Professor, BYU

Chapter 19Not-for-Profit EntitiesCopyright 2011 by The McGraw-Hill Companies, Inc. All rights reserved.McGraw-Hill/IrwinNote: Students sometimes like to print slides as handouts with 1, 2, 3, 4, 6, or 9 slides per page for taking notes in class. It is sometimes best to print them using the pure black and white option on the color/gray scale dropdown menu to avoid dark boxes that are not conducive to note taking. Be aware that many instructors will only cover a sub-set of the slides available in this file. Also note that we have removed slides containing solutions to group or individual in-class exercises. You may want to print some slides (such as worksheets or slides with a large quantity of calculations) as a full page slide to facilitate working the exercise in class.

119-2Learning Objective 1Understand financial reporting rules and make basic journal entries for private, not-for-profit entities.219-3Types of Not-for-Profit OrganizationsColleges and UniversitiesHealth Care OrganizationsVoluntary Health and Welfare OrganizationsCertain (or all other) Not-for-profit Organizations19-4Excluded EntitiesThe following entities are not NPOs because they solely serve the economic interests of their owners, members, participants, or trust beneficiaries:Credit unions and mutual banksEmployee benefit and pension plansMutual insurance companiesFarms and rural cooperativesTrusts19-5Characteristics of NPOsNo outside ownership interestA mission to provide servicesTo their users, patients, society as a whole, or membersBut NOT at a profitA dependence on significant levels of contributionsA significant level of assets that are restricted as to use because of donor stipulationsTax-exempt status. IRS Form 990, 990A, or 990PF

19-6Dependence on Contributions and Federal FundingNot-for-profit religious, charitable, and educational groups receive roughly $40 billion annually in federal government grants.

19-7Tax-Exempt StatusAdvantages to Tax-Exempt Status for U.S. Income Tax Reporting Purposes (in most states):No state income taxNo local property taxesNo sales taxes on purchases

19-8Tax-Exempt Status Private NPOs are exempt from U.S. income taxes if the NPO:Serves some common good.Does not make an accounting profit.Does not primarily benefit its own executives.Does not function for political purposes.

19-9Tax-Exempt Status IRS Audits of Tax-Exempt Groups:Annually, the IRS audits approximately 11,000 of the 1.2 million tax-exempt groups.The IRS assesses taxes & penalties of over $100 million per year.Such taxes are on business-related income (which is taxable at the highest corporate rate).19-10Differences between NPOs and BusinessesRevenues and support are often compared to expenses. However, remember thatExpenses are incurred to provide services (rather than to generate revenues as in commercial accounting).The purpose of NPOs is not to maximize return on an ownership interest.ROE = Not Applicable19-11The Reporting Model: Private NPOsThe reporting modelFocuses on the flow of all economic resourcesUses the accrual basis of accountingRecognizes depreciation expense in the operating statementThe use of this reporting model revealsThe improvement or deterioration in the NPOs financial condition for the period andIs similar to the model used in the commercial sector19-12Who Makes the Rules for Not-for-Profits Entities?The accounting and financial reporting for governmental not-for-profit entitiesGASBFASBAccounting and financial reporting for nongovernmental not-for-profit entities1219-13Financial Reporting for Private,Not-for-Profit EntitiesPrivate, not-for-profit entities must report their net assets in accordance with FAC 6.FAC 6 specifies three mutually exclusive classes of net assets:Unrestricted net assetsTemporarily restricted net assetsPermanently restricted net assets1319-14Financial Reporting for Private,Not-for-Profit EntitiesImportant FASB StandardsSFAS 93 guides depreciationSFAS 116 guides accounting for contributions SFAS 117 establishes financial display requirementsSFAS 124 establishes the accounting for investmentsSFAS 136 guides the accounting for transfers of assets to a not-for-profit organization that raises or holds contributions for others1419-15Financial Reporting for Private,Not-for-Profit EntitiesSome not-for-profit entities use a fund structure to account for each type of net asset class.Other not-for-profit entities maintain only an accounting record to show the amounts in each net asset class.The specific identification of any restricted asset must be made when the asset comes into the entity, generally by donation or bequest.1519-16Financial Reporting for Private,Not-for-Profit EntitiesMergers and acquisitionsExposure draftsThe proposed standardsRequire the recognition of identifiable assets acquired and liabilities assumed at their fair values at the date of the acquisitionRequire that intangible assets other than goodwill and goodwill be assigned to reporting units that are acquiredApproaches to evaluating goodwill impairmentQualitative Evaluation MethodFair-Value-Based Evaluation1619-17Contributions: Scope of FAS 116FAS 116, Accounting for Contributions applies to ALL 4 types of Private NPOs.Health Care OrganizationsColleges and UniversitiesVoluntary Health and Welfare OrganizationsCertain Other NPOsFASB 11619-18Contributions: Defined ContributionAn unconditional (no strings attached) transfer ofCash orOther AssetsIn a voluntary, nonreciprocal transfer.By a person or entity acting other than as an owner of the NPOExamples of Other Assets: Equipment, vehicles, land, and promises of cash.19-19Contributions: Promises, Promises Unconditional transfers include unconditional promises to give cash or other assets in the future.Promises may beOral orWrittenUnconditional promises result in reporting Contributions Receivable in the balance sheet (subject to an allowance for uncollectibles).

19-20Contributions: Recognizing Unconditional PromisesRecognizing unconditional promises in the financial statements requireshaving sufficient evidencein the form of verifiable documentationthat a promise was made19-21Contributions: Conditional Promises to Give Conditional promisesThe conceptual opposite of unconditional promises to giveNot contributions (as defined by FAS 116)Depend on the occurrence of a specified future and uncertain event thatMust occur to bind the promissor andThus transform the promise from conditional to unconditional status.19-22Contributions: Conditional Promises That May Be Deemed UnconditionalA conditional promise may be deemed unconditional if:The possibility that the future event will not be met [occur] is remote.Event not likely to occur=Conditional Event likely to occur=Unconditional 19-23Contributions: Conditional Use of Assets ReceivedIf assets have been received and the retention and use of such assets is conditional upon a future event that is not likely to occur,The offsetting credit is to a Refundable Advance account (a liability)Until the conditional event occurs. 19-24Contributions: Manner of Reporting By CategoryContributions are reported in the Statement of Activities (the operating statement) by categoryUnrestrictedTemporarily restrictedPermanently restricted19-25Contributions: Manner of Reporting By CategoryDonor-restricted contributions whose conditions are fulfilled in the same period in which the contribution is recognizedMay be reported in the unrestricted category of the operating statement (O/S) if the entity:Consistently follows this policy and Discloses this policy.Note: This option negates the need to show transfers between categories in the Operating Statement.19-26Contributions: EndowmentsEndowmentsA contribution that cannot be spent.The unspendable amount is called the principalit is invested in perpetuity.Income on EndowmentsDonor stipulations dictate the reporting classification (unrestricted, temporarily restricted or permanently restricted).19-27Contributions: Temporary RestrictionsContributed Assetsthat are restricted as to eitherorTemporarily Restricted Assetsare classified asPurposeTime Period19-28Contributions: Expirations of RestrictionsManner of Reporting Expirationsof Restrictions:Where: In the statement of activities.How: As a separate line item reclassification as shown below.Temporarily UnrestrictedRestrictedExpirations of restrictions$77,000$(77,000)19-29Contributions: Delayed Discussion of Additional IssuesThe following issuesAre covered after we discuss FAS 117 Financial Statements of Not-for-Profit OrganizationsSo that you may more readily see the close interrelation-ship that exists between FAS 116 and FAS 117.ValuationContributed servicesCollection items19-30Financial Statements: Scope of FAS 117FAS 117, Financial Statements of Not-for-profit Organizations applies to ALL 4 types of Private NPOs.Health Care OrganizationsColleges and UniversitiesVoluntary Health and Welfare OrganizationsCertain Other NPOsFASB 11719-31Financial Statements: FAS 117The Basic RequirementsFAS 117 specifies:What financial statements are to be presented.What specific information, as a minimum, is to be shown.19-32Financial Statements: Which Financial StatementsFAS 117 requires for the NPO as a whole:A Statement of Financial PositionA Statement of ActivitiesA Statement of Cash Flows.VH&WOs must also reportIn a separate statementExpenses by Natural Classification in a matrix format.19-33Financial Statements: The Three Classifications of Net AssetsThe three mandated classifications of net assets are:Unrestricted.Temporarily restricted.Permanently restricted.Note that these are the same three classifications used for reporting contributions.19-34Contributions: Additional IssuesContributions of monetary and nonmonetary assets are valued at the fair value of the assets received.Determining the fair value may requireObtaining quoted market prices.Using independent appraisals.Using other appropriate methods.19-35Contributions: Additional Issues Use of Present Value Procedures:Can use for estimated future cash flows on unconditional promises to contribute that are expected to be collected over a period of longer than one year.If used, subsequent recognition of the interest element is reported as contribution incomenot as interest income.19-36Contributions: Additional IssuesContributed ServicesRecognize as revenues only if:Nonfinancial assets are created or enhanced.Specialized skills are provided by individuals possessing these skills (e.g., carpenters, electricians, plumbers, lawyers, CPAs). Required Disclosures for Contributed Services:A description of the nature and extentThe amounts recognized as revenuesThe programs or activities in which the services were used

19-37Contributions: Additional IssuesContributed Services:Recognizable contributed services are usually recorded as revenues at the fair value of the services contributed.Allowed alternative valuation method for the creation or enhancement of nonfinancial assets:May value at the fair value ofthe asset created orasset enhancement 19-38Collection items (the exception):Consist of contributed works of art, historical treasures, and similar assets.Need not be recognized in the financial statements if three conditions are satisfied [how used, how cared for, and use of proceeds upon sale].Cannot be capitalized on a selective or arbitrary basis.Contributions: Additional Issues19-39Practice Quiz Question #1How do not-for-profit entities differ from for-profit businesses:a.Not for profit entities are prohibited from charging more than cost for goods or services provided while for-profit businesses may include a mark up.b.Both for-profit businesses and not-for-profit organizations are tax exempt.c.Not-for-profit entities rely heavily on contributions and grants while for-profit businesses rely on profitable operations for survival.

19-40Learning Objective 2Understand financial reporting rules and make basic journal entries fornot-for-profit colleges and universities.4019-41Colleges and UniversitiesSpecial conventions of revenue and expenditure recognitionTuition and fee remissions/waivers and uncollectible accountsThe full amount of the standard rate for tuition and fees is recognized as revenueAccounting for university-sponsored scholarships, fellowships, tuition and fee remissions or waivers depends on whether the recipient provides any services to the university4119-42Colleges and UniversitiesSpecial conventions of revenue and expenditure recognitionTuition and fee reimbursements for withdrawals from courseworkAccounted for as a reduction of revenueAcademic terms that span two fiscal periodsAccounted for as revenue in the fiscal year in which the term is predominantly conducted, along with all expenses incurredNACUBO recommended the use of the accrual basis of accounting4219-43Colleges and UniversitiesBoard-designated fundsThe board may designate unrestricted current fund resources for specific purposes.FASB 117 specifies that these funds may not be reported as restricted net assets because only external, donor-imposed restrictions can result in restricted net assets.4319-44Colleges and UniversitiesPublic colleges and universitiesAccounting and reporting is specified by the GASB. GASB 35 requires that they follow the standards for governmental entities as specified in GASB 34.Most public institutions will be special-purpose government entities engaged in only business-type activities.These entities present only the financial statements required for enterprise funds and then are included as component units of the state government.4419-45Colleges and UniversitiesPrivate colleges and universitiesThe FASB specifies the accounting and financial reporting standards.The three financial statements required are:The Statement of Financial PositionThe Statement of ActivitiesThe Statement of Cash FlowsThey are free to select any account structure that best serves their management and financial reporting needs.4519-46Colleges and Universities

Overview of the Accounting and Reporting of Colleges and Universities4619-47Colleges and Universities

Overview of the Accounting and Reporting of Colleges and Universities4719-48Practice Quiz Question #2Which of the following statements accurately describes differences between the accounting public and private universities?Both public and private universities follow FASB rules.Both public and private universities follow GASB rules.Public universities follow GASB rules while private universities follow FASB rules.Public universities follow FASB rules while private universities follow GASB rules.

19-49Learning Objective 3Understand financial reporting rules and make basic journal entries fornot-for-profit health care providers.4919-50Health Care ProvidersHospital accountingInvestor-owned hospitals provide the same types of financial reports as commercial entities.Not-for-profit hospitals present their financial results using a specific format required by the FASB.Governmental hospitals follow the GASBs accounting and reporting requirements and are considered special-purpose entities engaged in business-type activities.5019-51Health Care ProvidersHospital fund structureAlthough not required to do so, many hospitals have used a fund accounting structure for accounting purposes.Operating activities are carried on in the general fund, and a series of restricted funds can be used to account for assets whose use has been restricted by the donor.5119-52Health Care ProvidersOverview of the Hospital Accounting and Reporting

5219-53Health Care ProvidersFinancial statements for a not-for-profit hospitalSeparate, not-for-profit hospitals issue four basic financial statementsThe Balance SheetThe Statement of OperationsThe Statement of Changes in Net AssetsThe Statement of Cash Flows5319-54Health Care ProvidersNot-for-profit hospital: The Balance SheetPresents the total assets, liabilities, and net assets of the organization as a wholeMajor accountsReceivablesInvestments Initially recorded at cost if purchased or at fair value at the date of receipt if received as a giftPlant assets Property, plant, and equipment reported with any accumulated depreciation5419-55Health Care ProvidersNot-for-profit hospital: The Balance SheetAssets whose use is limited Separate disclosure should be made for assets that have restrictions placed on their use Long-term debt The hospital must also account for its long-term debt and pay the principal and interest as it becomes dueNet Assets Unrestricted net assets availableTemporarily restricted net assets available for usePermanently restricted net assets 5519-56Health Care ProvidersNot-for-profit hospital: The Statement of OperationsAlso often termed the statement of activities Includes the revenues, expenses, gains and losses, and other transactions affecting the unrestricted net assets during the periodOnly general fund transactions are reportedShould report an operating performance indicator5619-57Health Care ProvidersNot-for-profit hospital: Major accounts in The Statement of OperationsNet patient service revenueContractual adjustmentsIncome from ancillary programsInterfund transfers General fund expensesDonations

5719-58Health Care ProvidersNot-for-profit hospital: The Statement of Changes in Net AssetsIt presents the changes in all three categories of net assetsUnrestrictedTemporarily restrictedPermanently restrictedStatement of Cash FlowsIts format is similar to that for commercial entities5819-59Health Care ProvidersSummary of hospital accounting and financial reportingMajor operating activities take place in the general fund.The restricted funds are holding funds that transfer resources to the general fund for expenditures upon satisfaction of their respective restrictions.General fund uses the accrual basis of accounting.Patient services revenue is reported at gross amounts measured at standard billing rates.5919-60Health Care ProvidersSummary of hospital accounting and financial reportingA deduction for contractual adjustments is then made to arrive at net patient services revenue.Other revenue is recognized for ongoing nonpatient services.Charity care services are presented only in the footnotes; no revenue is recognized for them.6019-61Health Care ProvidersSummary of hospital accounting and financial reportingOperating expenses in the general fund include depreciation, bad debts, and the value of recognized donated services that are in support of the basic services of the hospital.Not all donated services are recognized.Donated property and equipment are typically recorded in a restricted fund until placed into service, at which time they are transferred to the general fund.Donated assets are recorded at fair values at the date of gift.6119-62Practice Quiz Question #3Which of the following is false with respect to not-for-profit hospital accounting? Not-for-profit hospitals follow FASB rules.Not-for-profit hospitals usually use fund accounting.Not-for-profit hospitals do not prepare a statement of cash flows.The general fund of not-for-profit hospitals uses the accrual basis of accounting.19-63Learning Objective 4Understand financial reporting rules and make basic journal entries for not-for-profit voluntary health and welfare organizations.6319-64Voluntary Health and Welfare OrganizationsVoluntary health and welfare organizations (VH&WOs) provide a variety of social servicesThey solicit funds from the community at large and typically provide their services for no fee.VH&WOs are typically audited.The federal government normally provides them tax-exempt status.6419-65Voluntary Health and Welfare OrganizationsAccounting for a VH&WOSimilar to other not-for-profit organizations except for special financial statements that report on the important aspects of VH&WOs.The accrual basis of accounting is required.VH&WOs have been free to use fund accounting in their accounting and reporting processes.6519-66Voluntary Health and Welfare OrganizationsFinancial statements for a VH&WOStatement of Financial PositionStatement of ActivitiesStatement of Cash FlowsStatement of Functional ExpensesThe statements are designed primarily for those who are interested in the organization as outsiders.6619-67Voluntary Health and Welfare OrganizationsThe Statement of financial position for a VH&WOMajor balance sheet accounts:Pledges from donorsInvestmentsLand, buildings, and equipmentLiabilitiesNet assets6719-68Voluntary Health and Welfare OrganizationsStatement of activitiesThe overall structure of the statement of activities for voluntary health and welfare organizations and other not-for-profit entities should be very similar as a result of FASB 117.6819-69Voluntary Health and Welfare OrganizationsStatement of activitiesPublic supportThe primary source of funds is likely to be contributions from individuals or organizations that do not derive any direct benefit from the VH&WO for their gifts.RevenuesFunds received in exchange for services provided or other activitiesGains Gain or loss on sale of investments and other assets6919-70Voluntary Health and Welfare OrganizationsStatement of activitiesDonated materials and services Should be recorded at fair value when receivedExpenses Information about the major costs of providing services to the public, fund-raising, and general and administrative costsCosts of informational materials that include a fund-raising appeal Many VH&WOs prefer to classify such costs as program rather than fund-raising7019-71Voluntary Health and Welfare OrganizationsStatement of Cash FlowsThe format of this statement is similar to that for hospitals.Statement of Functional ExpensesDetails the items reported in the expenses section of the statement of activities7119-72Voluntary Health and Welfare OrganizationsSummary of Accounting and Financial Reporting for VH&WOsReporting requirements are specified in FASB 116, FASB 117, and the AICPA Audit and Accounting Guide for Not-for-Profit Organizations.The accrual basis of accounting is used.Primary activities are reported in the unrestricted asset class.7219-73Voluntary Health and Welfare OrganizationsSummary of Accounting and Financial Reporting for VH&WOsResources restricted by the donor for specific operating purposes or future periods are reported as temporarily restricted assets.Assets contributed by the donor with permanent restrictions are reported as permanently restricted assets.7319-74Practice Quiz Question #4Which of the following is false with respect to the accounting for voluntary health and welfare organizations?a.VH&WOs solicit funds from the community and typically provide their services for no fee.b.VH&WOs use the modified accrual basis of accounting.c.VH&WOs must provide a statement of cash flows.d.VH&WOs primary activities are reported in the unrestricted asset class.19-75Learning Objective 5Understand financial reporting rules and make basic journal entries for othernot-for-profit organizations.7519-76Other Not-for-Profit EntitiesExamples of other not-for-profit organizations (ONPOs):Private elementary and secondary schoolsProfessional associationsPublic broadcasting stationsReligious organizationsResearch and scientific organizationsSocial and country clubsTrade associationsZoological and botanical societiesCemetery organizationsCivic organizationsFraternal organizationsLabor unionsLibrariesMuseumsOther cultural institutionsPerforming arts organizationsPolitical partiesPrivate and community foundations7619-77Other Not-for-Profit EntitiesAccounting for ONPOsIn addition to FASB 116 and FASB 117, the AICPA Audit Guide for Not-for-Profit Organizations provides guidance for accounting and financial reporting standards.While accrual accounting is required for all ONPOs, some small organizations operate on a cash basis during the year and convert to an accrual basis at year-end.7719-78Other Not-for-Profit EntitiesAccounting for ONPOsWith the adoption of FASB 116 and FASB 117, the procedures used by ONPOs and VH&WOs may move away from the traditional funds used They may account for all transactions in a single entity or by establishing separate accounts for unrestricted, temporarily restricted, and permanently restricted net assets7819-79Other Not-for-Profit EntitiesFinancial Statements of ONPOsExplains how the available resources have been used to carry out activities.They should disclose the nature and source of the resources acquired, any restrictions on the resources, and the principal programs and their costs.They should also provide information on the ability to continue to carry out objectives.FASB 117 requiresA Statement of Financial PositionA Statement of Activities, andA Statement of Cash Flows7919-80Other Not-for-Profit EntitiesSummary of Accounting and Financial Reporting Accounting is similar to that for VH&WOs.The accrual basis of accounting is used .When a large number of programs or a number of very different types of programs are part of the operations, it may be desirable to prepare a statement of expenses by functional area or major program as well.As a result of FASB 116 and FASB 117, the reporting requirements of ONPOs are substantially the same as VH&WOs.8019-81Practice Quiz Question #4Which of the following is false with respect to the accounting other not-for-profit organizations?a.While accrual accounting is required for all ONPOs, some small organizations operate on a cash basis during the year and convert to an accrual basis at year-end.Accounting is similar to that for VH&WOs.ONPOs may account for all transactions in a single entity or by establishing separate accounts for unrestricted, temporarily, and permanently restricted net assetsd.ONPOs follow GASB rules.ConclusionThe End19-8282