Government Accounting
&
Accounting for non-profit organizations
by: ZEUS VERNON B. MILLAN
Chapter 16
Non-profit Organizations
Learning Objectives
1. Explain the applicability of the PFRSs to
NPOs.
2. Account for the assets, liabilities, equity,
revenues and expenses of NPOs.
3. Enumerate and describe the financial
statements of NPOs.
4. State the accounting procedures peculiar
to specific types of NPOs.
GOVT ACCTG & ACCTG FOR NPOs by:
Z.B.Millan
Applicability of PFRSs to NPOs
• Although the IFRSs/PFRSs are designed to
apply to business entities, they can also be
applied to non-profit organizations.
GOVT ACCTG & ACCTG FOR NPOs by:
Z.B.Millan
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.
GOVT ACCTG & ACCTG FOR NPOs by:
Z.B.Millan
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.
GOVT ACCTG & ACCTG FOR NPOs by:
Z.B.Millan
PFRS principles applicable to NPOs
• Recognition criteria for assets and liabilities:
a. Meets the definition of an asset (or liability);
b. Probable inflow (or outflow) of resources; and
c. Reliable measurement of cost or other value.
GOVT ACCTG & ACCTG FOR NPOs by:
Z.B.Millan
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.
GOVT ACCTG & ACCTG FOR NPOs by:
Z.B.Millan
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.
GOVT ACCTG & ACCTG FOR NPOs by:
Z.B.Millan
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, and
h. Consistency of presentation.
GOVT ACCTG & ACCTG FOR NPOs by:
Z.B.Millan
Fund theory vs. Fund accounting
• The FS of most NPOs are based on the fund theory. The
fund theory stresses great importance on the custody and
administration of funds. Accordingly, the source, nature and
purpose of the funds held by the NPO are disclosed in order
to give information necessary for users to assess the
organization’s stewardship over those funds.
• Under fund accounting, the main accounting unit is the
fund. Accordingly, transactions are accounted for in the
books and presented in the financial statements strictly
based on their fund classifications as either (1)
Unrestricted, (2) Temporarily restricted, or (3) Permanently
restricted. Although fund accounting is an off-shoot of the
fund theory, it is not required.
GOVT ACCTG & ACCTG FOR NPOs by:
Z.B.Millan
Fund theory-based FS
 Focuses on the reporting entity
concept; thus, the accounting unit
is the organization as a whole.
Fund accounting-based FS
 Views the entity as being made up
of component parts; thus, the
accounting units are the various
funds held.
 Adheres to the accounting point-of-  Adheres to the bookkeeping pointview of providing useful
of-view of providing useful
information to external users.
information to managers.
 The term “funds” is more
 The term “funds” is used to refer to
commonly used to refer to the net
specific funds consisting of cash and
assets.
other non-cash assets.
 Provides disclosures on the types of  Focuses on classifying assets, net
restrictions on net assets and
assets, and changes in them strictly
revenues (i.e., unrestricted,
in accordance with their fund
temporarily restricted, or
classifications (i.e., unrestricted,
temporarily restricted, or
permanently restricted).
permanently restricted).
 Current trend
 Traditional
Contributions
• Contributions refer to resources received in nonreciprocal transactions (i.e., donations).
• Contributions are classified based on donor’s
restrictions as:
1. Unrestricted,
2. Temporarily restricted, and
3. Permanently restricted.
• These classifications are also applied to the net
assets.
• Internally-restricted funds (restricted based on
management’s sole discretion) are unrestricted.
GOVT ACCTG & ACCTG FOR NPOs by:
Z.B.Millan
Recognition and measurement
• Contributions in the form of cash or non-cash assets
are recognized as revenues measured at fair value
and reported as either:
1. Unrestricted support – revenue from unrestricted
contributions; or
2. Restricted support – revenue from temporarily
restricted or permanently restricted
contributions.
• Unrestricted support increases unrestricted net
assets.
• Restricted support increases either (a) temporarily
restricted net assets or (b) permanently restricted net
assets.
GOVT ACCTG & ACCTG FOR NPOs by:
Z.B.Millan
Promises to make contributions
• Unconditional promise to give cash or other noncash assets in a future period is recognized when the
unconditional promise to give is received from the
donor. This is classified as a temporarily restricted
contribution because of the time restriction.
• Conditional promise is recognized only when the
attached condition is substantially met. If the
promised contribution is received before the
attached condition is substantially met, it shall be
accounted for as a liability.
GOVT ACCTG & ACCTG FOR NPOs by:
Z.B.Millan
Services
• Contributions of services are recognized if the
services received:
a. create or enhance nonfinancial assets; or
b. require specialized skills, are provided by
individuals possessing those skills, and would
typically need to be purchased if not provided by
donation.
• Contributed services and promises to give services
that do not meet the above criteria are not be
recognized.
GOVT ACCTG & ACCTG FOR NPOs by:
Z.B.Millan
Works of art and similar items
• An entity need not recognize contributions of works
of art, historical treasures, and similar assets if the
donated items are added to collections that meet all
of the following conditions:
a. Held for public exhibition, education, or research
in furtherance of public service rather than
financial gain;
b. Protected, kept unencumbered, cared for, and
preserved; and
c. Proceeds from sales of collection items are to be
used to acquire other items for collections. (SFAS
No. 116.11)
GOVT ACCTG & ACCTG FOR NPOs by:
Z.B.Millan
Financial statements
PFRSs
SFAS No. 117
(based on IASCF’s published
audited financial statements)
a. Statement of financial
position
b. Statement of activities
a. Statement of financial
position
b. Statement of activities
c. Statement of cash flows
c. Statement of cash flows
d. Notes
d. Notes
GOVT ACCTG & ACCTG FOR NPOs by:
Z.B.Millan
Functional classification of Expenses
1. Program services – are the activities that result in
goods and services being distributed to
beneficiaries, customers, or members that fulfill the
purposes or mission for which the organization
exists. Those services are the major purpose for and
the major output of the organization and often
relate to several major programs.
2. Supporting activities – are all activities other than
program services. Generally, these include
management and general, fund-raising, and
membership-development activities.
(SFAS No. 117, 26 to 28)
GOVT ACCTG & ACCTG FOR NPOs by:
Z.B.Millan
Accounting procedures peculiar to
specific types of NPO’s
• The following are the specific types of NPOs with
peculiar accounting procedures/requirements:
a. Health Care Organizations
b. Private, non-profit, Colleges and Universities
c. Voluntary Health and Welfare Organizations
d. Other non-profit organizations
GOVT ACCTG & ACCTG FOR NPOs by:
Z.B.Millan
Health Care Organizations
• Financial statements:
1. Statement of financial position
2. Statement of operations (in lieu of a statement of
activities)
3. Statement of changes in net assets
4. Statement of cash flows, and
5. Notes to the financial statements.
GOVT ACCTG & ACCTG FOR NPOs by:
Z.B.Millan
Health Care Organizations
• Revenues in the statement of operations are
classified into the following:
a. Net patient revenue:
Gross patient service revenue
xx
Less: Contractual adjustments
(xx)
Employee discounts
(xx)
Billed charity care
(xx)
Net patient revenue
xx
b. Premium revenue – results from capitation
agreements
c. Other revenues – all other revenues except those
that are restricted.
GOVT ACCTG & ACCTG FOR NPOs by:
Z.B.Millan
Health Care Organizations
• A contractual adjustment 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 (e.g., PhilHealth).
• Employee discounts are special discounts available
only to the NPO’s employees (and their immediate
family members). Employee discounts are directly
deducted from patient service revenue.
• Charity care pertains to free services rendered to
patients. Charity care is not recognized but rather
disclosed only in the notes.
• Capitation agreements are agreements with third
parties based on the number of employees instead of
services rendered.
GOVT ACCTG & ACCTG FOR NPOs by:
Z.B.Millan
Health Care Organizations
• Health Care Organizations present revenues from
restricted contributions separately at the bottom
part of the statement of operations, after
unrestricted revenues and expenses.
• According to the AICPA Guide, the statement of
operations shall provide a performance indicator,
such as operating income, revenue over expenses,
etc. The policy used in determining the performance
indicator shall be disclosed in the notes.
• Unrealized gains and losses on investments in
securities are not a part of the performance indicator,
but shall be reported on the statement of operations
after the performance indicator.
GOVT ACCTG & ACCTG FOR NPOs by:
Z.B.Millan
Private, non-profit, Colleges and
Universities
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 for services rendered by the grantee
are treated as expenses, e.g., scholarships provided
to student assistants and faculty members or their
dependents.
c. Refunds of tuition fees from class cancellations and
other withdrawal of enrolment are treated as direct
reduction of revenues from tuition and fees.
GOVT ACCTG & ACCTG FOR NPOs by:
Z.B.Millan
Voluntary Health and Welfare
Organizations
• The accounting requirement unique to VHWOs 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 expense, etc.).
GOVT ACCTG & ACCTG FOR NPOs by:
Z.B.Millan
APPLICATION OF
CONCEPTS
PROBLEM 16-5: FOR CLASSROOM DISCUSSION
GOVT ACCTG & ACCTG FOR NPOs by:
Z.B.Millan
 QUESTIONS????
 REACTIONS!!!!!
GOVT ACCTG & ACCTG FOR NPOs by:
Z.B.Millan
END
GOVT ACCTG & ACCTG FOR NPOs by: Z.B.Millan