beams10e ch21

© Pearson Education, Inc. publishing as Prentice Hall 21-1

Chapter 21:Accounting for Not-for-Profit Organizations

by Jeanne M. David, Ph.D., Univ. of Detroit Mercy

to accompany

Advanced Accounting, 10th editionby Floyd A. Beams, Robin P. Clement,

Joseph H. Anthony, and Suzanne Lowensohn


Not-for-Profits : Objectives

1. Learn about the four main categories of not-for-profit 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.


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.


1: Categories of NFPs1: Categories of NFPsAccounting for Not-for-Profit Organizations


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


Categories of NFPs

1. Voluntary health and welfare2. Hospitals and health care 3. Colleges and universities4. Other not-for-profits

• Churches, museums• Other NFPs are similar to voluntary

health and welfare, without requiring a statement of functional expenses


2: Governmental and 2: Governmental and Nongovernmental NFPsNongovernmental NFPs

Accounting for Not-for-Profit Organizations


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


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: Not-for-Profit Organizations


3: Accounting Principles3: Accounting PrinciplesAccounting for Not-for-Profit Organizations


Financial Statements

Statement of financial positionStatement of activities

• Replace with "Statement of operations" and "Statement of changes in net assets" for hospitals and health care

Statement of cash flowsStatement of functional expenses

• Required only for voluntary health and welfare organizations


Net AssetsThree categories

1. Permanently restricted net assets• Asset use is limited• Donor imposed stipulations that do not

expire/ cannot be removed by entity2. Temporarily restricted net assets

• Donor imposed restrictions that expire (time restrictions)

• Can be removed by entity fulfilling stipulations (purpose restrictions)

3. Unrestricted net assets


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


Expenses

Expenses are classified into one of two major categories

Program servicesThese are the activities the NFP provides

Examples: Research expense, Educational expense, Food bank expense, Recreational expense

Supporting servicesManagement and general expensesFund-raising expenses


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)


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


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


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


4: Voluntary Health and Welfare4: Voluntary Health and WelfareAccounting for Not-for-Profit Organizations


Fund Raising

• 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

Expenses - supporting services - fund raising 145 Cash 145

Cash 1,950

Unrestricted gains – special event 1,950

Unrestricted gains – special event 250

Cash 250


Cash Donations and Pledges

• 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 restrictionSupport – contributions (restricted or not) is revenue

– Revenue accounts are closed to net assets (temporarily, permanently or unrestricted)

Cash 4,000 Contributions receivable 6,000

Allowance for uncollectibles 600 Unrestricted support – contributions 7,600 Temporarily restricted support - contributions 1,800


Collect a Time-Restricted Pledge

• Two entries• Cash collection• Reclassification for expiration of time

restrictionReclassification accounts are temporary accounts

closed to their respective net asset accounts

Cash 1,800

Contributions receivable 1,800

Temporarily restricted net asset - reclassification out 1,800

Unrestricted net assets - reclassification in 1,800


Receive Equipment and Use It

• 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

Equipment 1,500 Temporarily restricted net assets – contributions 1,500

Depreciation expense - program services - community service 500

Accumulated depreciation – equipment 500 Temporarily restricted net asset - reclassification out 500

Unrestricted net assets - reclassification in 500


Receive Cash with Purpose Restriction

• 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

Cash 1,000 Temporarily restricted support – contributions 1,000

Expenses - program services – research 900 Cash 900

Temporarily restricted net asset - reclassification out 900



• 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

Expenses - support services - management and general 500

Unrestricted support - donated services 500

Construction in process 1,200

Unrestricted support - donated services 1,200

Receive Donated Services


Statement of Financial Position


Statement of Activities


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


Statement of Cash Flows


Statement of Functional ExpensesExpenses as reported on

the Statement

of Activities


5: Hospitals and Other Health Care5: Hospitals and Other Health CareAccounting for Not-for-Profit Organizations


Hospitals and Health Care

• Applies to nongovernmental, not-for-profit hospitals and health care agencies

• Governmental: GASB• Private, for-profit: FASB as for businesses


Revenues and Other ReceiptsUnrestricted:• 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 bequestsTemporarily or Permanently restricted:• "T" or "P" restricted support, donated assets, investments,

gifts, bequests


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


Patient Revenue

• 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

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


Cash Contributions

• 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

Cash 275 Unrestricted support - nonoperating gains 25 Temporarily restricted support 250

Nursing services expense 250 Cash 250

Temporarily restricted net asset - reclassification out 250



• 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.

Inventory of materials and supplies 130

Unrestricted support - donated supplies 130

Nursing services expenses 70

Unrestricted support - donated services 70

Receive Donated Assets/Services


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


Statement of Operations: Hospital


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


6: Colleges and Universities6: Colleges and UniversitiesAccounting for Not-for-Profit Organizations


Colleges and Universities

• Applies to nongovernmental, not-for-profit colleges and universities

• Governmental: GASB• Private, for-profit: FASB as for businesses


Tuition and ScholarshipsTuition and fees: revenue at gross amount• Tuition waivers: contra revenueReported 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"


College Expenses

Expenses are only in the unrestricted net assetsClassify by function:

– Instruction expense– Research expense– Public service expense– Academic support– Student services– Institutional support– Operation and maintenance of plant– Student aid


Tuition Revenues

• Tuition is recorded at gross amount• Tuition waivers are contra-revenues

• Bad debts are recorded as for businesses• Grouped with institutional support expenses

Accounts receivable 1,000 Unrestricted revenues - tuition and fees 1,000

Tuition reduction: unrestricted - student aid 50 Accounts receivable 50

Expenses - educational and general - institutional support 30

Allowance for uncollectibles 30


Receive Appropriations

• 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

Cash 700

Unrestricted support - state appropriation 700


Funds Held for Students

• 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.

Cash 150

Grant funds held for students 150

Grant funds held for students 150

Cash 150


Endowments

• 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

Cash 50 Permanently restricted support - endowment contribution 50

Cash 4 Temporarily restricted support - endowment income 4

Expenses - unrestricted - student aid 3 Cash 3

Temporarily restricted net assets - reclassifications out 3 Unrestricted net assets - reclassifications in 3


Auxiliary Services

• 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

Cash 61

Revenues - auxiliary enterprises 61

Expenses - auxiliary enterprises 28

Cash 28


Statement of Activities: College


State. of Activities: College (cont.)


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beams10e ch21

Documents

fasb pearson education

net assets donor

restricted net assets

prentice hall21

assets withdonor

notforprofit organizations2

contributions fasb statement

accounting guide