Transcript Advanced Accounting by Hoyle et al, 6th Edition

Chapter Eighteen
Accounting for
Not-For-Profit
Organizations
McGraw-Hill/Irwin
Copyright © 2009 by The McGraw-Hill Companies, Inc. All rights reserved.
18-2
Not-for-Profit Organizations

General Characteristics
 They receive contributed resources from providers who
do not expect a return of equal financial value
 They have an operating purpose that is other than
providing goods and services for profit
 They do not have ownership interests as do for- profits


They may be governmental or private
Great variety






Charitable
Educational
Civic organizations
Political parties
Trade organizations
Fraternal associations
(In 2007, approximately 2.8 million not-for-profits existed
just in the United States)
18-3
Contributions to Various Not-forProfits in 2004
Religious
Education
Foundations
Health
Arts and culture
Environmental
$ 88.30 Billion
33.84 Billion
24.00 Billion
20.89 Billion
13.99 Billion
7.61 billion
Source: AAFRC Trust for Philanthropy website,
http://www.aafrc.org (2005)
“That’s a lotta
Dough!!
18-4
Large Nonprofits
2005
Revenues
YMCA of the USA
Salvation Army
American Red Cross
Catholic Charities USA
Goodwill Industries
$5,130,851,000
$4,559,292,000
$3,888,172,726
$3,286,072,070
$3,022,623,000
(Source: The Nonprofit Times, November 1, 2006)
18-5
Authoritative Jurisdiction
N o t-F o r-P ro fits
P u b lic
N o t-F o r-P ro fits
P riva te
N o t-F o r-P ro fits
G A S B h as
ju risd ictio n.
F A S B h as
ju risd ictio n.
18-6
Financial Reporting
Two basic ideas form the FASB’s
framework for not-for-profit standards:
The financial
statements should
focus on the entity
as a whole.
Reporting
requirements for notfor-profits should be
similar to business
entities, unless there
are critical
differences in the
needs of users.
18-7
A Little History….

Prior to 1993, there was a confusing
variety of private not-for-profit
accounting practices
 In that year, FASB tried to standardize
this reporting by issuing
 SFAS 116, “Accounting for Contributions
Received and Contributions Made”
 SFAS 117, “Financial Statements of Notfor-Profit Organizations”
18-8
Financial Reporting

FASB No. 117
requires three
financial
statements.
Statement of Financial
Position
 Uses “Net Assets” instead of
owners’ equity or fund balance.

Statement of Activities and
Changes in Net Assets
 Statement of Cash Flows
 Statement of Functional
Expense (required only for
voluntary health and welfare
organizations).
18-9
Statement of Financial Position
Report assets,
liabilities, and
net assets.
Use the term “Net
assets” rather than
owners’ equity or
fund balance.
?
Net assets are presented
in 3 categories:
Unrestricted
Temporarily Restricted
Permanently Restricted
?
18-10
Statement of Financial Position

Restrictions must be imposed by outside
donors before an asset is classified as
“restricted”
 For financial statement purposes, board-
designated or internally restricted assets continue
to be classified as “unrestricted”

Temporarily restricted
 For a particular purpose OR
 For use in a future time period

Permanently restricted
 Expected to remain restricted for as long as the
organization exists
18-11
Statement of Activities and
Changes in Net Assets
Change in net assets =
difference between
revenues and expenses
Change in net assets is
reported instead of net
income.
Per FASB No. 116, donors’
unconditional promises to
give are recognized as
both a revenue and a
receivable in the period of
promise.
Revenues &
expenses are
measured on the
accrual basis.
18-12
Statement of Activities and
Changes in Net Assets
Change in net assets =
difference between
revenues and expenses
Per FASB No. 116, donors’
unconditional promises to
give are recognized as
both a revenue and a
receivable in the period of
promise.
Expenses are
presented in 2
categories:
Program Services
Supporting Services
18-13
Statement of Activities and
Changes in Net Assets
Supporting Services
Administrative costs
and fund-raising
expenses.
Program Services
Activities relating to
social services,
research, or other
objectives of the
organization.
18-14
Statement of Cash Flows
Statement of Cash
Flows
Use the Standard
FASB classifications
May use either the
direct
or the indirect methods
18-15
Statement of Functional Expense
S ta te m e nt of F unc tiona l
E x pe ns e s
A d e ta ile d a n a ly sis
o f e x p e n se s b y b o th
fu n c tio n a n d o b je c t.
Allo c a tio n o f jo in t fu n d -ra isin g
& p ro g ra m se rvic e c o sts
is p e rm itte d o n ly w h e n c e rta in
c rite ria a re m e t (S O P 9 8 -2 ).
18-16
GAAP Hierarchy – State and Local
Governments
Level 1: GASB Statements
And Interpretations, plus AICPA
And FASB pronouncements
(if made applicable by GASB)
Level 2: GASB Technical Bulletins, plus AICPA
Industry Audit and Accounting Guides
And Statements of Position
(if made applicable by GASB)
Level 3: AICPA Accounting Standards Executive
Committee Practice Bulletins (if made applicable), plus
Consensus Positions of GASB-organized accountants
Level 4: GASB Implementation Guides and Widely recognized
And prevalent industry practices
18-17
Accounting for Contributions
F A S B S ta te m e n t N o . 1 1 6
C a sh is re co rd ed
a s a re ve n ue in
th e pe riod rece ive d.
C o n ditio n al p rom ises
to giv e a re re co g niz ed
a s re ven u es wh e n the
co n dition s are m e t.
U n co nd itio na l p rom ises
to give a re re co g nized
a s re ven u es wh e n the
p ro m ise is g ive n.
R e stricted g ifts a re
n o t th e sam e as
c o n ditio na l gifts.
P le dg e s th a t a llow
d o no rs to ch an ge
th e ir m in ds a re n ot
u n co n dition a l.
18-18
Accounting for Contributions
F A S B S ta te m e n t N o . 1 1 6
D o n atio n s o f w orks of
a rt a nd h is to ric al
tre a sure s are g en e ra lly
n o t re cog n ize d.
C o n trib u ted services
a re re c o gn iz ed as
re ven u es if o ne o f two
co n ditio ns is m e t.
1 . T h e se rvice cre a tes
o r en h an ce s a
n o nfin an cial a sse t.
E xcha n ge s, su ch as
m e m b er d ue s, a re
tre a te d as a ccru al
re ve n ue s.
2 . T he services a re
sp e cia lize d an d wo u ld
h ave h ad to be
p u rch a sed , oth e rwise.
18-19
Importance of
accounting for
Health Care
Organizations
More than 15% of US
GNP
Presence of third party
payors
18-20
Accounting for Patient Service
Revenues
Bad debts and fee
reductions for health
care organizations
can be significantly
higher than for other
kinds of businesses.
Amounts that the entity
does not intend to collect
should not be reported as
revenues.
In many cases, the patient is
not responsible for the entire
bill.
Third-party payors, such as
insurance providers, are an
important part of the process.
Patient Service Revenues Example
18-21
Mor-Health General Hospital is a private, not-for-profit
hospital. In March, Mor-Health had patient charges
totaling $980,000. Twelve percent of the patient
charges are due from the patients. The remaining
amount is due from insurance providers.
Date
Description
Debit
Credit
A/R - Third Party Payors
862,400
Record
the entry for Medi-Health’s
A/R
- Patients
117,600
Patient Service
Revenue
980,000
revenues.
Patient Service Revenues Example
18-22
Of the amount due from
patients, $36,000 is related to
services rendered to poor
patients that the hospital did
not intend to collect.
Date
Description
Patient Service Revenue
Record
the journal entry
A/R - Patients
Debit
Credit
36,000
for MediHealth’s uncollectible services.
36,000
Patient Service Revenues
Example
18-23
For the remaining
receivables from
patients, Mor-Health
expects to receive 92%.
Date
Description
Debit
Credit
Bad Debt Expense
6,528
Record the journal entry for Medi-Health’s
Allowance for
expected
bad debts
from patients. 6,528
Uncollectible
Accounts
18-24
Contractual Agreements with
Third-Party Payors

The amount billed to the
third-party payor may not
agree with the contracted
amount that the thirdparty payor pays.
 The difference is charged
to an account called:
Contractual
Adjustment
Third-Party Payors Example
18-25
Of the $862,400 that Mor-Health
has billed the insurance
companies, Mor-Health projects
that it will collect 96% based on
contractual agreements.
Date
Description
Debit
Credit
Contractual Adjustments
34,496
Record
the journal
Allowance
for entry for Medi-Health’s
billings
to the insurance
Uncollectible
Accounts companies. 34,496
18-26
Summary

SFAS 117 established reporting
requirements for private not-for-profit
organizations, requiring:







Statement of Financial Position
Statement of Cash Flows
Statement of Activity and Changes in Net Assets
Statement of Functional Expenses (for Voluntary
health and welfare organizations)
Donor imposed restrictions must be
accounted for
The distinction between program services
and supporting services can be problematic
Contributions are an important accounting
challenge for private not-for-profits
18-27
Possible Criticisms

Some critics argue that there should
not be a separate GASB and FASB,
but rather a unified standard setting
body for all US accounting.
 Performance evaluations for not-forprofits are often difficult because of
the subtleties of determining program
services versus supporting services.
WHAT DO YOU THINK????