Chapter
19-1

Chapter
19-2
19
Advanced Accounting, Fourth Edition

NNOs)
1. Nonprofit institutions of higher education.
2. Hospitals and other health care providers.
3. Voluntary health and welfare organizations (VHWOs).
4. Other nongovernment nonbusiness organizations
(ONNOs).
Chapter
19-3

Hierarchy of Reporting Standards (NNOs)
Most guidance for NNOs is found in Audit and Accounting
Guides of the AICPA and in publications of industry:
Colleges and Universities


Audits of Colleges and Universities, 2nd ed. (AICPA, 1975)
Financial Accounting and Reporting Manual for Higher Education
Hospitals and Other Health Care Providers

Audits of Providers of Health Care Services (AICPA, 1989)
Voluntary Health and Welfare Organizations (VHWOs)

Audits of Voluntary Health and Welfare Organizations (AICPA,
1988)
Chapter
19-4
Other Nongovernment Nonbusiness Organizations

Audits of Certain Nonprofit Organizations, second edition (AICPA,
1987).

Hierarchy of Reporting Standards (NNOs)
Most guidance for NNOs is found in Audit and Accounting
Guides of the AICPA and in publications of industry:
Chapter
19-5
LINK to Audit and Accounting Guides

Financial Reporting for Not-for-Profit
Chapter
19-6
1. Statement of financial position
Net Asset categories:
 Unrestricted net assets
 Temporarily restricted net assets
 Permanently restricted net assets
2. Statement of activities
3. Statement of cash flows

Fund Accounting
Chapter
19-7
Most NNOs use fund accounting for recordkeeping and reporting purposes.
Six funds commonly used:
1. Current Fund (restricted and unrestricted).
2. Plant Fund.
3. Endowment Fund.
4. Loan Fund.
5. Agency or Custodial Fund.
6. Annuity and Life Income Fund.

Accrual Basis of Accounting
Chapter
19-8
Financial statements for NNOs ( accrual basis )
Revenues are reported when earned and realized or realizable, and
Expenditures are reported when materials or services are received.
For external reporting purposes ,
Revenues are classified by source, and
Expenses and expenditures are classified by function or activity.

Accounting for Current Funds
Financial resources that may be expended at the discretion of the governing board
Resources restricted because of legal, contractual, or external restrictions on their use.
Chapter
19-9

Accounting for Current Funds
Part of current unrestricted fund.
Resources designated by governing board for specific purposes, projects, or investments.
To limit discretion of management.
Governing board can modify designations.
Hospitals = classified as assets whose use is limited .
Chapter
19-10

Accounting for Current Funds
Board designated funds for specific current operating purposes are accounted for by footnote or by reclassification of the Unrestricted Current Fund Balance.
Some board-restricted current resources can be transferred to other funds.
Chapter
19-11

Accounting for Current Funds
Unique to colleges and universities
Mandatory transfers
 Transfers from current funds group to other fund groups arising from binding legal agreements grant agreements
Nonmandatory transfers
 Transfers from current funds group to other fund groups at discretion of governing board .
Chapter
19-12

Contributions
SFAS No. 116, requires contributions to be recognized as revenue in the period received.
Contributions include gifts of cash, pledges, donated services, and gifts of noncash assets.
Conditional promises to give are recognized when they become unconditional.
Pledges are recorded as revenues when a promise to give is nonrevocable and unconditional, at present value of expected receipts.
Chapter
19-13

Contributions
Exercise 19-6: A well-known celebrity sponsored a telethon for the Help for the Blind Foundation on November 1, 2008. Pledges in the amount of $1,000,000 were called in. Using similar telethon campaigns as a basis, it is estimated that 25% of the pledges will be uncollectible. During 2009, $700,000 of contributions from these pledges were collected. The remainder were uncollectible.
Required: Identify the appropriate fund(s) and prepare the journal entries necessary in 2008 and 2009 to record these transactions.
Chapter
19-14

Contributions
Exercise 19-6: Prepare the journal entries necessary in 2008 .
Pledges Receivable
Revenue - Contributions
1,000,000
1,000,000
Provision for Uncollectible Pledges
Allowance for Uncollectible Pledges
250,000
250,000
Chapter
19-15

Contributions
Exercise 19-6: Prepare the journal entries necessary in 2009 .
Cash
Pledges Receivable
Provision for Uncollectible Pledges
Allowance for Uncollectible Pledges
Pledges Receivable
700,000
700,000
50,000
250,000
300,000
Chapter
19-16

Contributions
Recognized only if the services received:
1. Create or enhance nonfinancial assets, or
2. a. Require specialized skills, b. Are provided by individuals possessing those skills, and c. Would need to be purchased if not provided by donation.
Recorded as revenue or support with an amount equal to the revenue recognized as an expense in the appropriate expense account.
Chapter
19-17

Contributions
Exercise 19-2: During 2008 volunteer pinstripers donated their services to General Hospital at no cost. The staff at General Hospital was in control of the pinstripers’ duties. If regular employees had provided the services rendered by the volunteers, their salaries would have totaled $6,000. While working for the hospital, the pinstripers received complimentary meals from the cafeteria, which normally would have cost $500. Required: Prepare the journal entry necessary in the General Fund to record the donated services on the books of General Hospital.
Chapter
19-18
General Services Expense 5,500
Donated Services (Nonoperating Revenue) 5,500

Contributions
Recorded as contribution revenues in period received, thus increasing either temporarily or permanently restricted net assets.
When expenditures are made, or restriction expires, net assets are reported as unrestricted net assets on the
Statement of Activities.
Chapter
19-19

Contributions
Exercise 19-3: The Franklin Public Library received a restricted contribution of $300,000 in 2008. The donor specified that the money must be used to acquire books of poetry written in the sixteenth century. As of December 31, 2008, only $100,000 of the restricted resources had been expended.
Required: Prepare the journal entries necessary to record these events during 2008. Indicate the fund in which each journal entry is recorded.
Chapter
19-20

Contributions
Exercise 19-3: Prepare the journal entries necessary to record these events during 2008.
Restricted Current Fund
Cash
Contribution Revenue – Poetry Collection
300,000
Net Assets Released from Restrictions
Cash
100,000
300,000
100,000
Unrestricted Current Fund
Cash
Net Assets Released from Restrictions
Expenses – Poetry Collection
Cash
Chapter
19-21
100,000
100,000
100,000
100,000

Accounting for Plant Funds
The plant fund is used to account for
1) property, plant and equipment (PP&E) owned by the organization and the net investment,
2) accumulation of financial resources for acquisition or replacement of PP&E,
3) acquisition and disposal of PP&E,
4) liabilities relating to acquisition of PP&E, and
5) depreciation expense and accumulated depreciation.
Chapter
19-22

Accounting for Plant Funds
Divided into four separate self-balancing subgroups:
1. Unexpended Plant Fund
2. Funds for Renewals and Replacements
3. Funds for Retirement of Indebtedness
4. Investment in Plant
Both board-designated funds and externally restricted funds are accounted for in the plant fund; therefore, a distinction is made between restricted and unrestricted fund balances.
Chapter
19-23

Accounting for Plant Funds
Exercise 19-8: After the election of a prominent political figure, the principal from a term endowment fund was expendable by
Crandall University. The official was elected this year. The fund was restricted to the construction of a Political Science building annex. The following transactions occurred because of this event.
Required: For each of the following transactions, record the journal entries and identify the fund or fund subgroup in which each entry is recorded.
Chapter
19-24

Accounting for Plant Funds
Exercise 19-8:
1. A transfer of $3,000,000 is made from the Endowment Fund
(Term) to the Unexpended Plant Fund.
Endowment Fund
Endowment fund balance
Cash
3,000,000
3,000,000
Chapter
19-25
Unexpended Plant Fund
Cash
Fund Balance - Restricted
3,000,000
3,000,000

Accounting for Plant Funds
Exercise 19-8:
2. Construction is begun on the Political Science annex. Costs of construction during the year amounted to $1,000,000, of which
$30,000 remained unpaid at the end of the year. (The financial controller does not record transfers to the Investment in Plant subgroup until a project has been completed.)
Chapter
19-26
Unexpended Plant Fund
Construction in process
Cash
Accounts payable
1,000,000
970,000
30,000

Accounting for Plant Funds
Exercise 19-8:
3. By the end of the following year, the annex is completed at an additional cost of $2,100,000. All costs have been paid.
Unexpended Plant Fund
Construction in process
Accounts payable
Cash
Building
Work in process
2,100,000
30,000
3,100,000
2,130,000
3,100,000
Chapter
19-27

Accounting for Plant Funds
Exercise 19-8:
4. The completed building is recorded in the Investment in Plant subgroup.
Net Investment in Plant Fund
Building
Net investment in plant
3,100,000
3,100,000
Chapter
19-28

Accounting for Plant Funds
Property, plant and equipment (PP&E) transactions are accounted for in the General Fund.
Contributed resources restricted to acquire PP&E are accounted for in a plant replacement and expansion
(restricted) fund.
Upon expenditure, the assets acquired and the related fund balance are transferred to the General Fund.
Chapter
19-29

Accounting for Plant Funds
Single Plant Fund and report the fund balance in two classifications:
Expended Fund Balance is equal to the organization’s net investment in PP&E.
Unexpended Fund Balance represents the amount of resources available to replace or acquire additional PP&E.
Chapter
19-30

Accounting for Endowment Funds
Pure Endowment Fund - donated funds have been given in perpetuity.
Term Endowment Fund - donor has specified a particular date or event after which the principal of the endowment fund may be expended.
Income from endowment funds generally may be expended as earned either for specified purposes or at the discretion of the governing board.
Chapter
19-31

Accounting for Endowment Funds
Exercise 19-7 (partial): Jefferson Hospital received money from a donor to set up an endowment fund. The following information pertains to this contribution. Prepare the journal entries necessary to record the events in the endowment fund.
Chapter
19-32

Accounting for Endowment Funds
Exercise 19-7 (partial): During 2008
1. $2,000,000 was received to establish the fund. The requirements were (a) $100,000 of the endowment fund’s income must be used for research grants each year. (b) The remainder of income is under the discretion of the governing board. (c) The principal is expendable after the donor’s death. It shall be used to purchase equipment.
Cash
Revenue Contribution - Restricted
2,000,000
2,000,000
Chapter
19-33

Accounting for Endowment Funds
Exercise 19-7 (partial): During 2008
2. The cash received was invested in a number of securities.
Investment
Cash
2,000,000
2,000,000
Chapter
19-34

Accounting for Endowment Funds
Exercise 19-7 (partial): During 2009
3. Dividends of $100,000 and interest of $300,000 were received.
Cash
Due to General Fund
Due to Specific Purpose Fund
400,000
300,000
100,000
Chapter
19-35

Accounting for Endowment Funds
Exercise 19-7 (partial): During 2009
4. The income was transferred to the appropriate funds.
Due to General Fund
Due to Specific Purpose Fund
Cash
300,000
100,000
400,000
Chapter
19-36

Accounting for Endowment Funds
Exercise 19-7 (partial): During 2010
8. The was notified of the donor death.
Transfer to Plant Replacement and Expansion Fund 2,000,000
Cash 2,000,000
Chapter
19-37

Accounting for Investments
Chapter
19-38
SFAS No. 124 , “Accounting for Certain Investments Held by Not-forProfit Organizations,”
Requires NPOs to report investments in equity securities with readily determinable fair values and all debt securities at fair value in unrestricted , temporarily restricted , or permanently restricted net assets.
Unrealized and realized gains and losses are to be recognized in the Statement of Activities.
To improve effectiveness and flexibility, NNOs often pool investments of different funds into a single portfolio.

Accounting for Loan Funds
Students and staff of colleges and universities,
Employees of hospitals, and
Beneficiaries of the interests of certain ONNOs. (for example, loans to music students by symphony orchestra societies).
Chapter
19-39

Accounting for Loan Funds
Exercise 19-4: The following events relate to Grearson
University Loan Fund:
1. $100,000 is received from an estate to establish a faculty and student loan fund. Annual interest rates range from 8% for students to 10% for faculty.
2. Loans to students totaled $60,000, and $40,000 was disbursed to faculty members (of the total loans made, 10% are estimated to be uncollectible).
3. Grearson wrote off a $1,000 student loan as uncollectible.
4. The following loans were repaid.
Faculty
Student
Principal
$ 5,000
10,000
Interest
$500
800
Chapter
19-40

Accounting for Loan Funds
Exercise 19-4: Prepare the journal entries necessary to record these transactions.
1. $100,000 is received from an estate to establish a faculty and student loan fund. Annual interest rates range from 8% for students to 10% for faculty.
Cash
Revenue – Contributions Restricted
100,000
100,000
Chapter
19-41

Accounting for Loan Funds
Exercise 19-4: Prepare the journal entries necessary to record these transactions.
2. Loans to students totaled $60,000, and $40,000 was disbursed to faculty members (of the total loans made, 10% are estimated to be uncollectible).
60,000
40,000
Loans Receivable – Students
Loans Receivable – Faculty
Cash
Bad Debt Expense
Allowance for Uncollectible–Students
Allowance for Uncollectible–Faculty
Chapter
19-42
10,000
100,000
6,000
4,000

Accounting for Loan Funds
Exercise 19-4: Prepare the journal entries necessary to record these transactions.
3. Grearson wrote off a $1,000 student loan as uncollectible.
Allowance for Uncollectible–Students
Loans Receivable – Students
100,000
100,000
Chapter
19-43

Accounting for Loan Funds
Exercise 19-4: Prepare the journal entries necessary to record these transactions.
4. The following loans were repaid.
Faculty
Student
Principal
$ 5,000
10,000
Interest
$500
800
Chapter
19-44
Cash
Loans Receivable – Students
Loans Receivable – Faculty
Interest Income
16,300
10,000
5,000
1,300

Accounting for Agency (Custodial) Funds
Account for assets held by NNO as custodian for others.
Unless significant amounts are involved, resources held by an NNO as an agent for others are often accounted for as assets and liabilities in the unrestricted or general fund rather than in a separate agency fund.
Chapter
19-45

Accounting for Annuity and Life Income Funds
Annuity Fund - Annuity payments made to a specified recipient for a specified period of time.
Life Income Fund - Income earned on contributed assets is paid to a specified recipient during his or her lifetime.
At the end of the annuity or on the death of the life income beneficiary, the unexpended assets of the fund are transferred to the unrestricted fund or to an endowment fund, loan fund, plant fund, or other fund specified by the donor.
Chapter
19-46

Issues Relating to Colleges and Universities
Recognition of Service Fee Revenue
Operating versus Nonoperating Income
Issues Relating to Hospitals
Charity care
Contractual allowances
Capitation revenues
Malpractice
Chapter
19-47

Chapter
19-48
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