chapter 18 imsm

CHAPTER 18ACCOUNTING FOR NOT-FOR-PROFIT ORGANIZATIONS

Chapter Outline

I. Historically, the financial reporting for private not-for-profit entities have differed significantly according to the type of organization (such as a health care center versus a college or university). The reporting of these entities is now standardized considerably by FASB pronouncements that focus on the reporting of contributions and the financial statements to be issued. However, public colleges and universities and similar organizations still must follow the standards issued by the GASB.

A. This chapter looks at the financial reporting for private not-for-profit organizations. The FASB has placed the emphasis on the entity as a whole rather than on the individual funds.

B. Reporting for these organizations should be similar to a business entity unless a critical difference exists that impacts the needs of the financial statement users. Several critical differences can be identified such as:

1. Many private not-for-profit organizations receive a significant amount of their financial resources from contributions rather than from revenues or capital investments.

2. Some of the resources given to a not-for-profit organization include donor-imposed restrictions.

3. No single indicator of success is present such as net income provides for a for-profit business entity.

II. The FASB has established the following financial statements for a private not-for-profit organization.

A. Statement of Financial Position reports assets, liabilities, and net assets.

B. Statement of Activities and Changes in Net Assets reports revenues, expenses, gains, and losses.

C. Statement of Cash Flows

D. A voluntary health and welfare organization is also required to present a Statement of Functional Expenses which indicates the allocations of resources to program services (to meet the goals of the organization) and supporting services (to operate the organization and raise funds).

III. For reporting purposes, the economic resources of a private not-for-profit organization must be classified within one of three categories.

A. "Unrestricted net assets" indicates the amount of an entity's resources that are not subject to external donor restrictions; officials of the organization can make whatever use they wish of these assets.

B. "Temporarily restricted net assets" are restricted by an outside party (often a donor) for a particular use or for use in a future period of time. When the restriction is satisfied, these resources are switched to unrestricted net assets. Thus, on the statement of

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activities and changes in net assets, temporarily restricted net assets are shown as being reclassified as unrestricted net assets when the appropriate time has passed or the resource is used as stipulated.

C. "Permanently restricted net assets" are expected to remain restricted for as long as the organization exists. Income from these assets is normally unrestricted or temporarily restricted based on the specifications of the donor.

IV. Contributions should be recognized as revenues when received.

A. Restricted contributions are recognized as revenue either within temporarily restricted net assets or permanently restricted net assets.

B. Donated assets are recorded at fair market value. Recognition of art works, historical treasures, and the like is not required if three conditions are all met.

1. The items are added to a collection for public exhibition, education, or research.

2. The items are protected and preserved.

3. If sold, receipts must be used to acquire other collection items.

C. Unconditional promises to give that are received from a donor by a private not-for-profit organization should be reported immediately as both a receivable and a revenue.

1. If not to be collected within one year, the promise is recorded at the present value of the future cash flows. Subsequent amortization is recorded as contribution revenue.

2. Estimated uncollectible balances are also deducted.

3. Conversely, conditional promises are not recognized until the conditions are met.

D. Services contributed to a not-for-profit organization should be recognized as a revenue if the services (1) create or enhance a nonfinancial asset or (2) require a specialized skill possessed by the donor and would be purchased if not donated.

E. If a not-for-profit organization accepts a donation that must be conveyed to a separate individual or other beneficiary, the organization normally records the asset along with an accompanying liability. However, if the organization is given variance powers to change the beneficiary, a revenue is recognized instead of a liability.

V. Historically, not-for-profit organizations have been permitted but not required to report depreciation.

A. In 1987, the FASB ordered the recognition of depreciation by all not-for-profit organizations. At that time, governmental not-for-profit organizations, such as public colleges and universities, had to follow FASB pronouncements unless prohibited specifically by the GASB.

B. The GASB responded to the FASB’s standard in order to permit, but not require, public schools to report depreciation.

C. As a result of this controversy, a GAAP hierarchy has been created to identify which standards are more authoritative for each type of organization.

D. GASB 35 now requires public colleges and universities to follow GASB 34. Consequently, two sets of reporting standards have come to exist, one for private not-for-profit organizations and another for public. Many public schools simplify the reporting process by identifying themselves as solely an Enterprise Fund (an activity open to the public for a charge). Because fund-based statements and government-

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wide statements are virtually identical for proprietary funds (such as an Enterprise Fund), the entity only has to report fund-based statements.


VI. Education institutions record tuition revenue at gross amount billed and show revenue net of scholarships and financial aid in the Statment of Activities

VII.Health care organizations exhibit some unique reporting features that must be addressed in not-for-profit accounting.

A. Third-party payors such as Medicare and insurance companies have had a significant impact on the reporting process because of their need for usable financial information

B. A net patient service revenue figure is actually reported by these organizations but only after reduction for contractual adjustments. These adjustments are decreases allowed for some third-party payors based on the approved cost for a particular service in that geographic region.

C. Services to indigents are not included in receivables or revenues.

Learning Objectives

Having completed Chapter 18 of this textbook, "Accounting and Reporting for Private Not-for-Profit Organizations," students should be able to fulfill each of the following learning objectives:

1. List the three financial statements that must be produced by a private not-for-profit organization and the various types of accounts to be reported on each.

2. Identify the three types of net asset categories reported by a private not-for-profit organization.

3. Produce a statement of financial position and a statement of activities for a private not-for-profit organization and list the types of account balances reported in each of these statements.

4. Identify the purpose of a statement of functional expenses and the type of organization that must present this particular statement.

5. Differentiate between program service expenses and supporting service expenses and indicate why that distinction is important.

6. Describe the controversy that arose between the FASB and the GASB over the recording of depreciation by not-for-profit organizations as well as the resolution of that issue.

7. Explain the purpose of the GAAP hierarchy.

8. Identify the various ways that gifts are recorded if they are made to a not-for-profit organization but must eventually be conveyed to another individual or beneficiary.

9. Explain the allocation of joint costs incurred in mailing fund-raising literature along with other information.


10. Explain the problem of accounting for gifts of art works and historical treasures as revenues and identify the criteria that must be met for recognition to be avoided.

11. Indicate the appropriate method of accounting for unconditional promises made to a private not-for-profit organization for future donations.

12. Identify the criteria that must be met for contributed services to be recognized by a private not-for-profit organization.

13. Define a contractual adjustment and explain its impact on a health care organization.

Answers to Discussion Questions

Are Two Sets of GAAP Really Needed for Colleges and Universities?

Over the last few years, a number of differences have appeared between the accounting for public colleges and universities and for those that are private. According to the GAAP hierarchy, the FASB has authority over private educational institutions whereas the GASB holds authority over the reporting of public schools. Consequently, statements of the FASB do not apply to pubic schools unless specifically made applicable by the GASB. FASB pronouncements on depreciation, pledges, contributions, and financial statement format for not-for-private organizations do not affect public schools until and unless so stated by the GASB.

Because of this split, the financial statements for these two types of schools have developed several significant, unique differences. GASB 35 has now stated that public schools must follow the guidelines of GASB 34 which created financial statements for state and local governments. However, these new guidelines are not as radically different from private schools as might be first imagined. GASB 35 allows public colleges and universities to label themselves as solely Enterprise Funds if they meet required criteria. If this decision is made, the school can report only fund-based financial statements as would be produced by a proprietary fund. These statements have some resemblance to the statements prepared by private schools.

However, important distinctions do continue to exist. Students can be asked to address the question of whether a public and a private school need to have comparable financial statements. Net income is not an issue, rather the sources and utilization of resources is usually emphasized. Is the adoption of a single set of generally accepted accounting principles necessarily essential? A reader might prefer one technique but will a decision-maker actually be impacted if the University of Virginia does not report pledges and Southern Methodist University does? Will a decision-maker care if the University of North Carolina at Chapel Hill has one statement format but Duke University has another?

This approach to this controversy leads to the important question of user needs. Why does a company or individual look at the financial statements of a college or university? Donors might have one answer to that question while creditors could have an entirely different response. Once that question has been addressed, the need for comparability is easier to assess. No ultimate answer for that query currently exists but the students can be asked to develop their own list of user needs and then note whether the existence of two different sets of GAAP has an adverse impact on those needs.


Is This Really an Asset?

In theory, accounting for a pledge is a relatively straightforward process. A receivable is established (at present value if not to be received for a year) along with an adequate allowance for doubtful collections. However, in practice, the process might be much more complicated. In this case, for example, was a pledge actually made or was this just a superfluous statement spoken at a moment of overwhelming emotions? Is this a promise to give or an intention to give? Can the donor change his mind? Does this potential donor really own land in Idaho and can it be sold for $15 million? How can an adequate allowance be determined for this pledge? If the indivdiual's mother should die, would he lose interest in supporting the hospital? If the $5 million is reported as a receivable and then is not collected, what is the impact on the readers of the financial statements? How much time and energy should the hospital invest in attempting to arrive at a proper method of financial reporting? The accountant must address all of these questions (and more) to determine the appropriate accounting treatment.

At a minimum, hospital officials need to contact this donor and have a long discussion. He needs to understand their reasons for attempting to establish a valuation of this promise. In class discussion, students can be asked to identify questions that should be posed to this person. They would probably include the following:

—Does he really plan to give $5 million to the hospital?—When does he project that the land will be sold and the gift made?—How did he establish a $15 million price? Could the land be sold for less and, if so, how

will that impact on the gift to the hospital?—How does he want the $5 million to be used?—Is there any chance that he will change his mind?—What other charities has he supported? Has he previously made such large gitfs?—Would he be willing to furnish financial statements as well as a list of references who

could verify his intentions and his ability to carry out those intentions?—Does the hospital have legal recourse for the promise that is in writing and signed?

If this individual has supported other charities over the years, is committed to the work of Mercy Hospital, has adequate financial resources, and if the land appears to be worth $15 million, the hospital should report the pledge as a receivable. However, a large allowance should probably still be established simply because of the uncertainties involved with this amount of money over an extended period of time. Conversely, if too much uncertainty exists (a value for the land cannot be determined or the gentleman refuses to give information about his ability to meet this commitment), the hospital may decide that this is not a pledge at all but merely the promise of a possible future pledge the donor intends to give. In that case, the information should be adequately spelled out in a footnote.


Answers to Questions

1. The Financial Accounting Standards Board (FASB) has authority for establishing accounting standards for private not-for-profit organizations. In addition, audit and accounting guides produced by the AICPA provide further guidance for the preparation of financial statements.

2. If a user of the financial statements is a potential donor, that company or person is interested in assessing whether a gift to a not-for-profit organization is a wise use of resources. To make that assessment, the individual needs to know whether the organization uses its resources appropriately to achieve its stated goals. In this way, donors can decide which organization deserves to receive support and how much will be donated.

If a user of financial statements is a creditor, that company or person is primarily interested in whether the organization can generate sufficient cash flows to pay its debts as they come due.

3. According to FASB Statement 117, three financial statements are required to be produced by private not-for-profit organizations: a statement of financial position, a statement of activities and changes in net assets, and a statement of cash flows. A voluntary health and welfare organization must also produce a statement of functional expenses.

4. Temporarily restricted assets have been restricted by an external donor for a specified use or for use at a future point in time. For example, cash might be given that had to be used to buy a bus for the organization or that could not be spent for three years. Such restrictions are eventually lifted when the intended usage is fulfilled or when the time limit has been met.

5. Permanently restricted assets have been restricted by an external donor and that restriction is expected to last for as long as the organization continues to function. Normally, any income generated by these assets can be used by the organization although its specific usage may be restricted. For example, investments could be given to a private not-for-profit organization that could never be spent. However, the income produced by these investments might be designated by the donor for the purchase of computer equipment or might be available to the organization’s officials for whatever purpose they deemed necessary.

6. Private not-for-profit organizations report (a) program service expenses and (b) supporting service expenses. Program service expenses are those that relate to the goals and objectives of the organization. Supporting service expenses encompass the costs of operating the organization and raising funds.

7. Not-for-profit organizations are frequently evaluated based on the ratio of program service expenses to total expenses. This ratio tells the readers of the statements what portion of each dollar of expense can be attributed to achieving the goals of the organization.


8. A statement of functional expense is produced by a voluntary health and welfare organization to assist the reader of the statements in measuring the efficiency of the organization in using its resources. The assumption is that an entity should use a greater portion of its resources for its stated goals and a smaller part for administrative costs and fund raising. This statement provides a simple way of evaluating these organizations in comparison to one another.

9. Over 15 years ago, the FASB created an official statement that required all not-for-profit organizations (public as well as private) to report depreciation expense. Previously, the recording of depreciation had been optional for such organizations. At that time, FASB statements applied to public not-for-profit organizations unless specifically excluded by the GASB. In this case, the GASB had to stop its normal deliberations and begin to analyze this issue (and pass a statement making depreciaton optional once again for public not-for-profit organizations). Thus, the GASB was in a position of having to respond almost immediately to any action taken by the FASB that might affect public not-for-profit organizations. The Financial Accounting Foundation studied this problem and proposed that the FASB be given jurisdiction for all not-for-profit organizations with GASB in charge of the accounting for state and local governments. However, the threat by a number of government accounting organizations to cease helping to fund the GASB forced the FAF to return to the original structure. To help resolve this problem, the AICPA created a GAAP Hierarchy to provide guidance as to the applicability of accounting standards. Under this ranking, FASB statements only apply to public not-for-profit organizations if they are made applicable by the GASB. At the current time, the FASB is in the process of reissuing the hierarchy for nongovernmental entities in order to put it within its jurisdiction.

10. As indicated in the previous answer, the GAAP Hierarchy is a ranking system created originally by the AICPA to indicate the relative authority of various accounting standards. Thus, when two or more sources of accounting guidance are in disagreement, the GAAP Hierarchy indicates which has the greater authority. The GAAP Hierarchy was created because of the controversy between the FASB and the GASB as to the reporting of depreciation expense by not-for-profit organizations.

11. When an organization conveys a gift to a private not-for-profit organization (such as the United Way) that must be conveyed to a separate beneficiary, a question is raised as to the recording of the expense and the contribution revenue. Under normal circumstances, the original donor records an expense at the time of the gift while the charity reports both an asset and a liability until conveyed to the beneficiary. At the same time, the eventual beneficiary should record a receivable and a contribution revenue.

12. If a donor makes a contribution to a charity for conveyance to a separate beneficiary but can revoke or redirect the gift, the donor records a receivable (rather than an expense) until the gift is actually conveyed to the beneficiary. At that point, the receivable is reclassified as an expense. The charity shows a liability but, in this situation, it is directed to the donor and not to the beneficiary. Because the beneficiary is not completely certain of receipt of the gift, no recording is made until received. The donor has retained a significant degree of control which impacts the method by which the gift is reported.

13. If a donor makes a contribution to a charity for conveyance to a separate beneficiary but grants it variance powers to change the identity of the beneficiary, the donor reports an


expense immediately. However, since control of the gift now lies with the charity, it should record a contribution revenue instead of a liability. The beneficiary makes no entry until the gift is received because of the uncertainty involved. Here, the charity records both a revenue and, eventually, an expense for the contribution even thought it was not the original donor.

14. The value of donated services is recognized by a private not-for-profit organization if the service being performed (a) creates or enhances a nonfinancial asset (such as adding a room to a building) or (b) requires a specialized skill possessed by the donor that would have been purchased by the organization except for the gift. An example of this second criterion would be the donation of medical services by a surgeon to a children’s hospital.

15. Normally, the costs of a direct mailing that contains a solicitation for funds will be classified entirely as a fund-raising (supporting services) expense. However, under a specific set of circumstances, these costs can be allocated between supporting services and program services. This allocation is allowed where the mailing has a specific call for action that would have been made even without the fund raising solicitation. This call for action must further the mission of the organization and the appeal cannot be made purely to potential donors. For example, if a mailing was made by a private not-for-profit blood service asking all previous blood donors to donate blood during the next six weeks and was accompanied by a request for funds, the direct mail costs should probably be allocated between program service costs and supporting service costs.

16. Unconditional promises to give must be recorded immediately by a private not-for-profit organization at present value (if not to be received within the next year) and net of an allowance for uncollectibles. An unconditional promise requires no future service or action by the charity.

17. An unconditional promise to give is recorded immediately by the private not-for-profit organization that anticipates receiving the gift. Conversely, an intention to give is not to be recorded. In practice, the difference between the two can be rather subtle. If donors have the ability or the right to change their minds, the assumption is that they have only expressed their intention to make a gift at some time in the future but have not yet made an unconditional promise. If an action is required of the charity, the promise is not unconditional.

18. A number of private not-for-profit organizations assess dues of their membership and also receive contributions. Dues are only considered revenues rather than contributions if the member receives a benefit in return. That benefit can take the form of a periodic newsletter or journal or can also be the use of the facilities and services of the organization. However, if nothing of value is really being given to the member, the dues are considered to be merely donations. Here, revenues indicate some type of exchange transaction.

19. A third-party payor is any outside party who assumes responsibility for all or a part of a patient's medical charges. The most commonly encountered third-party payors would include insurance companies, Medicare, and the like. Because these third parties bear such a significant portion of the medical costs in this country, they require extensive as well as accurate financial information. Health care organizations have long been required, therefore, to develop and maintain accounting systems that will provide this needed data.


20. A contractual adjustment refers to a portion of a patient's charged fee that a health care organization estimates will not be received because of agreements with third-party payors. These arrangements specify that the provider (the health care entity) is willing to accept an amount that is less than its normal charge if the third-party payor determines that a lesser figure is reasonable for the services rendered. As an example, if a hospital charges $60,000 for a specific service but the third-party payor responsible for payment remits only $51,000 (based on its determination of reasonable costs for this service in this area of the world), the hospital must accept that amount as payment in full. The $9,000 reduction is recorded by the hospital as a contractual adjustment.

These reductions may take an extended period of time to finalize. Thus, the amounts are estimated by the health care organization and recorded (for matching purposes) at the time that the original invoice is submitted.

Answers to Problems

1. C (Amounts charged to patients less contractual adjustments)

2. A

3. B

4. B (Permanently restricted net assets have increased by only $120,000.)

5. B (Since the donor continues to have control, an asset [a receivable] will be reported. Because of the uncertainty, Charity Two should report nothing until received.)

6. B (The financial aid is shown as a direct reduction to the tuition revenue so that revenues and support should total only $780,000.)

7. C (The work of the librarian does not enhance a nonfinancial asset nor does it require a specialized skill that would be purchased if not donated.)

8. D (If the other information that is included contains a call for a specific action that will help accomplish the mission of the charity and if the mailing is not directed solely to potential donors, a portion of the costs can be allocated to program service expenses.)

9. A (The FASB wanted to get away from fund accounting and provide information about the private not-for-profit organization as a whole.)

10.C (The money to be used for the building is temporarily restricted for that purpose whereas the other $2 million is permanently restricted so that only the income can be used.)


11.D (The charity must convey the donation to the designated beneficiary. Unless the charity was given variance powers that allowed it to change the beneficiary, this amount represents a liability to the Jones family.)

12.B

13.B

14.A (Because of the time restriction, the amount spent for playground equipment remains in temporarily restricted net assets until depreciated. The equipment was bought at the end of the year so that no depreciation was recorded and no reclassification was made.)

15.D

16.C

17.C

18.D (The charity care work should not be recorded in any way because there is no expectation of collection. The contractual adjustment is reported as a contra balance to the revenue.)

19.B

20.B

21.C

22.D (These services do not meet the criteria for donated services that are recognized.)

23.B

24.A

25.B

26.A (The fund-raising costs and administrative salaries are supporting service expenses.)

27.B

28.D


29.(10 minutes) (Reporting of various account balances by a not-for-profit health care organization)

Donated medicines = an asset is reported as well as an increase in unrestricted net assets because of the contribution

Donated services (replacing salaried workers) = contribution causes an increase in unrestricted net assets along with an accompanying decrease in unrestricted net assets because the expense is recognized

Donated services (not replacing salaried workers) = not recordedInterest income = revenue is an increase in unrestricted net assetsCharges to patients = increase in unrestricted net assets shown as net patient

service revenuesCharity care = not recorded if the organization has no intention of seeking

collectionBad debts = amount is anticipated and recorded as an expense that

decreases unrestricted net assets

30. (15 Minutes) (Series of questions about the reporting of health care entities)

a. A third-party payor is an organization such as Medicare or an insurance company that pays a portion, or all, of a patient's medical expenses. Because of their need for accurate financial information, such third party payors have exerted pressure over the decades on health care entities to develop adequate accounting principles.

b. A contractual adjustment is a reduction to patient service revenues created when a lesser amount is paid by a third-party payor and accepted as payment in full by a health care entity. These outside parties often have established contractual arrangements whereby the health care entity agrees to accept a lower amount for a service if the third party determines the figure to be reasonable. These contractual adjustments create an accounting problem for the health care organization since it is not always able to determine the amount that eventually will be collected. Consequently, the entity recognizes the full amount of the invoice as a patient service revenue at the time the service is performed. The health care entity then estimates and establishes an offsetting Contractual Adjustment account to reduce the amount of net reported revenue to the amount anticipated as being collected.

c. At the time that materials are donated to a health care entity (or any private not-for-profit organization), the fair value is recorded as an asset. Because of the donation, a Contribution Revenue is also recognized as an increase in unrestricted net assets. If the asset has an extended life, the organization can assume a time restriction on the use of the asset so that the Contribution Revenue is reported initially as an increase in temporarily resticted net assets. An amount is then reclassified to unrestricted net assets each period equal to depreciation expense.


Donated services are recorded as a Contribution Revenue and as a Salary Expense; both are shown as changes in unrestricted net assets. The FASB requires private not-for-profit organizations to recognize donated services but only if they enhance nonfinancial assets or require specialized skills, are provided by individuals possessing those skills, and would need to be purchased if not provided by donation. If the donated service enhances a nonfinancial asset, the Contribution Revenue recognized is balanced with an increase in the asset’s reported balance rather than as Salary Expense.

31.(5 Minutes) (Reporting of various accounts by a not-for-profit organization)

Only $7.6 million is reported as patient service revenues. Charity care of $1.4 million is not recorded because no attempt at collection is anticipated. Then, the contractual adjustment total of $800,000 is netted with the revenue to leave the hospital with a net patient service revenue figure to report of $6.8 million.

The supplies are recorded at their $4,000 value with an offsetting entry to Contribution Revenues, which is an increase in unrestricted net assets.

All $860,000 of the board-designated assets remain as unrestricted net assets because neither the cash nor the investments has been restricted by an external donor. On the statement of financial position, these assets can be classified as "Assets Whose Use Is Limited" for disclosure purposes.

32. a). (8 Minutes) (Recording donations given to a voluntary health and welfare organization)

Pledges ........................................................................... $600,000Anticipated Amount Deemed to be Uncollectible (15%) (90,000 )

Net Pledge Balance.................................................... $510,000

Increase in Unrestricted Net Assets in 2008—Contributed Support (60%)........................................ $306,000

Increase in Temporarily Restricted Net Assets in2008—Contributed Support (40%)............................ $204,000

b). Donated services would be valued at $5,400 and recognized as an increase in Unrestricted Net Assets as contributed support. At the same time, a salary expense is also recognized for this same amount which serves as a decrease in Unrestricted Net Assets. Therefore, no overall effect is created but the impact of the donation is reflected.


33.(65 Minutes) (Preparation of both a statement of activities and a statement of financial position for a private not-for-profit organization)

a.Statement of Activities

Unrestricted Net Assets

Temporarily Restricted Net Assets

Permanently Restricted Net Assets

Public Supporta. Contributions $210,000 $78,000b. Contribution—

Interest 3,000

Revenuec. Membership dues 30,000d. Investment income 3,900 9,100

e.Net assets released from

restriction 72,000 (72,000)

Total Public Support and Revenue $315,900 $18,100

Expenses

Program service expenses—cure diseasef. Salaries (26,500)g. Depreciation (16,000)h. Supplies (93,000)

Total (135,500)

Supporting service expenses– General and administrativei. Salaries (32,000)j. Depreciation (2,000)

Total (34,000)

– Fund-raisingk. Salaries (26,500)l. Advertising (2,000)m. Depreciation (2,000)

Total (30,500)

Total Expenses (200,000)

Change in Net Assets $115,900 $18,100 -0-

Net Assets at Beginning of Year 400,000 200,000 $100,000

Net Assets at End of Year $515,900 $218,100 $100,000


33. (continued)

Explanation of Balancesa. Contributions. The balance to be reported is the unrestricted gift plus present

value of unrestricted pledge. Pledge is viewed as temporarily restricted because it will not be collected for three years.

b. Contribution-Interest. The pledge is recorded at its present value. Interest that must be recognized to raise the balance to the pledge amount is reported as contribution revenue.

c. Membership dues. The amount received is shown as a revenue and not as public support because rights are being conveyed to the members.

d. Investment income. Although this income is earned on permanently restricted net assets, 70 percent is shown as temporarily restricted because the donor has specified that it must be spent on advertising, whereas the remaining 30 percent is unrestricted.

e. Net assets released from restriction. Three restricted amounts were properly spent during the period: $20,000 for salaries, $50,000 for equipment, and $2,000 for advertising. No implied time restriction was assumed for the equipment so the reclassification was made immediately.

f. Salaries. During the period, $24,000 was paid in salaries and another $2,500 was owed at the end of the year.

g. Depreciation. Of the total for the period, 80 percent was allocated to program service expenses because that amount of the equipment was used for that purpose.

h. Supplies. A total of $93,000 was acquired and used during the year.i. Salaries. Administrative salaries amounted to $32,000 for the year.j. Depreciation. Of the total for the period, 10 percent was allocated to general

and administrative expenses.k. Salaries. During the period, $24,000 was paid in salaries and another $2,500

was owed at the end of the year.l. Advertising. Only $2,000 in advertising costs were incurred during the period.m. Depreciation. Of the total for the period, 10 percent was allocated to fund-

raising expenses.

---Because it qualifies as a museum piece, recording of the painting is optional. Officials do not want to report the painting, and they are not required to report it. ----The $10,000 gift must be conveyed to an outside beneficiary and is reported by the not-for-profit organization as a liability.


33. (continued)b.

Statement of Financial PositionAssetsa. Cash $738,000b. Pledge Receivable 81,000c. Equipment $300,000d. Accumulated Depreciation (20,000 ) 280,000

Total Assets $1,099,000

Liabilitiese. Salaries Payable $5,000f. Notes Payable 250,000g. Donated Amount That Is Due to

Separate Organization 10,000 $265,000

Net Assets (see Statement of Activities)Unrestricted $515,900Temporarily Restricted 218,100Permanently Restricted 100,000 834,000

Explanation of Balances:

a. Cash. The final balance is the beginning cash figure of $700,000 plus $210,000 in contributions, less $80,000 for salaries, less $50,000 for equipment, plus $30,000 in membership dues, plus $10,000 contribution that must be conveyed to separate organization, plus $13,000 investment income, less $2,000 paid for advertising, and less $93,000 paid for supplies.

b. Pledges receivable. The amount to be reported is the present value as of the end of the year (including the interest accrued for the period).

c. Equipment. Organization acquired $300,000 of equipment during the year.d. Accumulated Depreciation. The amount recorded for this initial year of

ownership.e. Salaries Payable. The amount owed employees as of the end of the year.f. Notes Payable. The liability incurred in acquiring equipment.g. Donated Amount That Is Due to Separate Organization. Amount given by a

donor that must be conveyed to a separate organization. The amount must be shown as a liability since no mention was made that the organization had variance powers that would allow it to change the beneficiary.


34.(50 Minutes) (Effect of various transactions on unrestricted and restricted net assets)

a. Investments—Internally Restricted ............................... 160,000Cash....................................................................... 160,000

b. Cash.................................................................................. 80,000Contributed Support— Permanently Restricted Net Assets ................ 80,000

c. Inventory of Medicines.................................................... 25,000Cash....................................................................... 25,000

Reclassification—TemporarilyRestricted Net Assets................................................ 25,000

Reclassification—UnrestrictedNet Assets........................................................ 25,000

d. Accounts Receivable—Patients..................................... 120,000Accounts Receivable—Third-Party

Payors.......................................................................... 480,000Patient Service Revenues.................................... 600,000

e. Depreciation Expense..................................................... 38,000Accumulated Depreciation................................... 38,000

f. Cash.................................................................................. 15,000Interest Revenue—

Unrestricted Net Assets (internally restricted) 15,000

g. Bad Debt Expense........................................................... 20,000Allowance for Uncollectible

Accounts.......................................................... 20,000

Contractual Adjustment.................................................. 30,000Allowance for Reduced Charges......................... 30,000


34. (continued)

h. Supplies Expense ........................................................... 25,000Inventory of Medicines......................................... 25,000

i. Cash ................................................................................. 172,000Investments—Internally Restricted..................... 160,000Gain on Sale of Investments—Unrestricted

Net Assets........................................................ 12,000

Equipment........................................................................ 212,000Cash ($172,000 + $15,000 + $25,000)................... 212,000

Reclassification—TemporarilyRestricted Net Assets................................................ 25,000

Reclassification—UnrestrictedNet Assets........................................................ 25,000

j. Cash.................................................................................. 12,600Pledges Receivable (present value).............................. 98,000

Allowance for Uncollectible Pledges.................. 9,000Contributed Support—Unrestricted

Net Assets........................................................ 12,600Contributed Support—Temporarily

Restricted Net Assets..................................... 89,000


34. (continued)Calculation of Changes in Net Assets

Unrestricted Temporarily Restricted Permanently RestrictedNet Assets Net Assets Net Assets

a. No change

b. Donation—Income forSalaries 80,000

c. StipulationMet—Reclass-ification 25,000 (25,000)

d. PatientServices 600,000

e. Depreciation (38,000)

f. Interest 15,000

g. Bad Debts (20,000)

ContractualAdjustment (30,000)

h. SuppliesExpense (25,000)

i. Gain onInvestments 12,000

StipulationMet—Reclas-sification 25,000 (25,000)

j. Pledges 12,600 89,000

Increase (Decrease)In Net Assets 576,600 39,000 80,000


35. (45 minutes) (Produce journal entries for a private university as well as a statement of activities)

a. Tuition Receivable 1,200,000Tuition Revenues 1,200,000

b. Investments 300,000Contributions—Permanently

Restricted 300,000

c. Cash 700,000Contributions—Temporarily

Restricted 700,000

d. Scholarships—Financial Aid 100,000Tuition Receivable 100,000

e. Salary Expenses 310,000Cash 310,000

f. Salary Expense 80,000Contributed Service Revenues—

Unrestricted Net Assets 80,000

g. Equipment 200,000 Cash 200,000

Temporarily Restricted Assets—Reclassification 200,000

Unrestricted Net Assets— Reclassification 200,000

h. Investments 30,000Unrealized Gain on Investments—

Permanently Restricted Assets 30,000

i. Cash 9,000Dividend Revenue—Unrestricted

Net Assets 9,000

j. Depreciation Expense 32,000Accumulated Depreciation 32,000

k. Cash—Internally Restricted 100,000Cash 100,000


35. (continued)

l. Pledge Receivable 7,000Contribution—Temporarily

Restricted Assets 7,000

m. No entry because of choice made by officials

n. Utilities and Other Expenses 212,000Cash 212,000

o. No entry—does not require a specialized skill.


35. (continued)

University of DanvilleStatement of Activities

Unrestricted Temporarily Permanently TotalNet Restricted Restricted

Assets Net Assets Net Assets Revenues and Gains-Tuition 1,200,000-Scholarships (100,000) 1,100,000 1,100,000

-Unrealized Gain on Investments 30,000 30,000-Dividend Revenue 9,000 9,000

Contributions-Cash and Other Assets 707,000 300,000 1,007,000-Services 80,000 _______ __80,000

Total Revenues, Gains, And Contributions 1,189,000 707,000 330,000 2,226,000

Net Assets Released From Restriction 200,000 (200,000 ) _______ ________

Totals 1,389,000 507,000 330,000 2,226,000

Operating Expenses-Salaries 390,000 390,000-Depreciation 32,000 32,000-Utilities and Other Expenses 212,000 212,000

Total Expenses 634,000 634,000

Increase in Net Assets 755,000 507,000 330,000 1,592,000

Net Assets—Beginning Of Year 400,000 200,000 100,000 700,000

Net Assets—End of Year 1,155,000 707,000 430,000 2,292,000

36.(30 Minutes) (Series of questions about private not-for-profit organizations)

a. Many private non-for-profit organizations depend heavily on gifts and grants from outside parties. An earning process is not present in connection with such receipts; asset inflows are simply created by donations. Such amounts are reported as public or contributed support. These same organizations, however, do sometimes earn (in an accounting sense) some of the funds that


are received. Membership dues, for example, are not viewed as gifts if rights that have value are conveyed to the members. The organization may also have receipts from sources such as interest or dividend income. Money derived in this fashion is not the same as a donation and is, thus, recorded as a revenue.

b. The statement of functional expenses is required to be reported by voluntary health or welfare organizations and is permitted for all other private not-for-profit organizations. It allows the reader to determine the ultimate usage of the money that has been raised by the organization. Expenses are separated according to program service expenses (directed towards activities of the organization that relate to its goals and mission) and supporting service expenses (dealing with the cost of running the organization and raising funds). This statement permits interested parties such as potential donors to see the allocation that has been made of the organization’s resources.

c. Some charitable organizations (Goodwill Industries and the Salvation Army, for example) receive a large portion of their contributions in the form of donated materials such as clothing and furniture. If the value of these goods has a clearly measurable basis, recording the gifts as contributed support is appropriate.

d. A not-for-profit organization may receive gifts (or unconditional promises to give) from outside parties that (1) must be expended for a particular purpose or (2) cannot be expended until a particular point in the future. Because the organization does not have the free use of these assets, they are labeled as "Temporarily Restricted Assets." At the time that the stipulation is met or the time period arrives, the asset is reclassified into the Unrestricted Net Asset category.

Other gifts may be given where the donor specifies that only the subsequent income can be expended (frequently for a designated purpose). Because the assets received in the original gift cannot be expended, they are termed “Permanently Restricted Assets."

e. Donated services are extremely common in the operation of many not-for-profit organizations. Literally thousands of individuals solicit funds for organizations such as the Heart Fund, Salvation Army, and March of Dimes. In addition, individuals often voluntarily fill positions of responsibility throughout many of these organizations. Donated services are formally recognized in the accounting records but only if specific circumstances are met:

1. The service creates or enhances a nonfinancial asset or


2. The service requires a specialized skill possessed by the donor that the organization would have had to be purchased if not donated.

f. Prior to 1987, the costs of direct mailings and other solicitations for support were recorded by private not-for-profit organizations as fund raising expenses even if educational materials were included. In that year, this requirement was modified so that an allocation of the joint costs could be made between educational expenses (a program service cost) and fund raising (a supporting service cost). These organizations took advantage of this rule because it made their statements look like they were spending more to meet their goals. In 1998, the AICPA issued its Statement of Position 98-2 “Accounting for Costs of Activities of Not-for-Profit Organizations and State and Local Governmental Entities That Include Fund-Raising.” This SOP stated that direct mailing costs should be assigned entirely to fund-raising costs unless a specific call for action was being made that was not limited to potential donors. This call for action had to be one that would further the mission of the organization. If these requirements were met, a portion of the direct mailing costs could be assigned to program service expenses.

g. Donated materials are normally reported as assets at their fair market value accompanied by an increase in unrestricted net assets. However, the recording of art works, historical treasures, and museum pieces is optional. An item qualifies for such treatment if (1) it is part of a collection for public exhibition, education, or research, (2) it is protected and preserved, and (3) if sold, the money received must be used to acquire other collection items.

37. (25 Minutes) (Determine impact of various transactions on a private college.)

(1)---False. The January 1, Year One restriction is internal and, therefore, causes no changes in the amount of unrestricted net assets. Such changes can only be created by external donors.

(2)---True. The stipulation of the April 1, gift is that only subsequent cash income can be used for the designated purpose. Therefore, changes in value are shown as adjustments to the permanently restricted net assets.

(3)---True. As indicated in (2), the donor has indicated that only cash income can be used for the football stadium. The change in value increases the amount of the assets held in permanently restricted net assets.

(4)---True. The school has properly spent the $500,000 earned on the investments. The school has not set a policy that assumes a time restriction on the use of this stadium. Therefore, the reclassification to unrestricted net assets is made immediately at the time of proper expenditure.


(5)---False. Depreciation expense is appropriate for all long-lived assets with a finite life regardless of the policy of the school.

(6)---False. This is the same answer as in (5). Depreciation expense is appropriate for all long-lived assets with a finite life regardless of the policy of the school.

(7)---True. The acquisition of the football stadium seat has two effects. Because the value of that seat for watching football games is $12,000, the school should recognize that amount as revenue. Dr. Johnson paid an extra $18,000, apparently as a gift to the school. There is no mention of a donor restriction on this additional amount so it is a contribution that also increases unrestricted net assets.

(8)---True. This is the same answer as in (7). Dr. Johnson paid an extra $18,000, apparently as a gift to the school. There is no mention of a donor restriction on this additional amount so it is a contribution that also increases unrestricted net assets.

(9)---True. These donated services meet the requirement for being reported so that a contributed revenue as well as a salary expense must be recognized.

(10)---False. Based on the information given, both the revenue and the expense must be reported. “Might” implies an option which is not available for this type of donation.

(11)---False. The answer is the same as in (10). Both the revenue and the expense must be reported. Unrestricted net assets both go up and go down.

(12)---False. If this painting does not qualify as a work of art, the school must record the asset at $30,000 along with a contribution revenue of that same amount. If the painting does qualify as a work of art, the school can either make the above entry or simply make no entry. Therefore, under one set of circumstances, the contribution revenue is not required.

(13)---False. As in answer (12), the handling depends on whether this painting qualifies as a work of art. However, if the value is $30,000, there is no situation where the school is not allowed to recognize a revenue.

38. (30 Minutes) (Determine changes in net asset balances for several different types of transactions)

Part (1)--Unrestricted Net Assets – No net change. When the $22,000 is spent properly, a reclassification of that amount is made into Unrestricted Net Assets. At the


same time, though, a faculty salary expense of the same amount is recognized. The two balance out for no net impact.--Temporarily Restricted Net Assets – Increase by $9,000. The $31,000 of investment income increases this category but it is then reduced by the $22,000 reclassified into Unrestricted Net Assets because it is properly spent. --Permanently Restricted Net Assets – Increase by $400,000. The current donation increases this category because only the subsequent income can be spent.

Part (2)--Unrestricted Net Assets – No net change. Because of the restriction on the use of the machine for this period of time, the $200,000 gift is initially reported as an increase in Temporarily Restricted Net Assets. At the end of the year, the asset balance will be reduced by $20,000 in depreciation. Thus, a $20,000 reclassification moves a $20,000 balance from Temporarily Restricted Net Assets to Unrestricted Net Assets. That $20,000 increase will exactly offset the $20,000 in depreciation expense also recognized within Unrestricted Net Assets.--Temporarily Restricted Net Assets – Increase by $180,000. Because of the restriction on the time use of the asset, the $200,000 is initially recorded here in Temporarily Restricted Net Assets. The $20,000 reclassification discussed above reduces that net increase to $180,000.--Operating Expenses – Increases by the $20,000 in depreciation expense.

Part (3)--Unrestricted Net Assets – Increase by $1.6 million. The tuition revenue of $2 milion is reduced by the $700,000 in financial aid for a net increase of $1.3 million. However, because $300,000 of previously restricted net assets were used here, a reclassification of that amount from Temporarily Restricted Net Assets to Unrestricted Net Assets causes the overall increase to be $1.6 million.--Operating Expenses – There are no operating expenses. Financial aid is a reduction to tuition revenue and not an operating expense.--Temporarily Restricted Net Assets – Decreases by $300,000. Money that had previously been restricted was properly utilized. Thus, a reclassification of this amount is reported.

39. (45 Minutes) (Prepare financial statements for a not-for-profit organization.)

a. Entries for this not-for-profit organization are presented below. The numbers in parenthesis indicate account totals at that point in time during the period. This method is used as an easy way to gather account balances.

Pledges receivable..................................... 20,000 (220,000)Contribution revenue—interest--unrestricted

net assets........................................... 20,000 ( 20,000)


Cash ........................................................... 100,000 (200,000)Allowance for uncollectible pledges........ 4,000 Pledges receivable................................. 104,000 (net of 120,000)

Cash ........................................................... 180,000 (380,000) Contributions revenue—unrestricted net assets............................................. 180,000 (180,000)

Salary expense........................................... 90,000 ( 90,000) Cash ..................................................... 90,000 (290,000)

Reclassification - Temporarily restricted net assets.................................................. 15,000 ( 15,000) Reclassification - Unrestricted net assets.................................................... 15,000 ( 15,000)

Cash ........................................................... 12,000 (302,000) Contributions revenue—temporarily restricted 12,000 ( 12,000)(To record gift to go to a specified beneficiary. Organization reportsa revenue because it has variance powers.)

Land, buildings, and equipment .............. 500,000 (700,000) Note payable........................................... 450,000 (450,000) Cash ..................................................... 50,000 (252,000)

Reclassification - Temporarily restricted net assets.................................................. 50,000 ( 65,000) Reclassification - Unrestricted net assets.................................................... 50,000 ( 65,000)(To record reclassification of restricted amount properly spent.)

Cash ............................................................ 30,000 (282,000) Membership revenue—unrestricted net assets 30,000 ( 30,000)(Membership dues are listed as revenues and not contributions because members receive substantial benefits.)

Cash............................................................. 30,000 (312,000) Investment revenue—unrestricted net assets 30,000 ( 30,000)(Income is earned on permanently restricted net assets but use of the income is unrestricted.)

Rent expense.............................................. 12,000 ( 12,000)Advertising expense ................................. 15,000 ( 15,000)


Utilities expense ........................................ 16,000 ( 16,000) Cash ..................................................... 43,000 (269,000)

Pledges receivable..................................... 149,000 (269,000) Contributions revenue—temporarily restricted net assets ........................................... 149,000 (161,000)(Although pledge is unrestricted, it will not be collected for fiveyears and, therefore, the proceeds are viewed as temporarily restricted.)

Pledges receivable..................................... 6,000 (275,000) Contribution revenue—interest--temporarily restricted net assets ........................ 6,000 ( 6,000)

Depreciation expense ............................... 40,000 ( 40,000) Land, buildings, and equipment ......... 40,000 (660,000)

Interest expense......................................... 15,000 ( 15,000) Cash ..................................................... 15,000 (254,000)


39. (continued)

Based on the final balances computed above, the following statements can be prepared.

WATSON ORGANIZATIONSTATEMENT OF ACTIVITIES

For Year Ending December 31, 2008

Temporarily Permanently Unrestricted Restricted Restricted Net Assets Net Assets Net AssetsContributions revenue $ 180,000 $ 161,000Contributions -- interest revenue 20,000 6,000Investment revenue 30,000Membership revenue 30,000 _______ ________ Total revenues $ 260,000 $ 167,000

Net assets released from restriction 65,000 ( 65,000) ________

Total revenues and net assets released from restriction $ 325,000 $ 102,000 ________

Expenses:General and administrative—Rent $ (12,000)—Salary (90,000)—Advertising (15,000)—Utilities (16,000)—Depreciation (40,000)—Interest (15,000)

Total expenses $(188,000)

Excess of total revenues and net assets released from restriction over expenses $137,000 $102,000 -0-

Net assets at beginning of year 400,000 100,000 $300,000

Net assets at end of year $537,000 $202,000 $300,000


39. (continued)

b.WATSON ORGANIZATION

STATEMENT OF FINANCIAL POSITIONDecember 31, 2008

ASSETSCash $ 254,000Pledges receivable (net) 275,000Investments 300,000Land, buildings, and equipment (net) 660,000 Total assets 1,489,000

LIABILITIES Notes payable 450,000

NET ASSETS- Unrestricted $537,000- Temporarily restricted 202,000- Permanently restricted 300,000 $1,039,000

40. (15 minutes) (Adjusting totals for an incorrectly reported balance)

a. The tuition was properly recorded as a revenue. However, the financial aid figure should have been a direct reduction to the tuition revenue rather than an expense. In either case, the aid reduces unrestricted net assets so the $400,000 total computed at the end of the year is correct.

b. As indicated in (a), the financial aid should not have been an expense but, rather, a reduction in the tuition revenue. Removing the $140,000 from the recognized expenses reduces that total from $500,000 to $360,000.

41. (15 minutes) (Adjusting totals for incorrectly recorded expenditures)

a. Because the use of the interest was specified by the donor, both interest balances should have been recorded initially within the Temporarily Restricted Net Assets. When properly spent, these amounts would have been reclassified into Unrestricted Net Assets. The organization recorded the amounts immediately in Unrestricted Net Assets. Since the amounts have been properly spent, they did wind up in the category where they were supposed to be reported. The $400,000 shown as unrestricted net assets is correct.


b. Each amount was reported as expenses in unrestricted net assets and that handling was correct. No change is needed so that the $500,000 reported as expenses is shown properly.

c. As indicated in (a), the $5,000 and the $7,000 should have gone to Temporarily Restricted Net Assets and then been removed through a reclassification. No net effect is left. Because nothing was recorded by the organization in Temporarily Restricted Net Assets, the total of $300,000 is correct.

42. (20 minutes) (Adjusting the incorrect recording of a donation and subsequent expenditure)

a. Because a time restriction has been assumed, only $5,000 ($50,000/10 years) should have been reclassified from Temporarily Restricted Net Assets into Unrestricted Net Assets. However, the organization increased Unrestricted Net Assets by $50,000. The final balance being reported, therefore, is $45,000 too high. Removing this $45,000 inflation reduces the final Unrestricted Net Asset figure from $400,000 down to $355,000.

b. Depreciation expense of $5,000 ($50,000/10 years) was recorded within the Unrestricted Net Assets. That handling is appropriate so that the $500,000 expense figure that is reported is correct.

c. Since the problem says that the correct entry was made in Year One, there is a $50,000 balance in Temporarily Restricted Net Assets. Because a time restriction was assumed, only an amount ($5,000) equal to the depreciation recorded should have been reclassified to Unrestricted Net Assets. That $5,000 amount was never removed. Reclassifying the $5,000 reduces Temporarily Restricted Net Assets from $300,000 to $295,000. The $50,000 reclassification error does not affect this category.

43. (5 minutes) (Incorrect reporting of membership dues)

In this case, since nothing was received in exchange for the members’ dues, these dues should have been recorded as a $100,000 per year contribution which would increase Unrestricted Net Assets. The dues were recorded as a membership revenue which is incorrect but it does increase Unrestricted Net Assets. So, the source is wrongly reported but the total Unrestricted Net Assets is correctly stated at $400,000.

44. (15 minutes) (Reporting of donated services)


a. The problem here is that an expense of $70,000 was reported when the donation was a garage that should have been capitalized as an asset. Subsequently, though, this asset would have been depreciated at the rate of $7,000 per year. For this reason, the expenses are overstated by $63,000 which causes Unrestricted Net Assets to be understated by $63,000. Instead of an Unrestricted Net Assets balance of $400,000, the organization should have reported $463,000.

b. The organization reported no assets. The organization should have reported a $70,000 garage less $7,000 in accumulated depreciation. The net balance of $63,000 should be added to the reported total for assets of $900,000 to arrive at a corrected figure of $963,000.

c. As indicated in (a) above, the expenses were overstated by $63,000. Removing this $63,000 drops the expense total from $500,000 to $437,000.

45. (10 minutes) (Reporting a gift that must be transferred to another party)

a. This money is still under the control of the donor. Consequently, the organization should have recorded a liability to the donor until a final resolution. Instead, the charity recorded a contribution revenue which served to increase Unrestricted Net Assets. That $40,000 should be removed so that Unrestricted Net Assets are $360,000 and not $400,000.

b. This issue is about whether a contribution or a liability should be reported. The amount reported as assets is not in question and is, then, correctly stated at $900,000.

Develop Your Skills

Research Case 1

This is an excellent assignment to demonstrate the wealth of information that is available on the Internet about charities. Many individuals want to be generous and help organizations that deserve their assistance. Determining, though, whether an organization is truly worthy of support is not necessarily easy. Every organization will claim that it is effectively helping to improve some element of society that is in need.

Obviously, the information that a student finds at this website will depend upon the specific organizations that are examined. However, some of the information that is normally available includes:

stated purpose of the organization, year it was started,


the existence of any affiliated organizations, whether this organization has met all of the standards of the group that

created the website and, if not, what was the problem, a discussion of the organization’s programs along with the program

expenses, identification of the chief executive officer (along with compensation), number of individuals on the board and the number of staff members

working in the organization, methods used for fund-raising, tax status, sources of funding, including dollar amounts

From this type of information, a student should be able to write a good overview of the organization and its operations and finances.

RESEARCH CASE 2

This case is designed to introduce students to the information that can be found on the Form 990 that must be made public by tax-exempt organizations. Much of the information is the same as is shown on the organization’s financial statements but the availability of the Form 990 ensures that such information is made public.

Most not-for-profit organizations that a student might research will qualify as Section 501(c)(3) charities.

The salary information will give an opportunity to discuss whether officials of these organizations made too much or too little. Do the amounts seem reasonable in comparison to the amount of revenues generated or the amount of assets held. What, for example, would the president of a comparable for-profit business make in salary and other compensation?

One exercise that can be done is to simply list on the classroom board the types of information that the students uncover. Which of these is most important and why is each of the items listed included?

Analysis Case 1

Many times a potential donor may be interested in an array of information that can only be found by studying the actual financial statements of a not-for-profit organization. The purpose of financial statements is to provide a complete picture of the financial operations and position of the organization to help outsiders make decisions. Students can observe the construction of financial statements in textbooks but only by actually making use of these statements can they come to appreciate the information that is available. One way to approach


this assignment is to ask the students to list out the five most interesting pieces of information that they uncover about a particular charity.

The web site for many not-for-profit organizations can be found by going to www.give.org and then clicking on “Charity Reports.” At that spot, a large number of charitable organizations are listed. By clicking on a specific charity, the student can get considerable information including the organization’s website address.

The exact information that is found will, obviously, depend on the particular not-for-profit organization that is studied. As just one example, the following information comes from recent financial statements for the American Heart Association for the year ended June 30, 2006:

1--This not-for-profit organization has four different program services listed in its financial statements: research, public health education, professional education and training, and community services.

2--The charity reported total expenses for 2006 in excess of $681 million. Of that total, more than $137 million was incurred in connection with supporting services. Thus, approximately 20 percent of each dollar of expense was incurred in connection with supporting services.

3--In the statement of activities, the American Heart Association recognized $87.5 million in donated services for the year ended June 30, 2006. Note 1, section j, spells out additional information about these donations as well as other donated services that were not recognized.

4--A question that is raised in connection with virtually any charitable organization has to do with the amount of resources that are expended to raise more resources. In the year ended June 30, 2006, the American Heart Association, incurred $88.5 million in fund-raising expenses. That amount makes up approximately 13 percent of the organization’s total expenses for the period.

5--The financial statements at June 30, 2006 show that the American Heart Association held $319.7 million in unrestricted net assets, $244.4 million in temporarily restricted net assets, and $147.6 million in permanently restricted net assets.

6--During FYE June 30, 2006, $111.5 million of temporarily restricted net assets were reclassified as unrestricted. Either the related purpose restriction or the time restriction had been satisfied.

Analysis Case 2


http://www.give.org/

Most private colleges and universities now place their latest audited financial statements on their Web site. However, in some cases, a bit of searching is needed to locate these statements. The method by which the statements are made available is certainly not standardized.

The information that will be uncovered by reading through these financial statements will depend entirely on the school being used. Here are the answers to the posed questions for the University of Richmond as of June 30, 2006, and the year then ended:

1--Tuition and fee revenue for the period totaled $109.2 while the school’s “scholarship allowance” was $34.7 million. Hence, this financial aid covered approximately 31.8 percent of the tuition charged to students. To put this information another way, the “average” student paid 68.2 percent of the school’s tuition charges.

2--The University’s balance sheet shows a pledge receivable of over $20.9 million on its balance sheet. A look at note five to the financial statements indicates that over 80 percent of that money is expected within the next five years. Because a lot of these dollars will not be received until well into the future, the actual amount being reported is the present value of these expected future cash flows discounted at rates ranging from 3 percent to 11 percent.

3--This is an extremely difficult question for any school to answer because the costs of “educating the students” can be included within several different accounts: instruction, libraries, academic support, institutional support, and the like. So, no exact comparison between educational costs and research costs is possible here. However, considerable information can be determined about the school’s priorities simply by comparing instruction expenses ($52.0 million) and research expenses ($4.1 million).

4--For 2006, the University of Richmond shows $6.2 million in operating revenue contributions and $8.0 million in non-operating contributions (such as for buildings and equipment).

5--At the end of 2006, the University of Richmond reported $1.29 billion in unrestricted net assets, $42.5 million in temporarily restricted net assets, and $279.1 million in permanently restricted net assets. For these last two figures, the restrictions had to have been put in place by an outside party (probably the donor).

6--The statement of activities shows a total of both realized and unrealized gains for the year of $168.4 million. No explicit indication is made as to


what part of that loss resulted from the sale of investments and what part came from changes in fair market value.

7--The problem with this computation is determining exactly what is meant by “education expenses.” One way to compute that figure for the University of Richmond for 2006 is as follows:

Net Tuition and Fees $74,488,125

Education Expenses (one way that term can be defined)—Instruction $51,956,444—Libraries 10,286,082—Academic Support 18,278,762—Student Services 11,687,030—Institutional Support 30,629,603 (122,837,921 )

Net Loss on Educating Students $(48,349,796 )

Many students feel that, because of the high amounts being charged, colleges and universities should make a great profit from tuition. Depending on how education costs are defined, most schools will show a monetary loss (and often a considerable loss) from the process of educating students. This is one computation that can really interest a college student.

Communication Case

There is a considerable amount of information available at this Web site so that a student’s actual report will vary depending on which pieces are emphasized. A general checklist is available:

(1) - Develop a Culture of Accountability and Transparency (2) - Adopt a Statement of Values and Code of Ethics (3) - Adopt a Conflict of Interest Policy (4) - Ensure that the Board of Directors Understands and Can Fulfill Its Financial Responsibilities (5) - Conduct Independent Financial Reviews, Particularly Audits (6) - Ensure the Accuracy of and Make Public Your Organization’s Form 990 (7) - Be Transparent (8) - Establish and Support a Policy on Reporting Suspected Misconduct or Malfeasance (“Whistleblower Protection Policy”) (9) - Remain Current with the Law

Each of these is then linked to considerably more information. For example, at “Be Transparent,” the following advice is available:

Information that should be made available on your organization’s website.


http://www.independentsector.org/issues/accountability/Checklist/9_Law.html

http://www.independentsector.org/issues/accountability/Checklist/8_Whistleblower.html

http://www.independentsector.org/issues/accountability/Checklist/8_Whistleblower.html

http://www.independentsector.org/issues/accountability/Checklist/7_Transparent.html

http://www.independentsector.org/issues/accountability/Checklist/6_Form990.html

http://www.independentsector.org/issues/accountability/Checklist/5_FinReviews.html

http://www.independentsector.org/issues/accountability/Checklist/4_Financials.html

http://www.independentsector.org/issues/accountability/Checklist/4_Financials.html

http://www.independentsector.org/issues/accountability/Checklist/3_Conflicts.html

http://www.independentsector.org/issues/accountability/Checklist/2_Statements.html

http://www.independentsector.org/issues/accountability/Checklist/1_Culture.html

--Vision and mission statements; --Statement of values and code of ethics; --Conflict of interest policy; --Form 990 or 990-PF, with all parts and schedules (except contributors’ list with amounts, which is protected under the Privacy Act); --Most recent audited financial statements; --Information on programs and impact of your work; --Information on evaluation procedures for assessing effectiveness and performance of the organization; --Annual Report or other regular report on accomplishments; --Information on accreditations the organization holds or certifications/standards it may meet; --List of board members and officers, and staff (if you have security concerns you may refer inquiries to your switchboard or to a general information email); --List of contributors (amounts of contributions should be disclosed only with permission of contributor); donor requests for anonymity should be honored; --Form 1023 (the organization’s original application for recognition of tax-exempt status); --Bylaws or charter documents; and --Other relevant policies and documents.


chapter 18 imsm

Documents