Accounting for Not-For-Profit Organizations

Dayag:) Presently, there are two (2) schools of thought on the accounting for not-for-profit organizations:1. There are little differences between business and not-for-profit accounting Therefore, its advocates believe not-for-profit accounting could, with little exceptions, make use of the principles applicable to business accounting Non business accounting is going to be essentially like business accounting Non business organizations will prepare operating statements, balance sheets, and funds flow statement The primary focus will be on the operating statement and its principles will be governed by the same principles that now apply in business accounting2. Fund accounting, as it is currently practiced, will remain in vogue (remain popular). The advantages of fund accounting were extolled from: The legal point of view The management control viewpoint Its advocates believe that fund have legal restrictions or discretionary restrictions Accordingly, they must be segregated between: Restricted funds Unrestricted funds The international accounting unit for many not-for-profit organizations is the fund: 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: Different types of funds are necessary to distinguish between: Assets that may be used as authorized by the BODs Assets whose use is restricted by donors Funds commonly used by some of the not-for-profit organizations were as follows: Unrestricted funds (sometimes called unrestricted current fund, general fund, or current unrestricted fund) Restricted funds (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) 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 externally 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 Accrual basis of accounting: All not-for-profit organizations accounting for revenues and expenses use the accrual basis of accounting. Requires not-for-profit organization that issue GAAP basis financial statements to recognize depreciation expense on long-lived assets Depreciation should be recorded if: The assets are gifts The assets arise because of donations Note: Works of art and historical treasures that meet the definition of collections Need not be capitalized nor 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 organizations net assets based on the existence or absence of donor-imposed restrictions The financial statements display three (3) classes of net assets: Unrestricted Temporarily restricted Permanently restricted Note: Any changes of these three (3) classes of net assets must be reported

Financial statements (continuation): The financial statements are: 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 Statement of activities Which reports revenues, expenses, gains, losses, and reclassifications or changes in the organizations 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 of operations in the statement of activities is permitted Statement of cash flows With categories similar to regular business enterprises: Operating Investing Financing Notes to the financial statements They are accompanying notes to the above statements necessary for disclosure purposes Classification of net-assets This division of net assets is the focal point in presenting financial statement for not-for-profit entities These classes of net assets are totally dependent on the existence or absence of donor-imposed obligations The organizations net assets, revenue, expenses, gains, and losses are classified according to the three (3) classes of net assets Revenues, gains, and losses: Can be reported in each net asset class Expenses: Are reported only in unrestricted net assets class The three (3)classes 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 entity2. Temporarily restricted net assets: Are the portion of net assets whose use is limited by donor-imposed stipulations that either: Expire (time restrictions) 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 Accounting for Hospitals: Hospitals depend its large part on donations and grants, which often come with restrictions Hospitals will use normal accrual accounting methods, including the classification of costs as expenses rather than expenditure, and will not record budgetary accounts or encumbrances on the books Fund accounting is required for Hospitals In order to maintain accountability over restricted resources In general, there are two (2) 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: Board-designated funds are unrestricted Designation: Is an internal process which can be altered at the discretion of the BOTs of the hospital Restrictions: Are externally imposed and not subject to alteration by the board Items in the General (unrestricted) fund category are as follows: Assets whose use is limited: Include assets set aside by the governing board for identified purpose Agency funds: Are included in the 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 Property and equipment used for general operations, and the related liabilities Note: PPE whose use is restricted are reported in the donor-restricted fund

Accounting for Hospitals: In general, there are two (2) types of funds used by a hospital:2. Donor-restricted funds: Accounts for temporarily restricted and permanently restricted resources This class is subdivided into:1. Temporary restricted fund: May be: Specific purpose fund Is a restricted fund used by health care providers to account for principal and income in accordance with donors specified restrictions Term endowment fund Used by hospital to account for a trust where the principal must be kept intact and the income be expanded for either current operations or a specific purpose in accordance with grantors wishes May be in perpetuity, or it may be fixed term or until a specific event occurs Plant replacement and expansion fund A restricted fund used by hospitals and other health care providers to account for donors contributions that must be used to acquire property, plant, and equipment Life income fund2. Permanently restricted fund: Is also an endowment fund but differs from a term-endowment fund in that the principal must be maintained intact in perpetuity and only the income may be used in accordance with the donors wishes Accounting for Revenues and Expenses: Revenues and gains1. Patient service revenue: Include room and board, nursing services, and other professional services Typically are recorded at established (gross) rates as the services are provided but are reported net of amounts that are considered deductions from revenues Objective is to report the amount that the hospital is entitled to collect as patient service revenues Allowance accounts are used to reduce receivables for estimated deductions from revenues as well as estimated doubtful accounts Deductions from revenues include: Courtesy allowances: Discounts to doctors and employees Contractual adjustments: Discounts arranged with third-party payors (Philhealth for example) that frequently have agreements to reimburse at less-than-established rates Note: Charity care services provided free of charge to patients who qualify under a hospitals charity care policy are excluded from both gross and net patient service revenues According to the AICPA audit guide and accounting guide, health care organizations: Charity care cases do not qualify for recognition as receivables or revenues in the financial statements Managements policy for providing charity care, as well as the level of charity care provided, should be disclosed in the financial statements Such disclosure generally is made in the notes to the financial statement and is measured based on the providers rates, costs units of service, or other statistical measure2. Premium fees Also known as subscriber fees or capitation fees Are revenues from agreements which a hospital provides any necessary patient services (perhaps from a contractually established list of services) for a specific fee The fee is usually a specific fee per member per month The fees are earned whether the standard charges for services actually rendered are more or less than the amount of the fee i.e. without regard to services actually provided in the period Therefore, they are reported separately from patient service revenues Growing portion of hospital revenues in many hospitals

Accounting for Hospitals: Accounting for Revenues and Expenses: Revenues and gains3. Other operating revenues: Revenues from services to patients other than for health care Revenues from sales and services provided to non-patients Tuition from schools operated by the hospital Rentals of hospital space Charges for preparing and reproducing medical records Room charges for telephone calls and televisions Proceeds from cafeterias, gift shops, snack bars, donated medicine, linen and office supplies The control account Nonoperating revenues Records revenue not related directly to an entitys principal operations These items are primarily financial in nature Include: Unrestricted and donor-restricted pledges Gifts or grants Unrestricted income from endowment funds Maturing term endowment funds Income and gain from investments Gains on sale of hospital property Realized and unrealized gains from investments reported at fair value Note: The other operating revenue and the nonoperating revenue accounts can be lumped as one account and be called Other Revenues and Gains Operating expenses Operating expenses of hospitals are reported on an accrual basis Classification (Functional categories) of Operating expenses:1. Nursing services Medical and surgical Intensive care Nurseries Operating rooms2. Other profession services Laboratories Radiology Anesthesiology Pharmacy3. General services Housekeeping Maintenance Laundry4. Fiscal services Accounting Cashier Credits and collection Data processing5. Administrative services Personnel Purchasing Insurance Governing board6. Interest provisions7. Depreciation provisions Note: Although accounts are maintained for employee and contractual allowances, these items are not expenses They are revenue deductions that are subtracted from gross patient service revenues to arrive at net patient service revenue reported in the statement of operations Provision for bad debts is an expense What is the difference between charity care and bad debts expense? Charity care results from the hospitals policy of providing health care to individuals who meet certain financial criteria Health care services provided as charity care were never intended to provide cash flows Bad debts result from extending credit

Accounting for Colleges and Universities Colleges and universities are required to use fund accounting due to the large amount of restricted resources under their control Six (6)Types of funds:1. Current funds Account for resources of the institution that will be used in carrying out the primary objectives: instruction, research, extension, and public service Restricted current funds have been restricted by donors or grantors to specific purposes Unrestricted current funds are not subject to outside restraints on usage Resources designated by the BOTs are still considered unrestricted Since they lack externally-imposed restrictions2. Loan funds Are established for resources that are to be loaned to students, faculty or staff Not for loans, notes, or bonds payable to others Designed to hold assets, not liabilities Fund balances should separately report restricted and unrestricted amounts: Restricted amounts Represent resources which outside parties provided to the university on condition that it will be used for loans Unrestricted amounts Represent resources which were placed in the loan fund at the election of the university itself3. Endowment and similar funds Endowment funds: Resources which outside parties contributed to the university on condition that they not be spent but invested to yield earnings which may be spent Term endowment funds: May be spent after a specific period of time has passed or a certain event has occurred Quasi-endowment funds: Arent actually restricted but have been designated by the BORs to be retained and invested4. Annuity and Life income funds Annuity funds: Are resources given to the university on condition that regular payments be made to a specific person for a certain period of time, after which all the principal is available to the institution Life income funds: Require distribution of all earnings to a specified person, upon whose death the balance becomes expendable by the university5. 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:1. Unexpended plant funds Contain liquid assets which are to be used to acquire new plant assets in the future2. Funds for renewals and replacements Contain liquid assets which are to be used to replace existing plant assets as needed3. Funds for retirement of indebtedness Contain resources to be used to make principal and interest payments on debts incurred to acquire plant assets4. Investment in plant Consists of the fixed assets themselves and any long-term debt issued in connection with the acquisition of these fixed assets Note: The fund balances of the first three (3) funds should be subdivided further into restricted and unrestricted balances, based on whether classification in the plant fund is the result of external requirements or internal designation Investment in plant fund balance isnt subdivided6. 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 There is never any fund balance in agency funds, since all assets held are owed to others Accrual accounting is used There are certain similarities to Accounting of governmental funds especially in the reporting of expenditures rather than expenses

Accounting for Colleges and Universities Accounting for Revenues and Expenses: Revenues include: Tuition fees Government appropriations Government grants and contracts Private gifts, grants, and contracts Endowment income Sales and services of educational activities Sales and services of auxiliary enterprises (such as residence halls, food services, intercollegiate athletics, and college stores) Sales and services of hospitals (if operated by the university) Other sources(such as expired term endowments, annuities, and life income agreements) Independent operations (such as government research laboratories) Expenditures include: Educational and general expenditures Auxiliary enterprises Hospitals Independent operations

Accounting for Voluntary Health and Welfare Organizations Voluntary health and welfare organizations adhere to the accrual basis of accounting Revenues are generally recognized when earned and expenses are shown when the related services of the organization are provided Sources and uses of funds are not merely classified as revenues and expenses However, but are instead broken down into categories: Donations of services Should be charged to the appropriate expense with an offsetting credit to support Donated property Should be recorded at fair market value on the date of gift Pledges Should be recognized net of uncollectible amounts Pledges or cash donations that will not be spendable until a future period should be shown as a deferred credit on the balance sheet Voluntary health and welfare organizations must also provide a Statement of Functional Expenses This statement reports expenses by both: Function (program and supporting) Natural classification (salary expenses, depreciation expenses, etc) The five (5) funds used by the Voluntary health and welfare organizations include:1. Current fund unrestricted: Used for operations that require only the discretion of the organizations board Includes assets designated by the board for specific purposes2. Current fund restricted: Used for operations, but only in accordance with a donor or grantors specifications Example: Restricted pledges to be used to promote the adoption of handicapped children3. Land, building, and equipment fund: This fund is used to account for: Land, building, and equipment acquired by the organization Liabilities arising from the acquisition or improvement of plant assets Current assets restricted by donors or grantors for future disposition4. Endowment fund: Used to account for: Permanently restricted endowment principal To be maintained intact either in perpetuity or until a specific event occurs Temporary restricted term endowments5. Custodian fund: A fund established to account for assets received by an organization to be held or disbursed only on instructions of the person or organization from whom they were received Similar to Agency fund of a college or university The assets do not belong to the organization

Accounting for Voluntary Health and Welfare Organizations Accounting for Revenues and Expenses: Revenues Recorded using the full accrual basis Inflows of resources resulting from a charge for service from financial activities or from other exchange transactions Include: Membership dues Program service fees Sales of publications and supplies or proceeds from the sale of these items Investment income e.g. interest, dividends, and other earnings Expenses: Recorded using the full accrual basis in a manner similar to that used by business organizations Recorded in each fund that incurs the expenses Expenses are classified into program services and supporting services and are reported on a functional basis under these classifications: Program services Relate to the expenses incurred in providing the organizations social service activities Supporting services Consist of: Administrative expenses Fund-raising costs In reporting expenses in the Statement of Activities, the functional classifications might appear as follows: Expenses: Program services (focus on social services) Research Public education Professional education Community services Supporting services (focus on administration and fund-raising activities) Management and general Fund raising Note: Public support: Is the inflow of resources from voluntary donors who receive no direct, personal benefit from the organizations usual programs in exchange for their contributions Include: Contributions Special events support Legacies and bequests Proceeds from fund raisers

Accounting for Other Not-For-Profit Organizations A great deal of flexibility is permitted in the accounting for these organizations A wide variety of other organizations have the option of using fund accounting Examples: Research and scientific organizations Social and country clubs Religious organizations Museums

Accounting for Voluntary Health and Welfare Organizations (VHWOs) and Other Not-For-Profit Organizations Financial statements: All not-for-profit organizations, including VHWOs, to present three (3) general-purpose financial statements: 1. Statement of financial position Presented for the entire entity Its purpose is to provide relevant information about the organizations assets, liabilities, and net assets It should provide information about their relationships to each other as of date of the statement Certain principle should be followed in preparing the statement. The focus is on the entity as a whole and should report total assets, liabilities, and net assets. 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 Net assets should be segregated into three (3) classes: Unrestricted Temporarily restricted Permanently restricted The nature and timing of donor restrictions must be disclosed Voluntary restrictions of unrestricted net assets by the entitys governing body, resulting in board-designated funds may be disclosed Different types of restrictions that may be placed on assets: Assets may be permanently restricted: Example may be a donor-restricted gift, such as artwork, that must be used for a certain purpose and may not be sold Example may be a donor-restricted gift to be invested with the principal preserved and the income available for expenditure Assets may be temporarily restricted: 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 Example may 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: Assets resulting from operations Unrestricted gifts of cash and other assets Temporarily restricted assets released due to satisfaction of the donors provisions Governing board - designated funds2. Statement of activities Also presented for the entity as a whole Primary focus is to provide relevant information about: The effects of transactions and other events and circumstances that change the amount and nature of net assets The relationships of those transactions and other events and circumstances to each other How the organizations resources are used in providing various programs or services3. Statement of cash flows A not-for-profit organization presents a statement of cash flows similar to that presented by a business enterprise They may use either direct or indirect method of presenting operating cash flows Primary purpose is to provide relevant information about the cash receipts and cash payments of an organization during the period In addition, VHWOs must present: Statement of functional expenses Has no parallel in business Breaks down each category of program and supporting expense by type of expense such as: Salaries Supplies Depreciation Provides details omitted from the statement of support, revenue and expenses, and changes in fund balances, which only lists expenses by function

Punzalan:)Accounting for non-governmental (not-for-profit) organizations

All not-for-profit organizations use the accrual basis of accounting There are four (4) major non-for-profit organizations: Colleges and universities Hospitals Voluntary health and welfare organizations Other not-for-profit organizations

Accounting for colleges and universities Responsibilities for a not-for-profit university may be classified as: Academic Instruction Research Public service Financial Management Reporting of business Student services Admissions Records Counseling Public relations Communication and establishment of goodwill A university levies tuition fees but these tuition fees are not sufficient to cover total operational costs Thus, other sources are essential: Gifts Income from endowment funds Grants from governmental units or foundations Appropriations (for public universities) Public college and university funds include three (3) broad categories: Current funds Which may be: Restricted unrestricted Plant funds Plant funds of public universities include four (4) separate, self-balancing subgroups:1. Unexpended plant fund2. Plant fund for renewals and replacements3. Plant fund for retirement of indebtedness4. Investment in plant fund Trust and agency funds Accounting for private colleges and universities Shift away from a fund group focus to an organization-wide focus In which there is no requirement for external financial statements to include fund group reporting Instead of fund balances, three (3) net asset classes are used:1. Unrestricted2. Temporarily restricted3. Permanently restricted Events that were previously recorded as changes in fund balance will now be recorded as contributions, exchange transactions, capital acquisitions, or expenses Financial statements The three (3) principal financial statements for public and private universities are: Public universities1. Statement of current funds, revenues, expenditures, and other changes2. Balance sheet3. Statement of changes in fund balance Private universities1. Statement of activities2. Balance sheet3. Statement of cash flows

Accounting for health care providers Health care entities include: Hospitals Clinics Continuing care retirement communities Health maintenance organizations Home health agencies Nursing homes A modern health care provider may be a complex entity with: Medical aspect Surgical aspect Research aspect Teaching aspect Public service aspect One very unusual element about health care operations is the manner of payment for services: That is, when a significant portion of the fees for health care services is paid by a third party, like Medicare or Philhealth Health care entities employs two (2) classes of funds:1. General funds Which account for resources available for general purposes2. Donor-restricted funds Which account for temporarily and permanently restricted resources such as: Specific purpose funds Plant replacement and expansion funds Endowment funds Other donor-restricted funds Assets and liabilities of a health care provider are sequenced by their liquidity and are classified as current or non-current Assets of a health care provider comprise three (3) distinct segments: Current assets Assets whose use is limited Property and equipment Revenues, expenses, gains, and losses increase or decrease the net assets of a health care provider entity They may be operating if: They are related to the principal activity They may be non-operating if: They are from activities that are incidental or from events beyond the entitys control Financial statements Include: Statement of activities Which present organization-wide totals for changes in unrestricted, temporarily restricted, and permanently restricted net assets Statement of financial position Statement of cash flows

Accounting for voluntary health and welfare organizations To qualify as a voluntary health and welfare organization: The organizations primary source of revenue should be contributions from donors, who do not benefit directly from the organization The program must be in area of health, welfare, or community services There are some instances where contributions received by an organization specify the purpose for which they must be expended To segregate resources with external restrictions, the organization must report these items under three (3) classes of net assets:1. Unrestricted2. Temporarily restricted3. Permanently restricted Financial statements The four (4) financial statements for VHWOs are as follows:1. Statement of financial position2. Statement of activities3. Statement of cash flows4. Statement of functional expenses Which supplements the operating statement Presents the total of each functional expense to programs and supporting services

Accounting for other not-for-profit organizations Organizations that have restricted resources may use fund accounting for internal control and management reporting purposes In order to demonstrate compliance with externally imposed restrictions Net assets are classified as: Unrestricted Temporarily restricted Permanently restricted Financial statements Report organization-wide totals for all assets and liabilities Include: Statement of financial position Statement of activities Statement of cash flows

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