Not for Profit Org Dayag.

Accounting for Not-For-Profit Organizations Dayag:) 

Presently, there are two (2) schools of thought on the accounting for not-for-profit organizations: 1.

There are little differences between business and not-for-profit accounting 

Therefore, its advocates believe not-for-profit accounting could, with little exceptions, make use of the principles applicable to business accounting

 

Non business accounting is going to be essentially like business accounting

Non business organizations will prepare operating statements, balance sheets, and funds flow statement 

2.

The primary focus will be on the operating statement and its principles will be governed by the same principles that now apply in business accounting

Fund accounting, as it is currently practiced, will remain in vogue (remain popular). 

The advantages of fund accounting were extolled from:  



The legal point of view

The management control viewpoint

Its advocates believe that fund have legal restrictions or discretionary restrictions 

Accordingly, they must be segregated between: o o



Restricted funds

Unrestricted funds

The international accounting unit for many not-for-profit organizations is the fund: o

Defined as a fiscal and accounting entity with a self-balancing set of accounts recording cash and other financial resources with all

related liabilities and residual equities, or balances, and changes therein which are segregated for the purpose of carrying on specific activities or attaining certain objectives in accordance with special regulations, restrictions, or limitations: o

Different types of funds are necessary to distinguish between:  

o

      Fund accounting: o

Assets whose use is restricted by donors

Funds commonly used by some of the not-for-profit organizations were as follows: 



Assets that may be used as authorized by the BODs

Unrestricted funds (sometimes called unrestricted current fund, general fund, or current unrestricted fund) Restricted funds (sometimes called restricted current fund or current restricted fund) Endowment fund (pure or term endowment)

Agency fund (sometimes called custodian fund)

Annuity fund and life income fund (sometimes called living trust fund) Loan fund

Plant fund (sometimes called land, building, and equipment fund)

Has been used to organize and manage resources for various purposes in accordance with regulations, restrictions, or limitations imposed by parties outside the institution or with discretions issued by the governing board

o

A clear distinction of funds that are externally restricted and those that are internally designated by action of the governing board has been maintained in the accounts and disclosed on the financial reports



Accrual basis of accounting: o o

All not-for-profit organizations accounting for revenues and expenses use the accrual basis of accounting.

Requires not-for-profit organization that issue GAAP basis financial statements to recognize depreciation expense on long-lived assets 

Depreciation should be recorded if:  

o

Note: 

Financial statements: o

The assets arise because of donations

Works of art and historical treasures that meet the definition of ‘collections’ 



The assets are gifts

Need not be capitalized nor depreciated

Financial statements prepared in accordance with the present GAAP represent a shift away from the fund reporting to an emphasis on the organization as a whole

o

The ‘equity account fund balance’ has been replaced with the term ‘net assets’

o

Under the present GAAP:

o

The financial statements display three (3) classes of net assets:

    

It requires classifications of the organization’s net assets based on the existence or absence of donor-imposed restrictions Unrestricted

Temporarily restricted

Permanently restricted Note:



© itsjohnsanatomy

Any changes of these three (3) classes of net assets must be reported

Page 1

Accounting for Not-For-Profit Organizations



Financial statements (continuation): o

The financial statements are: 

Statement of financial position (balance sheet) 

Which will report organizations-wide total for assets, liabilities, and net assets, and assets identified as unrestricted, temporarily restricted, and permanently restricted



Statement of activities 

Which reports revenues, expenses, gains, losses, and reclassifications or changes in the organization’s net assets or change in equity: permanently restricted, temporarily restricted, and unrestricted



Minimum requirements are organization-wide totals, changes in net assets for each class of assets, and all expenses recognized only in the unrestricted classification

 

A display of a measure of operations in the statement of activities is permitted

Statement of cash flows 

With categories similar to regular business enterprises: o

Operating

o

Investing

o 

 

Classification of net-assets o o o

They are accompanying notes to the above statements necessary for disclosure purposes

This division of net assets is the focal point in presenting financial statement for not-for-profit entities

These classes of net assets are totally dependent on the existence or absence of donor-imposed obligations

The organization’s net assets, revenue, expenses, gains, and losses are classified according to the three (3) classes of net assets 

Revenues, gains, and losses:



Expenses:

  o

Can be reported in each net asset class Are reported only in unrestricted net assets class

The three (3)classes are: 1.

Permanently restricted net assets: 

2.

Are the portion of net assets whose use is limited by donor-imposed stipulations that do not expire and cannot be removed by action of the not-for-profit entity

Temporarily restricted net assets: 

Are the portion of net assets whose use is limited by donor-imposed stipulations that either: o o

3.

Accounting for Hospitals: o o

Expire (time restrictions)

Can be removed by the organization fulfilling the stipulations (purpose restrictions)

Unrestricted net assets: 



Financing

Notes to the financial statements

Are the portion of net assets that carry no donor-imposed stipulations

Hospitals depend its large part on donations and grants, which often come with restrictions

Hospitals will use normal accrual accounting methods, including the classification of costs as expenses rather than expenditure, and will not record budgetary accounts or encumbrances on the books

o

Fund accounting is required for Hospitals

o

In general, there are two (2) types of funds used by a hospital:

 1.

In order to maintain accountability over restricted resources General (unrestricted) fund: 

Account for all resources of the hospital which are not subject to outside restrictions; they are used for day-to-day operations



Note:

o

Board-designated funds are unrestricted

o

Designation:

o

Restrictions:

  

Is an internal process which can be altered at the discretion of the BOTs of the hospital Are externally imposed and not subject to alteration by the board

Items in the General (unrestricted) fund category are as follows: o

Assets whose use is limited:

o

Agency funds:

  

Include assets set aside by the governing board for identified purpose Are included in the General funds as both an asset and a liability

They are used to account for fees collected as an agent of physicians who have privatepractice patients coming to hospital offices provided to the staff physicians

o

Property and equipment used for general operations, and the related liabilities 

Note:



© itsjohnsanatomy

PPE whose use is restricted are reported in the donor-restricted fund

Page 2

Accounting for Not-For-Profit Organizations



Accounting for Hospitals: o

In general, there are two (2) types of funds used by a hospital: 2.

Donor-restricted funds:  

Accounts for temporarily restricted and permanently restricted resources This class is subdivided into: 1.

Temporary restricted fund: 

May be: 

Specific purpose fund o

Is a restricted fund used by health care providers to account for principal and income in accordance with donor’s specified restrictions



Term endowment fund o

Used by hospital to account for a trust where the principal must be kept

intact and the income be expanded for either current operations or a specific purpose in accordance with grantor’s wishes o

May be in perpetuity, or it may be fixed term or until a specific event occurs



Plant replacement and expansion fund o

A restricted fund used by hospitals and other health care providers to

account for donor’s contributions that must be used to acquire property, plant, and equipment

 2.

Life income fund

Permanently restricted fund: 

Is also an endowment fund but differs from a term-endowment fund in that the principal

must be maintained intact in perpetuity and only the income may be used in accordance with o

Accounting for Revenues and Expenses: 

the donor’s wishes

Revenues and gains 1.

Patient service revenue: o o

Include room and board, nursing services, and other professional services

Typically are recorded at established (gross) rates as the services are provided but are reported net of amounts that are considered deductions from revenues 

o

Objective is to report the amount that the hospital is entitled to collect as patient service revenues

Allowance accounts are used to reduce receivables for estimated deductions from revenues as well as estimated doubtful accounts 

Deductions from revenues include: 

Courtesy allowances:



Contractual adjustments:

o o o

Discounts to doctors and employees Discounts arranged with third-party payors (Philhealth for example) that frequently have agreements to reimburse at less-than-established rates

Note: 

Charity care services provided free of charge to patients who qualify under a hospital’s charity care policy are excluded from both gross and net patient service revenues 

According to the AICPA audit guide and accounting guide, health care organizations: o

Charity care cases do not qualify for recognition as receivables or revenues in the financial statements

o

Management’s policy for providing charity care, as well as the level of charity care provided, should be disclosed in the financial statements 

Such disclosure generally is made in the notes to the financial

statement and is measured based on the provider’s rates, costs 2.

units of service, or other statistical measure

Premium fees o o

Also known as ‘subscriber fees’ or ‘capitation fees’

Are revenues from agreements which a hospital provides any necessary patient services (perhaps from a contractually established list of services) for a specific fee 

o

The fee is usually a specific fee per member per month

The fees are earned whether the standard charges for services actually rendered are more or less than the amount of the fee i.e. without regard to services actually provided in the period

o o

© itsjohnsanatomy

Therefore, they are reported separately from patient service revenues Growing portion of hospital revenues in many hospitals

Page 3

Accounting for Not-For-Profit Organizations



Accounting for Hospitals: o

Accounting for Revenues and Expenses: 

Revenues and gains 3.

Other operating revenues: o o o o o o o



Revenues from services to patients other than for health care Revenues from sales and services provided to non-patients Tuition from schools operated by the hospital Rentals of hospital space

Charges for preparing and reproducing medical records Room charges for telephone calls and televisions

Proceeds from cafeterias, gift shops, snack bars, donated medicine, linen and office supplies

The control account ‘Nonoperating revenues’ o

Records revenue not related directly to an entity’s principal operations

o

These items are primarily financial in nature

o

Include:       



Note: o



Operating expenses  

Gifts or grants

Unrestricted income from endowment funds Maturing term endowment funds

Income and gain from investments Gains on sale of hospital property

Realized and unrealized gains from investments reported at fair value

The ‘other operating revenue’ and the ‘nonoperating revenue’ accounts can be lumped as one account and be called ‘Other Revenues and Gains’

Operating expenses of hospitals are reported on an accrual basis Classification (Functional categories) of Operating expenses: 1.

Nursing services    

2.

   3.

 

  

Operating rooms Laboratories Radiology

Anesthesiology Pharmacy

Housekeeping Maintenance Laundry

Accounting Cashier

Credits and collection Data processing

Administrative services    

Note:

Nurseries

Fiscal services 

5.

Intensive care

General services 

4.

Medical and surgical

Other profession services 



Unrestricted and donor-restricted pledges

Personnel

Purchasing Insurance

Governing board

6.

Interest provisions

o

Although accounts are maintained for employee and contractual allowances, these items are not expenses

7.

Depreciation provisions



They are revenue deductions that are subtracted from gross patient service revenues to arrive at net patient service revenue reported in the statement of operations

o o

Provision for bad debts is an expense

What is the difference between charity care and bad debts expense? 

Charity care results from the hospital’s policy of providing health care to individuals who meet certain financial criteria 



© itsjohnsanatomy

Health care services provided as charity care were never intended to provide cash flows

Bad debts result from extending credit

Page 4

Accounting for Not-For-Profit Organizations



Accounting for Colleges and Universities o

Colleges and universities are required to use fund accounting due to the large amount of restricted resources under their control 

Six (6)Types of funds: 1.

Current funds o

Account for resources of the institution that will be used in carrying out the primary objectives: instruction, research, extension, and public service

o o

Restricted current funds have been restricted by donors or grantors to specific purposes Unrestricted current funds are not subject to outside restraints on usage 

Resources designated by the BOTs are still considered ‘unrestricted’ 

2.

Loan funds o o

Since they lack externally-imposed restrictions

Are established for resources that are to be loaned to students, faculty or staff Not for loans, notes, or bonds payable to others

o

Designed to hold assets, not liabilities

o

Fund balances should separately report ‘restricted’ and ‘unrestricted’ amounts: 

Restricted amounts 

Represent resources which outside parties provided to the university on condition that it will be used for loans



Unrestricted amounts 

3.

Endowment and similar funds o

Represent resources which were placed in the loan fund at the election of the university itself

Endowment funds: 

Resources which outside parties contributed to the university on condition that they not be spent but invested to yield earnings which may be spent

o

Term endowment funds:

o

Quasi-endowment funds:

  4.

May be spent after a specific period of time has passed or a certain event has occurred Aren’t actually restricted but have been designated by the BORs to be retained and invested

Annuity and Life income funds o

Annuity funds: 

Are resources given to the university on condition that regular payments be made to a specific person for a certain period of time, after which all the principal is available to the institution

o

Life income funds: 

5.

becomes expendable by the university

Plant funds o o

Require distribution of all earnings to a specified person, upon whose death the balance

All of the assets and liabilities associated with fixed assets of a university are accounted for in the plant fund The plant fund balances include: 1.

Unexpended plant funds

2.

Funds for renewals and replacements

3.

Funds for retirement of indebtedness

   4.

Contain liquid assets which are to be used to replace existing plant assets as needed Contain resources to be used to make principal and interest payments on debts incurred to acquire plant assets

Investment in plant 



Contain liquid assets which are to be used to acquire new plant assets in the future

Consists of the fixed assets themselves and any long-term debt issued in connection with the acquisition of these fixed assets

Note: 

The fund balances of the first three (3) funds should be subdivided further into ‘restricted’ and ‘unrestricted’ balances, based on whether classification in the plant fund is the result of external requirements or internal designation

 6.

Agency funds o

Investment in plant fund balance isn’t subdivided

Resources received by the institution which belong to others, such as student body fees, are held in agency funds, with a liability equal to the assets collected

o o o

Accrual accounting is used

There is never any fund balance in agency funds, since all assets held are owed to others

There are certain similarities to ‘Accounting of governmental funds’ especially in the reporting of expenditures rather than expenses

© itsjohnsanatomy

Page 5

Accounting for Not-For-Profit Organizations



Accounting for Colleges and Universities o

Accounting for Revenues and Expenses: 

Revenues include:          



Government appropriations

Government grants and contracts

Private gifts, grants, and contracts Endowment income

Sales and services of educational activities

Sales and services of auxiliary enterprises (such as residence halls, food services, intercollegiate athletics, and college stores) Sales and services of hospitals (if operated by the university)

Other sources(such as expired term endowments, annuities, and life income agreements) Independent operations (such as government research laboratories)

Expenditures include:    



Tuition fees

Educational and general expenditures Auxiliary enterprises Hospitals

Independent operations

Accounting for Voluntary Health and Welfare Organizations o

Voluntary health and welfare organizations adhere to the accrual basis of accounting

o

Sources and uses of funds are not merely classified as revenues and expenses

 

Revenues are generally recognized when earned and expenses are shown when the related services of the organization are provided However, but are instead broken down into categories: 

Donations of services



Donated property



Pledges

o o o o

Should be charged to the appropriate expense with an offsetting credit to support Should be recorded at fair market value on the date of gift Should be recognized net of uncollectible amounts

Pledges or cash donations that will not be spendable until a future period should be shown as a deferred credit on the balance sheet

o

Voluntary health and welfare organizations must also provide a ‘Statement of Functional Expenses’ 

This statement reports expenses by both:  

o

Function (program and supporting)

Natural classification (salary expenses, depreciation expenses, etc)

The five (5) funds used by the Voluntary health and welfare organizations include: 1.

Current fund – unrestricted:  

2.

Used for operations that require only the discretion of the organization’s board Includes assets designated by the board for specific purposes

Current fund – restricted: 

Used for operations, but only in accordance with a donor or grantor’s specifications



Example: o

3.



This fund is used to account for: o o o

4.

Restricted pledges to be used to promote the adoption of handicapped children

Land, building, and equipment fund:

Endowment fund: 

Land, building, and equipment acquired by the organization

Liabilities arising from the acquisition or improvement of plant assets Current assets restricted by donors or grantors for future disposition

Used to account for: o

‘Permanently restricted endowment principal’

o

‘Temporary restricted term endowments’

 5.

Custodian fund: 

To be maintained intact either in perpetuity or until a specific event occurs

A fund established to account for assets received by an organization to be held or disbursed only on instructions of the person or organization from whom they were received

 

© itsjohnsanatomy

Similar to ‘Agency fund’ of a college or university The assets do not belong to the organization

Page 6

Accounting for Not-For-Profit Organizations



Accounting for Voluntary Health and Welfare Organizations o

Accounting for Revenues and Expenses: 

Revenues  

Recorded using the full accrual basis

Inflows of resources resulting from a charge for service from financial activities or from other exchange transactions



Include: o o o o



Expenses: 

Membership dues

Program service fees

Sales of publications and supplies or proceeds from the sale of these items Investment income e.g. interest, dividends, and other earnings

Recorded using the full accrual basis in a manner similar to that used by business organizations



Recorded in each fund that incurs the expenses



Expenses are classified into ‘program services’ and ‘supporting services’ and are reported on a functional basis under these classifications: o

Program services

o

Supporting services

 

Relate to the expenses incurred in providing the organization’s social service activities Consist of:  



Expenses: 

Program services (focus on social services)    



 

Research

Public education

Professional education Community services

Supporting services (focus on administration and fund-raising activities) 

Note:

Fund-raising costs

In reporting expenses in the Statement of Activities, the functional classifications might appear as follows: o



Administrative expenses

Management and general Fund raising

Public support: o

Is the inflow of resources from voluntary donors who receive no direct, personal benefit from the organization’s usual programs in exchange for their contributions

o

Include:    



Contributions

Special events support Legacies and bequests

Proceeds from fund raisers

Accounting for Other Not-For-Profit Organizations o o

A great deal of flexibility is permitted in the accounting for these organizations

A wide variety of other organizations have the option of using fund accounting 

Examples:    

© itsjohnsanatomy

Research and scientific organizations Social and country clubs Religious organizations Museums

Page 7

Accounting for Not-For-Profit Organizations



Accounting for Voluntary Health and Welfare Organizations (VHWOs) and Other Not-For-Profit Organizations o

Financial statements: 

All not-for-profit organizations, including VHWOs, to present three (3) general-purpose financial statements: 1.

Statement of financial position o o

Presented for the entire entity

Its purpose is to provide relevant information about the organization’s assets, liabilities, and net assets 

It should provide information about their relationships to each other as of date of the statement

o

Certain principle should be followed in preparing the statement. The focus is on the entity as a whole and should report total assets, liabilities, and net assets.

o

Cash or other assets that have restrictions imposed by the donor, limiting the use of those assets to longterm purposes 

o

   o

Should be segregated from other assets that are unrestricted

Net assets should be segregated into three (3) classes: Unrestricted

Temporarily restricted

Permanently restricted

The nature and timing of donor restrictions must be disclosed 

Voluntary restrictions of unrestricted net assets by the entity’s governing body, resulting in board-designated funds may be disclosed

o

Different types of restrictions that may be placed on assets: 

Assets may be permanently restricted: 

Example may be a donor-restricted gift, such as artwork, that must be used for a certain purpose and may not be sold



Example may be a donor-restricted gift to be invested with the principal preserved and the income available for expenditure



Assets may be temporarily restricted: 

Example may be a donor-restricted gift to be invested for a certain period during which only the income may be expended. After a certain point in time, the principal may be expended as well



Example may be a donor-restricted gift to be expended for certain purposes only, such as a special program or project. The gift might be restricted to the building and equipment fund



Assets may be unrestricted: 

Examples: o o o

Assets resulting from operations

Unrestricted gifts of cash and other assets

Temporarily restricted assets released due to satisfaction of the donor’s provisions

o 2.

Statement of activities

Governing board - designated funds

o

Also presented for the entity as a whole

o

Primary focus is to provide relevant information about: 

The effects of transactions and other events and circumstances that change the amount and nature of net assets

  3.

The relationships of those transactions and other events and circumstances to each other How the organization’s resources are used in providing various programs or services

Statement of cash flows o

A not-for-profit organization presents a statement of cash flows similar to that presented by a business enterprise

o o

They may use either direct or indirect method of presenting operating cash flows

Primary purpose is to provide relevant information about the cash receipts and cash payments of an organization during the period



In addition, VHWOs must present: 

Statement of functional expenses o o

Has no parallel in business

Breaks down each category of program and supporting expense by type of expense such as:   

o

Salaries

Supplies

Depreciation

Provides details omitted from the statement of support, revenue and expenses, and changes in fund balances, which only lists expenses by function

© itsjohnsanatomy

Page 8

Accounting for Not-For-Profit Organizations Punzalan:)

Accounting for non-governmental (not-for-profit) organizations  

All not-for-profit organizations use the accrual basis of accounting There are four (4) major non-for-profit organizations: o o o o

Colleges and universities Hospitals

Voluntary health and welfare organizations Other not-for-profit organizations

Accounting for colleges and universities 

Responsibilities for a not-for-profit university may be classified as: o

Academic 

o

Research



Public service

Financial  

o

 

Admissions Records

Counseling Communication and establishment of goodwill

A university levies tuition fees but these tuition fees are not sufficient to cover total operational costs o

Thus, other sources are essential:    



Reporting of business

Public relations 



Management

Student services 

o

Instruction



Gifts

Income from endowment funds

Grants from governmental units or foundations Appropriations (for public universities)

Public college and university funds include three (3) broad categories: o

Current funds 

Which may be:  

o

Plant funds 

1.

Unexpended plant fund

3.

Plant fund for retirement of indebtedness

4.



unrestricted

Plant funds of public universities include four (4) separate, self-balancing subgroups: 2.

o

Restricted

Plant fund for renewals and replacements Investment in plant fund

Trust and agency funds

Accounting for private colleges and universities o

Shift away from a fund group focus to an organization-wide focus

o

Instead of fund balances, three (3) net asset classes are used:

 1.

Unrestricted

3.

Permanently restricted

2. o

In which there is no requirement for external financial statements to include fund group reporting

Temporarily restricted

Events that were previously recorded as changes in fund balance will now be recorded as contributions, exchange transactions, capital acquisitions, or expenses



Financial statements o

The three (3) principal financial statements for public and private universities are: 

Public universities 1.

Statement of current funds, revenues, expenditures, and other changes

3.

Statement of changes in fund balance

2. 

Private universities 1.

Statement of activities

3.

Statement of cash flows

2.

© itsjohnsanatomy

Balance sheet

Balance sheet

Page 9

Accounting for Not-For-Profit Organizations Accounting for health care providers 

Health care entities include: o o o o o o



Hospitals Clinics

Continuing care retirement communities Health maintenance organizations Home health agencies Nursing homes

A modern health care provider may be a complex entity with: o o o o o

Medical aspect

Surgical aspect

Research aspect

Teaching aspect

Public service aspect



One very unusual element about health care operations is the manner of payment for services:



Health care entities employs two (2) classes of funds:

o

That is, when a significant portion of the fees for health care services is paid by a third party, like Medicare or Philhealth

1.

General funds

2.

Donor-restricted funds

 

Which account for resources available for general purposes Which account for temporarily and permanently restricted resources such as:    



Endowment funds

Other donor-restricted funds

Assets of a health care provider comprise three (3) distinct segments:   

Current assets

Assets whose use is limited Property and equipment

Revenues, expenses, gains, and losses increase or decrease the net assets of a health care provider entity o

They may be operating if:

o

They may be non-operating if:

  

Plant replacement and expansion funds

Assets and liabilities of a health care provider are sequenced by their liquidity and are classified as current or non-current o



Specific purpose funds

Financial statements o

Include: 

They are related to the principal activity They are from activities that are incidental or from events beyond the entity’s control

Statement of activities 

Which present organization-wide totals for changes in unrestricted, temporarily restricted, and permanently restricted net assets

 

Statement of financial position Statement of cash flows

Accounting for voluntary health and welfare organizations 

To qualify as a voluntary health and welfare organization: o o



The organization’s primary source of revenue should be contributions from donors, who do not benefit directly from the organization The program must be in area of health, welfare, or community services

There are some instances where contributions received by an organization specify the purpose for which they must be expended o

To segregate resources with external restrictions, the organization must report these items under three (3) classes of net assets: 1.

Unrestricted

3.

Permanently restricted

2. 

Financial statements o

Temporarily restricted

The four (4) financial statements for VHWOs are as follows: 1.

Statement of financial position

3.

Statement of cash flows

2. 4.

Statement of activities

Statement of functional expenses  

© itsjohnsanatomy

Which supplements the operating statement

Presents the total of each functional expense to programs and supporting services

Page 10

Accounting for Not-For-Profit Organizations Accounting for other not-for-profit organizations 

Organizations that have restricted resources may use fund accounting for internal control and management reporting purposes



Net assets are classified as:

o o o o 

In order to demonstrate compliance with externally imposed restrictions Unrestricted

Temporarily restricted

Permanently restricted

Financial statements o o

Report organization-wide totals for all assets and liabilities Include:   

© itsjohnsanatomy

Statement of financial position Statement of activities

Statement of cash flows

Page 11