Current trend in practice •In practice, the accounting for NPOs is essentially similar to the accounting for businesses. The notable differences are the terminologies used in the financial statements, which are modified to suit the NPO’s purpose, and the presentation and disclosure of equity. Non-profit Organization •Non-profit organization (NPO)– is one that carries out some socially desirable needs of the community or its members and whose activities are not directed towards making profit. •Surplus revenues of NPOs do not inure to the benefit of a particular individual or group of individuals but rather retained in furtherance of the organization’s mission. Accordingly, none of the surplus revenues are distributed as dividends. • A non-stock corporation that is organized for the benefit of the public as a whole, rather than for the benefit of an individual proprietor, or a group of partners or stockholders. •Obtains revenues sufficient to cover its expenses. Charitable donations or other fundraising activities. Educational, religious, social, cultural or charitable. •Exempt from Income Taxes but subject to Business Taxes. Characteristics of NPOs NPO & GOVERNMENTAL ENTITIES 1. Public service 2. No profit motives 3. Finance by the citizenry 4. Stewardship of resources EXAMPLES OF NON-PROFIT ORGANIZATIONS 1. Health Care Organizations 2. Private, non-profit, Colleges and Universities 3. Voluntary Health and Welfare Organizations 4. Other Non-profit Organizations ex. Churches, museums, etc. PFRS principles applicable to NPOs •Measurement of Asset or Liability: a. Initial measurement at cost except when a relevant PFRS requires measurement at fair value or some other value. b. Subsequent measurement at amortized cost, under the cost model, or some other measurement model required by a relevant PFRS. PFRS principles applicable to NPOs Derecognition of Asset or Liability: •An asset (or liability) is derecognized when it ceases to provide inflow (or require outflow) of resources embodying economic benefits. The difference between the carrying amount and net proceeds (or net settlement), if any, is recognized in change in net assets. PFRS principles applicable to NPOs •General features in the Presentation of FS: a.Fair presentation and compliance with PFRSs, b.Going concern, c.Accrual basis, d.Materiality and aggregation, e.Offsetting, f.Frequency of reporting, g.Comparative information, h.Consistency of presentation. Accounting for Non-profit Organization Fund theory vs. Fund Accounting The term "funds " is more commonly used to refer to the net assets. The term "funds " is used to refer to specific funds consisting of cash and other non-cash assets. Provide disclosures on the types of restrictions of net assets and revenues. Focuses on classifying assets, net assets, and changes in them strictly in accordance with their funds classifications. Current trend Traditional Contributions Contributions- refers to the resources received in non-reciprocal transactions. 1. Unrestricted •Available for immediate use and for any purpose 2. Temporarily Restricted •Restricted by the donor and the availability for use depends on: a)Performance of a task b) Happening of a future event c) Passage of time 3. Permanently Restricted •Restricted by the donor, NPO can’t use the contribution itself but can use the income therefrom. Recognition and Measurement •Contributions (cash and other non-cash assets) are recognized as revenues in the period received and measure at fair value at the date of contribution. •Reported as: 1. Unrestricted Support - revenue from unrestricted contributions. 2. Restricted Support -revenue from temporarily restricted and permanently restricted contributions. Unconditional Promises ▪ Unconditional promises to give cash or other non cash assets in a future period is recognized when unconditional promise to give is received from the donor. ▪ Unconditional promise is classified as temporarily restricted contribution. ▪ If the promised contribution becomes doubtful, allowance for uncollectibility is recognized. Conditional Promises ▪ Conditional promises to give, which depend on the occurrence of specified future and uncertain event to bind the promisor, are recognized only when the attached conditions are substantially met. ▪ If the probability of the condition is remote, it is considered unconditional. ▪ A transfer of assets with a conditional promise to contribute them shall be accounted for as refundable advance until the conditions have been substantially met. Services Conditions of services are recognized if the service received: A. Create or enhance nonfinancial assets or; B. Require specialized skills (like accountant, lawyers, architects, doctors, etc) , are provided by individuals possessing those skills, and would typically need to be purchased if not provided by donation. If the above criteria does not met, it is not recognized. Work of art and similar items An entity need not recognized contributions of work of art, historical treasures and similar assets if the donated items are added to the collections that meet all the following conditions: A. Held for public exhibition, education or research In furtherance of public service rather than financial gai, B. Protected, kept unencumbered, cared for and preserved and C. Proceeds from sale of collection items are to be used to acquire other items for collections. If a work of art recognize criteria for an asset, it is recognized as an asset and revenue measured at fair value. Fund Accounting Transactions are recorded in a manner that as if the organization is divided into its component parts unrestricted funds, temporarily restricted funds and permanently restricted funds. Accordingly, transfers between the funds are viewed as accountable events that are recorded through journal entries. Other funds held by NPOs A. Endowment fund – classified into the following: ▪ Term endowment fund – Under the donor’s restrictions, the NPO can use a portion of the principal each period. This is classified as temporarily restricted. ▪ Regular endowment fund – under the donor’s restrictions, the NPO cannot spend any of the principal. This is classified as permanently restricted This fund is used according to donor’s instruction. B. Agency fund – funds held by the NPO acting as a custodian. Agency fund is recognize as liabilities. C. Plant fund – consists of the following: ▪ Unexpended funds for the acquisition of plant assets. ▪ Funds for the renewal and replacement of plant assets. ▪ Funds for the retirement of indebtedness. ▪ Investment of plant assets. C. Board designated fund (quasi-endowment) – Funds which are restricted at the sole discretion of the NPOs governing board. Funds that are internally restricted are classified as unrestricted. Only contributions with donor-imposed restriction are classified as restricted. The SFAS no. 117 and the PFRSs do not require fund accounting. NPOs normally use fund accounting as a managerial tool rather than a system for providing generalpurpose financial statements. Deferral method of recognizing contributions The deferral method is similar to the provisions of PAS 20 Accounting for Government Grants and Disclosure of Government Assistance. The income from donation is recognized based on the matching concept. Under the deferral method, restricted contributions are initially recognized as liability and revenue in the same period where the related expenditures, for which the contributions were intended to reimburse, are incurred. Financial Statements A complete set of general-purpose financial statements of an NPO consists of the following: The PFRS ( based on IASCF published audited financial statements) and SFAS no. 117. Under PFRS and SFAS no. 117 ▪ Statement of financial position ▪ Statement of activities ▪ Statement of cash flows Notes Statement of Activities • Shows information on revenues, expenses, and changes in net assets for a period. It takes the place of the income statement and statement of changes in equity for business entity. • The term “profit” or “net income” is replaced by the term “change in net assets”. • SFAS No. 117 requires that the statement of activities report the changes in net assets for each of the three categories of support separately: 1. Unrestricted 2. Temporarily Restricted 3. Permanently Restricted Expenses A statement of activities shall report expenses as decreases in unrestricted net assets. SFAS No. 117 requires expenses to be presented in the statement of activities or in the notes according to their function. Functional Classification 1. Program services- activities that result in goods and services being distributed to beneficiaries, customers, or members that fulfill purpose or mission for which the organization exists. 2. Supporting activities- activities other than program services. Generally, these include management and general fund-raising, and membership development activities. Accounting procedures peculiar to specific types of NPOs There are some accounting procedures that are unique to specific types of NPOs. NPOs will be subdivided into the following 1. Health Care Organizations 2. Private, non-profit, Colleges and Universities 3. Voluntary Health and Welfare Organizations 4. Other non-profit organizations Health Care Organizations In accordance with “AICPA Audit and Accounting Guide, Health Care Organizations”, the following are the accounting requirements unique to health care organization: 1. Components of a complete set of financial statements 2. Presentation of revenues in the statement of operations 3. Presentation of contributions in the statement of operations 4. Disclosure of performance indicator. According to “AICPA Audit and Accounting Guide, Health Care Organizations”, health care organizations shall prepare the following statements a) Statement of Financial Position b) Statement of operations (in lieu statement of activities) c) Statement of changes in net assets d) Statement of cash flows and; e) Notes to financial statements Presentation of revenues in the statement of operations Revenues in the statement of operations are classified into the following: a) Net patient revenue – gross patient service revenue less contractual adjustments, employee discounts and billed charity care. b) Premium revenue – results from capilation agreements c) Other revenues- all other revenues not classifiable as net patient revenue or premium revenue. Contractual Adjustments A portion of hospital’s revenue is collectible from third-party payors, such as the Philippine Health Insurance Corporation (PhilHealth) and other health insurance providers. In this regard, a contractual adjustment may arise form the reimbursement agreement It is the difference between what the hospital considers a fair price for a service rendered versus an agreed upon amount for the service with the insurance company. Example: ABC Hospital may consider Php 60,000 a fair price for a service but agrees with PhilHealth to accept only Php 58,000. The difference of Php 2,000 represents the contractual adjustment which is written off as a direct reduction to patient service revenue Employee Discounts These are special discounts available only to the NPO’s employees and their immediate family members in the form of reduction in the price of patient services. Employee discounts are accounted for as direct reduction to patient service revenue. Charity Care Charity care pertains to free services rendered to patients. Charity care is not recognized but rather disclosed only in the notes. Capitation agreements These are agreements with third parties based on the number of employees instead of services rendered. SFAS No. 117 requires revenues from capitation agreements to be shown separately on the statement of operations under the caption “Premium Revenue”, which is a line item below net patient revenue Private, non-profit, Colleges and Universities The accounting procedure that is unique to private, non-profit, colleges and universities is the accounting for scholarships and fellowships. The concepts are provided below: a) Scholarships and fellowships granted freely are treated as direct reduction of revenues from tuition and fees, e.g., academic scholarship b) Scholarships and fellowships granted as compensation to services rendered by the grantee are treated as expenses, e.g., scholarships provided to student assistants and faculty members or their departments. c) Refunds of tuition fees from class cancellation and other withdrawal of enrollment are treated as direct reduction of revenues from tuition and fees. Voluntary Health and Welfare Organizations • These are non profit entities that derive their revenues primarily from donations from the general public to be used form purposes connected with health, welfare, or community services. • What distinguishes a VHWO providing health care services from Health Care Organization is the source of revenue rather than the type of services provided. A VHWO derives its revenues from donation from the general public while a Health Care Organization derives its revenues from patients. • Accounting requirement for VHWO is the provision of a statement of functional expenses that reports expenses by both functional (i.e., program and supporting) and natural classifications (salaries expense, depreciation etc). According to SFAS No. 117, the statement o functional expenses is useful in associating expenses with service efforts and accomplishments of the organization.
