deducting it from the carrying amount of the asset.

IAS 20 Accounting for Government Grants and Disclosure of Government Assistance outlines how to account for
government grants and other assistance. Government grants are recognised in profit or loss on a systematic
basis over the periods in which the entity recognises expenses for the related costs for which the grants are
intended to compensate, which in the case of grants related to assets requires setting up the grant as deferred
income or deducting it from the carrying amount of the asset.

Summary of IAS 20

Objective of IAS 20

The objective of IAS 20 is to prescribe the accounting for, and disclosure of, government grants and other forms
of government assistance.

Scope

IAS 20 applies to all government grants and other forms of government assistance. [IAS 20.1] However, it does
not cover government assistance that is provided in the form of benefits in determining taxable income. It does
not cover government grants covered by IAS 41 Agriculture, either. [IAS 20.2] The benefit of a government loan
at a below-market rate of interest is treated as a government grant. [IAS 20.10A]

Accounting for grants

A government grant is recognised only when there is reasonable assurance that (a) the entity will comply with
any conditions attached to the grant and (b) the grant will be received. [IAS 20.7]

The grant is recognised as income over the period necessary to match them with the related costs, for which
they are intended to compensate, on a systematic basis. [IAS 20.12]

Non-monetary grants, such as land or other resources, are usually accounted for at fair value, although
recording both the asset and the grant at a nominal amount is also permitted. [IAS 20.23]

Even if there are no conditions attached to the assistance specifically relating to the operating activities of the
entity (other than the requirement to operate in certain regions or industry sectors), such grants should not be
credited to equity. [SIC-10]

A grant receivable as compensation for costs already incurred or for immediate financial support, with no future
related costs, should be recognised as income in the period in which it is receivable. [IAS 20.20]

A grant relating to assets may be presented in one of two ways: [IAS 20.24]

 as deferred income, or
 by deducting the grant from the asset's carrying amount.
A grant relating to income may be reported separately as 'other income' or deducted from the related expense.
[IAS 20.29]

If a grant becomes repayable, it should be treated as a change in estimate. Where the original grant related to
income, the repayment should be applied first against any related un-amortized deferred credit, and any excess
should be dealt with as an expense. Where the original grant related to an asset, the repayment should be
treated as increasing the carrying amount of the asset or reducing the deferred income balance. The cumulative
depreciation which would have been charged had the grant not been received should be charged as an expense.
[IAS 20.32]

Disclosure of government grants

The following must be disclosed: [IAS 20.39]

 accounting policy adopted for grants, including method of balance sheet presentation
 nature and extent of grants recognised in the financial statements
 unfulfilled conditions and contingencies attaching to recognised grants

Government assistance

Government grants do not include government assistance whose value cannot be reasonably measured, such as
technical or marketing advice. [IAS 20.34] Disclosure of the benefits is required. [IAS 20.39(b)]

Accounting for Non-Profit Organizations

A number of privately organized not-for-profit organizations that possess many of the characteristics of
the governmental unit are found in our society. These organizations include professional organizations, schools,
colleges, and universities, hospitals, churches, charities and social service groups. Services of these units may be
offered only to closed membership groups or they may be offered to the general public. Most hospitals, trade
associations and membership organizations provide a statement of financial position and a statement of
revenues and expenses (activities) that report their financial position and results of operations for the entity as a
whole. Educational institutions, religious organizations and certain other not-for-profit organizations often
provide information on financial position, changes in financial position, and results of operations by fund groups
and not for the entity as a whole and funds flow statement.

Privately organized service organizations differ widely as to size, nature, and diversity of operations.
They may differ in the means they employ to finance their activities. Contributions are generally an important
part of the financing program, but the nature of the contributions and the use of such resources also differ.

Service organizations require books and records to summarize receipts and disbursements as well as
assets, liabilities and equities or net assets. Systems for achieving accounting and administrative control are
required. Budgets that provide for direction and control of proposed activities and financial statements that
summarize past activities are indispensable parts of an accounting program. Instead of emphasis upon
operating at a profit, emphasis centers on exactly how such resources are to be spent or utilized and in meeting
the service objectives for the units being organized.
Fund Accounting has been used to organize and manage resources for various purposes in accordance with
regulations, restrictions or limitations imposed by parties outside the institution, or with discretions issued by
the governing board. A clear distinction of funds that are extremely restricted and those that are internally
designated by action of the governing board has been maintained in the accounts and disclosed on the financial
reports. Fund is defined as a fiscal and accounting entity with a self-balancing set of accounts recording cash
and other financial resources with all related liabilities and residual equities, or balances, and changes therein
which are segregated for the purpose of carrying on specific activities or attaining certain objectives in
accordance with special regulations, restrictions or limitations.

The following are various commonly used funds:

- Unrestricted fund (sometimes called unrestricted current fund, general fund, or current unrestricted fund).
- Restricted fund (sometimes called restricted current fund or current restricted fund)
- Endowment fund (pure or term endowment)
- Agency fund (sometimes called custodian fund)
- Annuity fund and life income fund (sometimes called living trust fund)
- Loan fund
- Plant fund (sometimes called land, building, and equipment fund)

Accrual Basis of Accounting

All not-for-profit organizations accounting for revenues and expenses are using the accrual basis of
accounting. It also requires the issued GAAP basis financial statements recognize depreciation expense on long-
lived assets. Depreciation should be recorded if the assets are gifts or it arises because of donations. Works of
art and historical treasures that meet the definition of “collections” need not be capitalized or depreciated.

Financial Statements
Financial statements prepared in accordance with the present GAAP represent a shift away from the
fund reporting to an emphasis on the organization as a whole. The equity account fund balance, has been
replaced with the term net assets. Under the present GAAP, it requires classifications of the organization’s net
assets based on the existence or absence of donor-imposed restrictions.

The financial statements display three classes of net assets: unrestricted, temporarily restricted, and
permanently restricted. Any changes of these three classes of net assets must be reported.

The financial statements are:

1. Statement of Financial Position (Balance Sheet) which will report organizations-wide total for
assets, liabilities and net assets, and assets identified as unrestricted, temporarily restricted and
permanently restricted.
2. Statement of Activities which reports revenues, expenses, gains, losses and reclassifications or
changes in the organization’s net assets or change in equity: permanently restricted, temporarily
restricted, and unrestricted. Minimum requirements are organization-wide totals, changes in net
assets for each class of assets, and all expenses recognized only in the unrestricted classification. A
display of a measure or operations in the statement of activities is permitted.
3. Statement of Cash Flows with categories (operating, financing and investing) similar to regular
business enterprises.
4. Notes to Financial Statements, they are accompanying notes to the above statements necessary for
disclosure purposes.
Classification of Net Assets

The Financial Statements reporting requirements are based on a division of net assets into three
classifications. These classes of net assets are totally dependent on the existence or absence of donor-imposed
restrictions. The three classes of net assets are:
1. Permanently restricted net assets are the portion of net assets whose use is limited by donor-
imposed stipulations that do not expire and cannot be removed by action of the not-for-profit
entity.
2. Temporarily restricted net assets are the portion of net assets whose use is limited by donor-
imposed stipulations that either expire (time restriction) or can be removed by the organization
fulfilling the stipulations (purpose restrictions).
3. Unrestricted net assets are the portion of net assets that carry no donor-imposed stipulations.

The organization’s net assets, revenues, expenses, gains and losses are classified according to the three
classes of net assets. This division of net assets into permanently restricted, temporarily restricted, and
unrestricted classifications is the focal point in presenting financial statement for not-for-profit entities.
Revenues, gains, and losses can be reported in each net asset class, but expenses are reported only in
unrestricted net assets class.

Accounting for Hospitals

Hospitals depend its large part on donations and grants, which often come with restrictions, Fund
accounting is required for hospitals in order to maintain accountability over restricted resources. Hospitals will
use normal accrual accounting methods, including the classification of costs as expenses rather than
expenditures, and will not record budgetary accounts or encumbrances on the books.

Types of Funds – Hospitals

There are two types of funds used by a hospital:
1. General (Unrestricted ) Fund – account for all resources of the hospital which are not subject to
outside restrictions. They are used for day-to-day operations. Note that board-designated funds
are unrestricted. Designation is an internal process which can be altered at the discretion of the
Board of Trustees of the hospital. Restrictions are externally imposed and not subject to alteration
by the board. Items in this category includes:
a. Assets whose use is limited include assets set aside by the governing board for identified
purpose.
b. Agency funds are included in General Funds as both an asset and a liability. They are used to
account for fees collected as an agent of physicians who have private-practice patients coming
to hospital offices provided to the staff physicians.
c. Property and equipment used for general operations and the related liabilities.
Property plant and equipment whose use is restricted are reported in the donor-restricted
fund.

2. Donor-Restricted Funds – accounts for temporarily restricted and permanently restricted

resources. This class is subdivided into:
a. Temporary Restricted Fund may be a specific purpose fund, a term endowment fund, a plant
replacement and expansion fund.
a.1 Specific Purpose Fund is a restricted fund by health care providers to account for principal
and income in accordance with donor’s specified restrictions.
 a.2 Endowment Fund is used by hospital to account for a trust where the principal must be kept
intact and the income be expanded for either operations or a specific purpose in
accordance with grantor’s wishes. An endowment may be in perpetuity, it may fixed or
until a specific event occurs.
a.3 Permanently Restricted fund is also an endowment but differs from a term-endowment
fund is that the principle must be maintained intact in perpetuity and only the income may
be used in accordance with the donor’s wishes.

b. Permanently Restricted Fund is also an endowment fund but differs from a term-endowment
fund is that the principle must be maintained intact in perpetuity and only the income may be
used in accordance with the donor’s wishes.

Accounting for Revenues and Expenses

Revenues and Gains

1. Patient service Revenue include room and board, nursing services, and other professional services.
Patient service revenues typically are recorded at established (gross) rates as the services are
provided but are reported net of amounts that are considered deductions from revenues. The
objective is to report the amount that the hospital is entitled to collect as patient service revenues.

Charity care services provided free of charge to patients who qualify under a hospital’s charity care
policy – are excluded from both gross and net patient service revenues..

Charity care services should be disclosed in the financial statements in the notes and is measured
based on the provider’s rates, cost units of service or other statistical measure.

Allowance accounts are used to reduce receivables for estimated deductions from revenues, as well
as estimated doubtful accounts. Deductions from revenues include:
a. Courtesy allowances – discounts to doctors and employees
b. Contractual adjustments – discounts arranged with third-party payors (ex. PhilHealth) that
frequently have agreements to reimburse at less-than-established rates.
2. Premium fees also known as subscriber fees, are revenues from agreements which a hospital
provide any necessary patient services for a fee.

They are reported separately from patient service revenues.

3. Other operating revenues includes revenues from services to patients other than for health care
and revenues from sales and services provided to nonpatients. Ex. Proceeds from cafeterias, gift
shops, snacks bar, donated medicine, linen and office supplies.

Non-operating Revenues records revenue not related directly to an entity’s principal operations.
Both Other Operating Revenue and Non-operating Revenue can be lump as one account and be
called, as Other Revenue and Gains.

Accounting for Colleges and Universities

Six fund groups used by a college or universities:
1. Current Funds – used in carrying out the primary objectives: instruction, research, extension,
and public service. Unrestrricted current funds are not subject to outside restraints on
usage, and restricted current funds have been restricted by donors or grantors to specific
purpose.
 As in the case of hospitals, resources designated by the Board of Trustees are still
considered unrestricted, since they lack externally-imposed restrictions.

2. Loan Funds – are established for resources that are to be loaned to students, faculty or
staff. The loan fund is not for loans, notes, or bonds payable to others.It is designed to hold
assets, not liabilities. Restricted amounts represents resources which outside parties
provided to the university on condition it will be used for loans. Unrestricted fund balances
represent resources which were placed in the loan fund at the election of the university
itself.

3. Endowment and Similar Funds – are resources which outside parties contributed to the
university on condition they not be spent, but invested to yield earnings which may be
spent.. It may be spent after a specific period of time has passed or a certain event has
occurred.
Quasi-endowment funds are not actually restricted, but have been designated by the
board of the university to be retained and invested. Occasionally, a donor will establish an
endowment fund, but place the funds with an independent trustee, who will remit earnings
to the university on a regular basis. Since the fund principal is not under the control of the
university, it will not account for it, but simply note the arrangement by memorandum
and in the notes to the financial statements.

4. Annuity Funds and Life Income funds. Annuity funds are resources given to the university
on the condition that regular payments be made to a specific person for a certain period of

5. time, after which all principal is available to the institution. Life income funds require
distribution of all earnings to a specified person, upon whose death the balances becomes
expendable by the university

6. Plant Funds. All of the assets and liabilities associated with fixed assets of a university are
accounted for in the plant fund. The plant fund balances include the following:

(1) unexpended plant funds contain liquid assets which are to be used to acquire new
plant assets in the future.
(2) funds for renewals and replacements contain liquid assets which are to be used to
replace existing plant assets as needed,
(3) funds for retirement of indebtedness contain resources to be used to make principal
and interest payments on debts incurred to acquire plant assets, and
(4) investment in plant consists of the fixed assets themselves and any long-term debt
issued in connection with acquisitions of these assets.

7. Agency Funds

Resources received by the institution which belong to others, such as student body fees,
are held in agency funds, with a liability equal to the assets collected.

Revenues include tuition and fees; government appropriations; government grants and
contracts; private gifts, grants and contracts.
 Expenditures include educational and general expenditures, auxiliary enterprise,
hospitals and independent operations.

Accounting for Voluntary Health and Welfare Organization and Other Not-for-Profit Organizations
The Funds used by the VHWO include:
1. Current Fund – Unrestricted. This fund is used for operations that require only the
discretion of the organization’s board of directors, and include assets designated by the
board for specific purposes.

Revenues recorded using the full accrual basis. A distinction should be made between
Public Support and Revenues.

Public Support is the inflow of resources from voluntary donors who receive no direct,
personal benefit from the organization’s usual programs in exchange for their contributions.

They include the following:

1. Contributions
2. Special Event Support
3. Legacies and Bequests
4. Proceeds from fund raisers

Revenues are inflows of resources resulting from a charge for services from financial activities or
from other exchange transactions.
1. Membership Dues
2. Program Service Fees
3. Sales of Publications and Supplies for proceeds from the sales of these items.
4. Investment Income, e.g. interest dividends, and other earnings.

Expenses are classified as Program Services and Supporting Services

Program Services relate to the expenses incurred in providing the organization’s social service activities.
Supporting services consist of administrative expenses and fund raising costs.

In reporting expenses in the statement of activities, the functional classifications might appear as
follows:
Expenses
Program Services – it focus on social services
Research
Public Education
Professional Education
Community Services

Supporting Services – it focuses on administration and fundraising activities.

Management and general
Fund-raising
Expenses are recorded on accrual basis in a manner similar to that used by business organizations.
Expenses are recorded in each fund that incurs the expenses.

2. Current Fund – Restricted. This fund is used for operations, but only in accordance with a
donor or grantor’s specifications.

Restricted pledges to be used to promote the adoption of handicapped children would

be recorded in this classification.

3. Land, Building and Equipment Fund. This fund is used to account for:
a. Land, buildings, and equipment acquired by the organization.
b. Liabilities arising from the acquisition or improvement of plant assets,
c. Current assets restricted by donors or grantors for future disposition.

4. Endowment Fund. This fund is used to accounts for permanently restricted endowment
principal to be maintained intact either in perpetuity or until a specific event occurs and
temporary restricted term endowments.

5. Custodian Fund. This fund is similar to agency fund of a college or university. The assets do
not belong to the organization.

Financial Statements

For VHWO – Statement of Functional Expenses. This statement only lists expenses by function.

Statement of Financial Position. Presented for the entire entity. Its purpose is to provide relevant
information about the organization’s assets, liabilities and net assets. Certain principles
followed:
a. Cash or other assets that have restrictions imposed by the donor, limiting the use of those
assets to long-term purposes should be segregated from other assets that are unrestricted.
b. Net assets should be segregated into three classes within the statement. These will include
unrestricted, temporarily restricted, and permanently restricted net assets.
c. The nature and timing of donor restrictions must be disclosed. Voluntary restrictions of
unrestricted net assets by the entity’s governing body, resulting in board-designated funds,
may be disclosed.

Different types of restriction that may be placed on assets.

Assets may be permanently restricted:

a. An example may be a donor-restricted gift, such as artwork, that must be used for a certain
purpose and may not be sold.
b. Another example might be a donor-restricted gift to be invested, with the principal
preserved and the income available for expenditure.

Assets may be temporarily restricted:

a. An example may be a donor-restricted gift to be invested for a certain period during which
only the income may be expended. After a certain point in time, the principal may be
expended as well.
 b. Another example might be a donor-restricted gift to be expended for certain purposes only
such as a special program or project. The gift might be restricted to the building and
equipment fund.

Assets may be unrestricted. Examples include:

a. Assets resulting from operations.
b. Unrestricted gifts of cash or other assets.
c. Temporarily restricted assets released due to satisfaction of the donor’s provisions.
d. Governing board-designated funds.

Statement of Activities

The statement of activities is also presented for the entity as a whole. Its primary focus is to provide
relevant information about:
a. The effects of transactions and other events and circumstances that change the amount and
nature of net assets.
b. The relationships of those transactions and other events and circumstances to each other.
c. How the organization’s resources are used in providing various programs or services.

Statement of Cash Flows

This statement is similar to that presented by a business enterprise. They may use either direct or
indirect method in presenting the statement from operating activities.

Its primary purpose is to provide relevant information about the cash receipts and cash payments of an
organization during the period.