CHAPTER
12
Accounting for Private Not-forProfit Organizations (including
Colleges and Universities and
Health Care Organizations)
Fundamentals of Advanced Accounting 1st
Edition
Fischer, Taylor, and Cheng
Not-for-profit Organizations
• Provide services without intention of realizing profit
• AICPA definition
– Has significant contributions from resource providers
with no expectation of anything in return
– Has operating purpose other than to make a profit
– Has no owners
• External users of financial statements have
common interest assessing
– Its services and ability to continue those services
– Its creditworthiness
– Management performance in stewardship/other aspects
Chapter 12, Slide #2
Copyright 2008 by Thomson South-Western, a part of The Thomson Corporation. All rights reserved.
Not-for-profit Organizations –
Accounting And Financial Reporting
Jurisdiction for accounting and financial reporting for notfor-profit organizations: shared by FASB and GASB
•GASB – Government not-for-profits
– Public colleges and universities
– Government hospitals
•FASB – Private not-for-profit organizations
–
–
–
–
Voluntary health and welfare organizations
Private colleges and universities
Private health care providers
Other
Chapter 12, Slide #3
Copyright 2008 by Thomson South-Western, a part of The Thomson Corporation. All rights reserved.
Accounting For Private Not-for-profit
Organizations
• Accrual basis of accounting is used
• Provide financial statements with
– organization-wide changes in net assets
– Organization-wide cash flow
• Three classes of net assets
– Unrestricted
– Temporarily restricted
– Permanently restricted
Chapter 12, Slide #4
Copyright 2008 by Thomson South-Western, a part of The Thomson Corporation. All rights reserved.
Three “Net Asset" Categories
• Unrestricted: Assets unrestricted by donors,
assets formerly temporarily restricted by donors
and have become unrestricted; may include
board-designated assets
• Temporarily restricted: Donor-imposed
restriction that will lapse when restriction is met
• Permanently restricted: A donor-imposed
restriction (e.g., principal of a permanent
endowment)
Chapter 12, Slide #5
Copyright 2008 by Thomson South-Western, a part of The Thomson Corporation. All rights reserved.
Revenues, Gains And Contributions
Private Not-for-profit Organizations
Events recorded as
• Exchange transactions
• Contributions
• Agency transactions
• Capital acquisitions
• Expenses
Each type of transaction will affect one of the three
net asset classes
Chapter 12, Slide #6
Copyright 2008 by Thomson South-Western, a part of The Thomson Corporation. All rights reserved.
Exchange Transactions
Private Not-for-profit Organizations
• Exchange transactions – reciprocal transfers
– Charges for services
– Government awards
– Other awards
• Affect unrestricted net assets
Chapter 12, Slide #7
Copyright 2008 by Thomson South-Western, a part of The Thomson Corporation. All rights reserved.
Agency Transactions
Private Not-for-profit Organizations
• Government or privates sponsored flow-through
awards to individuals or other organizations
• Recognized as revenue when received
• Assets received on behalf of another individual (or
organization) must be offset with a payable to the
alternate beneficiary unless
– Donor granted variance power
– Recipient and beneficiary are financially interrelated
Chapter 12, Slide #8
Copyright 2008 by Thomson South-Western, a part of The Thomson Corporation. All rights reserved.
Contributions
Private Not-for-profit Organizations
• Contributions – unconditional transfer of asset or
release of liability in voluntary, nonreciprocal
manner.
• Revenue recognized in period received
– Unconditional promise recognized as revenue in period
promised
• Recorded at fair value at date of gift
• Exceptions
– Donated services
– Donated works of art
Chapter 12, Slide #9
Copyright 2008 by Thomson South-Western, a part of The Thomson Corporation. All rights reserved.
Contributions – Pledges
Private Not-for-profit Organizations
Unconditional and conditional pledges
• Unconditional – depends only on passage of time
– Recognized as receivable and revenue in year made
• Conditional – depends on occurrence of uncertain
future event
– Recognized as revenue when conditions are met
• Multi-year unconditional pledges
–
–
–
–
Temporarily restricted revenue
Recorded at present value of estimated future cash flows
Reclassified to unrestricted when time stipulation met
Allowance for doubtful accounts should be established
Chapter 12, Slide #10
Copyright 2008 by Thomson South-Western, a part of The Thomson Corporation. All rights reserved.
Contributions – Donor-imposed Restrictions
And Reclassifications
• All contributions received are classified into one of
three resource categories
– Unrestricted
– Temporarily restricted
– Permanently restricted
• Restrictions do not affect timing of recognition
– Affect manner of reporting contributions & related assets
Chapter 12, Slide #11
Copyright 2008 by Thomson South-Western, a part of The Thomson Corporation. All rights reserved.
Contributions – Temporary Restrictions
• Temporary restrictions expire when
– Stipulated time has lapsed
– Stipulated purpose has been fulfilled
– Useful life of donated asset has ended
• Reclassification entry needed to release restriction
– Simultaneously decreases temporarily restricted net
assets and increases unrestricted net assets
– Matches expenses they support
Chapter 12, Slide #12
Copyright 2008 by Thomson South-Western, a part of The Thomson Corporation. All rights reserved.
Investments
• Permanently restricted contributions are called
endowments
• Earnings on endowments reported in period
earned based on donor specifications
– Unrestricted revenue or
– Temporarily restricted revenue
• Investments in debt and equity securities adjusted
to fair value at report date
Chapter 12, Slide #13
Copyright 2008 by Thomson South-Western, a part of The Thomson Corporation. All rights reserved.
Expenses
•
•
•
•
Expenses, not expenditures
Recognized on accrual basis
Reported as decreases in unrestricted net assets
Depreciation of capital assets recorded as
expense
– Land, historical treasures and works of art not
depreciated
• Segregated as
– Program functions
– Program support functions
Chapter 12, Slide #14
Copyright 2008 by Thomson South-Western, a part of The Thomson Corporation. All rights reserved.
Expenses – Continued
• Not-for-profits often combine program and fund
raising
• AICPA SOP 98-2 makes it more difficult to allocate
educating the public or advocacy costs to
programs
– Cost of all materials and activities of fund-raising appeal
should be reported as fund-raising costs
– Criteria of purpose, audience and content must be met
– Joint costs should be allocated using equitable
allocation base
– Disclosure requirements if joint costs are allocated
Chapter 12, Slide #15
Copyright 2008 by Thomson South-Western, a part of The Thomson Corporation. All rights reserved.
Summary - Unrestricted Net Assets
• Expenses, including:
–
–
–
–
–
–
Functional programs
Supporting programs
Bad debts expense
Depreciation
Student aid (university only)
Auxiliary expenses
(university only)
• Revenue (exchange
transactions)
• Revenue from endowments
• Revenue from government
grants
• Revenue from investments
• Contributions
• Reclassification in (net
assets released from
restriction):
– Satisfy program restrictions
– Fixed asset purchase or
use
– Passage of time restrictions
• Auxiliary revenues
(university only)
Chapter 12, Slide #16
Copyright 2008 by Thomson South-Western, a part of The Thomson Corporation. All rights reserved.
Summary –
Temporarily Restricted Net Assets
• Reclassification out (net
assets released from
restriction):
• Contributions
• Investment income
• Realized gains (loss) on
– Satisfy program restrictions
investments
– Fixed asset purchase or use
– Passage of time restrictions
• Actuarial adjustment for
interest on annuity funds
• Life income payments
Chapter 12, Slide #17
Copyright 2008 by Thomson South-Western, a part of The Thomson Corporation. All rights reserved.
Summary –
Permanently Restricted Net Assets
• Contributions
• Possible
nondistributable gains
(loss)
Chapter 12, Slide #18
Copyright 2008 by Thomson South-Western, a part of The Thomson Corporation. All rights reserved.
Financial Statements
Private Not-for-profit Organizations
• Statement of Financial Position
– Reports organization-wide totals for assets, liabilities and net
assets
– Identifies net assets as unrestricted, temporarily restricted and
permanently restricted
• Statement of Activities
– Reports revenues, expenses, gains, losses and reclassifications
• Statement of Cash Flows
– Operating, investing and financing activities
• Statement of Functional Expenses
– Reports detailed program, fund-raising and management expenses
Chapter 12, Slide #19
Copyright 2008 by Thomson South-Western, a part of The Thomson Corporation. All rights reserved.
Voluntary Health and Welfare
Organizations
For example….
• United Way
• Red Cross
• Boy and Girl Scouts
• American Heart Association
• Most social service agencies
Chapter 12, Slide #20
Copyright 2008 by Thomson South-Western, a part of The Thomson Corporation. All rights reserved.
Qualifications
• Primary source of revenue is from donors who do
not directly benefit for the organization’s
programs
• Program must be in the area of health, welfare,
or community service
Chapter 12, Slide #21
Copyright 2008 by Thomson South-Western, a part of The Thomson Corporation. All rights reserved.
Accounting Principles and Procedures
• Two categories to record and communicate inflows
of resources
– Public support
• Inflow of resources from voluntary donors who receive no direct
benefit
– Revenues
• Inflow of resources resulting from a charge for service
Chapter 12, Slide #22
Copyright 2008 by Thomson South-Western, a part of The Thomson Corporation. All rights reserved.
Public Support
•
•
•
•
Contributions
Special events support
Legacies and bequests
Received from federated and nonfederated
campaigns
Recognize as unrestricted, temporarily
restricted, or permanently restricted support in
the period received
Chapter 12, Slide #23
Copyright 2008 by Thomson South-Western, a part of The Thomson Corporation. All rights reserved.
Public Support - Contributions
• Contributions recognized as public support in
period received
• Unconditional promises (pledges) also recognized
in period received
• Contributions may be unrestricted or restricted
– Restricted contributions classified as temporary or
permanent
• Expiration of donor restrictions recognized in
period restriction expires
• Property received valued at FMV: date of receipt
Chapter 12, Slide #24
Copyright 2008 by Thomson South-Western, a part of The Thomson Corporation. All rights reserved.
Contributions – Journal entries
Cash received – no prior pledge
DR Cash
CR
Contributions
Pledge received
DR Contributions receivable
CR
Contributions
Note – provision for uncollectible accounts and an allowance
account is recorded for contributions receivable
Chapter 12, Slide #25
Copyright 2008 by Thomson South-Western, a part of The Thomson Corporation. All rights reserved.
Contributions – Certain Donations
• Volunteers – Recognize at FMV as both expense
and unrestricted contribution if
– Services create or enhance non financial assets, or
– Services required special skills, provided by individual
with those skills and would need to be purchased if not
donated
• Donated Materials – Recognize at FMV both
inventory and unrestricted contributions when
received
• Free Rent – Recognize at fair market value both
rent expense and unrestricted contributions when
received
Chapter 12, Slide #26
Copyright 2008 by Thomson South-Western, a part of The Thomson Corporation. All rights reserved.
Public Support – Special Events Support
• Special fund-raising events where participant has
the opportunity to receive something of value in
exchange for contribution
– Raffles, dinners, bingo
• Inflow of resources credited to Special Events
Support
• Direct cost of event (excluding promotions)
debited to Cost of Special Events
Chapter 12, Slide #27
Copyright 2008 by Thomson South-Western, a part of The Thomson Corporation. All rights reserved.
Public Support – Legacies & Bequests
• Donors make major contributions of personal or
real property through wills
• Credited to account Legacies and Bequests
• Recognized when reasonably certain of amount to
be received
• Classified as unrestricted, temporarily restricted or
permanently restricted
Chapter 12, Slide #28
Copyright 2008 by Thomson South-Western, a part of The Thomson Corporation. All rights reserved.
Public Support – Received From Federated
And Nonfederated Campaigns
• Amount received from federated (associated) and
nonfederated organizations
– Examples
– Federated - United Way allocated funds to health and
welfare organization
– Nonfederated – amounts raised by independent,
professional fund-raising groups
• Amount credited to Received from Federated
and Nonfederated Campaigns
• Usually unrestricted
Chapter 12, Slide #29
Copyright 2008 by Thomson South-Western, a part of The Thomson Corporation. All rights reserved.
Revenues
• Unrestricted revenues
– Membership dues revenue
– Program services fees
– Sales of publications and supplies
Chapter 12, Slide #30
Copyright 2008 by Thomson South-Western, a part of The Thomson Corporation. All rights reserved.
Other Revenues
• Investment revenues
– Investment revenue for interest, dividends, and other
earnings
– Realized gain on investment transactions
– Net increase (decrease) in carrying value of
investments
Each item is recorded as unrestricted or
unrestricted depending on donor stipulations
Chapter 12, Slide #31
Copyright 2008 by Thomson South-Western, a part of The Thomson Corporation. All rights reserved.
Program And Supporting Services Costs
• Operating statements show cost of each program
or service provided
• Expenses reduce unrestricted net assets
• Direct and indirect natural (object) expenses are
allocated to functional and support classifications
– Program expenses – Cost of Actual programs
conducted by the voluntary health and welfare
organization
– Support expenses – Management and general,
fund-raising, membership development costs
Chapter 12, Slide #32
Copyright 2008 by Thomson South-Western, a part of The Thomson Corporation. All rights reserved.
Financial Statements
•
•
•
•
Statement of Financial Position
Statement of Activities
Statement of Cash Flows
Statement of Functional Expenses
– Required for all VHWOs
– Matrix providing detail of how natural expenses have
been allocated to program and support classifications
Chapter 12, Slide #33
Copyright 2008 by Thomson South-Western, a part of The Thomson Corporation. All rights reserved.
Colleges and Universities
Fund Accounting
• Universities have traditionally used fund
accounting
• Funds are similar to state and local government
funds
Chapter 12, Slide #34
Copyright 2008 by Thomson South-Western, a part of The Thomson Corporation. All rights reserved.
College and University Funds
Three broad categories
• Current funds (unrestricted and
restricted)
• Plant funds
• Trust and agency funds
Chapter 12, Slide #35
Copyright 2008 by Thomson South-Western, a part of The Thomson Corporation. All rights reserved.
Accounting For Revenues
• Recognize revenues in all fund on accrual basis
• Three major groups of revenues
– Educational and general revenues group
– Auxiliary enterprises revenues
– Expired term endowment revenues
Chapter 12, Slide #36
Copyright 2008 by Thomson South-Western, a part of The Thomson Corporation. All rights reserved.
Colleges and Universities
Accounting For Expenses
• Recognized in all funds on accrual basis
• Most common classification
– Educational and general expenses group
– Auxiliary enterprises expense
Chapter 12, Slide #37
Copyright 2008 by Thomson South-Western, a part of The Thomson Corporation. All rights reserved.
Colleges and Universities
Accounting For Contributions
• Recognize contributions and unconditional
promises as revenues in the period received
• Measured at fair value
• Exceptions for service donations and works of art
Chapter 12, Slide #38
Copyright 2008 by Thomson South-Western, a part of The Thomson Corporation. All rights reserved.
Colleges and Universities
Financial Statements
Private colleges and universities requirements
• Statement of Financial Position
– Reports organization-wide totals for assets, liabilities and net
assets
– Identifies net assets as unrestricted, temporarily restricted and
permanently restricted
• Statement of Activities
– Reports revenues, expenses, gains, losses and reclassifications
• Statement of Cash Flows
– Operating, investing and financing activities
Most public colleges and universities will use the same
format
Chapter 12, Slide #39
Copyright 2008 by Thomson South-Western, a part of The Thomson Corporation. All rights reserved.
Health Care Entities
• Hospitals, clinics, nursing homes, HMOs, etc.
• Health care units fall into three categories
– Investor owned health care entities
– Government health care entities
– Voluntary not-for-profit health care entities
• Unusual manner of payment for services
– Payments by third parties
– Based on cost of providing services
– Costs determined by the third parties making payments
• Use accrual basis of accounting
– Application of overhead to determine costs
Chapter 12, Slide #40
Copyright 2008 by Thomson South-Western, a part of The Thomson Corporation. All rights reserved.
Health Care Entities - Continued
• AICPA Audit Guide covers both government and
private health care organizations
• GASB Statement 34 allows reporting as special
purpose government using proprietary fund
accounting
• Public and private health care organization
reporting is similar
• Net asset reporting is slightly different
Chapter 12, Slide #41
Copyright 2008 by Thomson South-Western, a part of The Thomson Corporation. All rights reserved.
Health Care Fund Structure
• General funds account for resources available
for general operations
• Donor-restricted funds
– Specific purpose funds
– Plant replacement and expansion funds
– Endowment funds
– Annuities or life income funds, or loan funds
Chapter 12, Slide #42
Copyright 2008 by Thomson South-Western, a part of The Thomson Corporation. All rights reserved.
Classification of Assets
Assets comprise three distinct segments
• Current assets
• Assets whose use is limited
– Includes board designated assets
– Assets from operational agreement by board
– Assets set aside for self insurance
• Property and equipment
– Includes accumulated depreciation
Chapter 12, Slide #43
Copyright 2008 by Thomson South-Western, a part of The Thomson Corporation. All rights reserved.
Classification Of Liabilities And Net Assets
• Current liabilities may include accounts and
notes payable, deposits from patients, advances
from and amounts payable to third-party payers
• Long-term liabilities may include notes,
mortgages, capital leases, bond payables, and
estimated malpractice costs
• Net assets (assets – liabilities) have 3 classes
– Permanently restricted net assets
– Temporarily restricted net assets
– Unrestricted net assets
Chapter 12, Slide #44
Copyright 2008 by Thomson South-Western, a part of The Thomson Corporation. All rights reserved.
Types of Revenues
• Operating revenue relates to principal activity of
providing health care services
– Patient service revenue
– Resident service revenue
– Other operating revenue
• Nonoperating revenue
– Unrestricted and donor-restricted pledges, gifts,
grants, investment income
– Beyond entity’s control
Chapter 12, Slide #45
Copyright 2008 by Thomson South-Western, a part of The Thomson Corporation. All rights reserved.
Types Of Fees/Revenue Classifications
• Hospital payment systems include fees based on
–
–
–
–
Diagnosis-related groups (DRG’s)
Capitation premiums
Negotiated bids
Cost-reimbursement methods
• Operating revenue classifications
–
–
–
–
Patient Service Revenue
Premium Revenue
Resident Service Revenue
Other Operating Revenue
Chapter 12, Slide #46
Copyright 2008 by Thomson South-Western, a part of The Thomson Corporation. All rights reserved.
Types of Expenses
•
•
•
•
•
•
•
•
•
•
Nursing services expense
Other professional service
General services expense
Fiscal services expense
Administrative services expense
Other services
Malpractice insurance expense (if not already allocated)
Depreciation expense (if not already allocated)
Interest expense (if not already allocated)
Provision for bad debts (if not already allocated)
Chapter 12, Slide #47
Copyright 2008 by Thomson South-Western, a part of The Thomson Corporation. All rights reserved.
Accounting for Contributions
• If contribution is unconditional and unrestricted
– Other operating revenue – unrestricted (ongoing and
central activities) or
– Nonoperating revenue – unrestricted (peripheral or
incidental transactions)
• If contribution is unconditional and restricted
– Other operating revenue – temporarily restricted or
– Other operating revenue – permanently restricted
Chapter 12, Slide #48
Copyright 2008 by Thomson South-Western, a part of The Thomson Corporation. All rights reserved.
Volunteers and Donated Items
• Volunteers
– Same rules as other not-for-profits
– Create or enhance nonfinancial assets or
– Require specialized skills and would typically need to
be purchased
• Donated items: depending on nature of gift
– Other operating revenues – unrestricted
– Nonoperating revenues
Chapter 12, Slide #49
Copyright 2008 by Thomson South-Western, a part of The Thomson Corporation. All rights reserved.
Medical Malpractice Claims
• Potential major expense
• If covered by insurance, premiums applicable to
reporting period are expensed
• If self-insured:
– Establish a trust account
– Establish an expense and liability for estimated
claims and judgments
Chapter 12, Slide #50
Copyright 2008 by Thomson South-Western, a part of The Thomson Corporation. All rights reserved.
Financial Statements – Private
• Entity-wide reporting
– Statement of financial position
– Statement of activities
– Statement of cash flows
• Net assets
– Permanently restricted
– Temporarily restricted
– Unrestricted
Chapter 12, Slide #51
Copyright 2008 by Thomson South-Western, a part of The Thomson Corporation. All rights reserved.
Financial Statements – Public
• Classified as special purpose governments
engaged only in business type activities
• Present financial statements required for
use in proprietary fund accounting.
Chapter 12, Slide #52
Copyright 2008 by Thomson South-Western, a part of The Thomson Corporation. All rights reserved.