Copyright © 2013 by The McGraw-Hill Companies, Inc. All rights reserved.
McGraw-Hill/Irwin

General Characteristics
 They receive contributions from donors who do not expect a return of equal financial value
 Their operating purpose is not providing goods and services for profit
 They do not have ownership interests as do forprofits
They may be governmental or private
 Charitable




Educational
Civic organizations
Political parties
Trade organizations
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LO 1
FASB has jurisdiction over private Not-For-
Profits, and two basic ideas form the FASB’s framework for not-for-profit standards:
The financial statements should focus on the entity as a whole.
Reporting requirements for not-for-profits should be similar to business entities, unless there are critical differences in the needs of users.
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Prior to 1993, there was a confusing variety of private not-for-profit accounting practices.
 In that year, FASB issued guidance to
 standardize the reporting,
 emphasize reporting the operations and financial position of the entire entity, and
 allow the use of many of the same accrual-based techniques utilized by for-profit entities.
18-4

LO2
FASB requires three financial statements for not-for-profits.
1)
2)
3)
4)
Statement of Financial Position
Statement of Activities and Changes in Net Assets
Statement of Cash Flows
Statement of Functional Expenses (required only for voluntary health and welfare organizations).
18-5

Report assets, liabilities, and net assets.
Use the term “Net assets” rather than owners’ equity or fund balance.
Net assets are presented in three categories:
 Unrestricted
 Temporarily

Restricted
Permanently
Restricted
18-6

Restrictions by an outside donor results in an asset that is classified as:
 Temporarily restricted
 For a particular purpose OR
 For use in a future time period
 Permanently restricted
 Expected to remain restricted for as long as the organization exists
 Unrestricted
 B oard-designated or internally restricted assets
18-7


Change in net assets = difference between revenues and expenses.

The change in net assets is reported instead of net income. Donors’ unconditional promises to give are recognized as both revenue and a receivable in the period of promise.

Revenues and expenses are measured on the accrual basis.
18-8

Expenses are presented in two categories:

Program Services

Supporting Services
Program Services
Activities relating to social services, research, or other objectives of the organization.
Supporting Services
Administrative costs and fund-raising expenses.
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LO 3
Statement of Functional Expenses
A detailed analysis of expenses by both function and object. Allocation of joint fund-raising & program service costs is permitted only when certain criteria are met.
18-10

LO 4
Cash is recorded as revenue in the period received.
Conditional promises to give are recognized as revenue when the conditions are met.
Restricted gifts are not the same as conditional gifts.
Unconditional promises to give are recognized as revenue when the promise is made.
Pledges that allow donors to change their minds are not unconditional.
18-11

LO 5
Tax-Exempt Status – Not-for-profits may not have to pay federal income taxes under the following sections of the Internal Revenue Code:
Section
501(c)(3)
Applies to charitable, educational or scientific.
Section
501(c)(4)
Applies to advocacy groups
Section 501(c)(6)
Applies to business leagues, boards of trade
18-12

LO 6

Why have mergers and acquisitions become prevalent among Not-for-Profits?

Efficient use of resources

Common goals

Efficiencies of size

Rescue suffering charities
 Expand one organization’s scope of outreach
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
The respective Boards of Directors make the decision to acquire another entity, there are no shareholders to buy out or consider.

In an Acquisition, the acquired accounts are added at FMV.

In a Merger, the newly formed not-forprofit records all accounts at their previous book values.
18-14

LO 6 Accounting for
Health Care Organizations
Health Care expenditures account for 16% of our
Gross Domestic Product, much of which is paid by third-party payors.
From a financial reporting perspective, these organizations have no need to compute and report net income.
However, readers of the financial statements need a way to measure the efficiency of the entity’s operations.
FASB requires the reporting of a “performance indicator” to show operational success or failure.
18-15

Accounting for
Patient Service Revenues
Bad debts and fee reductions for health care organizations can be significantly higher than for other kinds of
Amounts that the entity does not intend to collect should not ultimately be reported as revenues.
entire bill. Third-party payors, such as insurance providers, are an important part of the process.
18-16