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Accounting for Not-For-Profit Organizations


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 business accounting Therefore, its advocates believe not-for-profit accounting could, with little exceptions, make use of the principles applicable to Non business accounting is going to be essentially like business accounting 2.

Non business organizations will prepare operating statements, balance sheets, and funds flow statement now apply in business accounting

The primary focus will be on the operating statement and its principles will be governed by the same principles that

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 activities or attaining certain objectives in accordance with special regulations, restrictions, or limitations:

related liabilities and residual equities, or balances, and changes therein which are segregated for the purpose of carrying on specific o Different types of funds are necessary to distinguish between: o Fund accounting: o o Assets whose use is restricted by donors

Assets that may be used as authorized by the BODs

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

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) Loan fund

Annuity fund and life income fund (sometimes called living trust 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 been maintained in the accounts and disclosed on the financial reports A clear distinction of funds that are externally restricted and those that are internally designated by action of the governing board has

Accrual basis of accounting: o o

All not-for-profit organizations accounting for revenues and expenses use the accrual basis of accounting. Depreciation should be recorded if: The assets are gifts

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

The assets arise because of donations


Works of art and historical treasures that meet the definition of collections Need not be capitalized nor depreciated

Financial statements: o o o o

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 The equity account fund balance has been replaced with the term net assets Under the present GAAP: It requires classifications of the organizations net assets based on the existence or absence of donor-imposed restrictions Unrestricted

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

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


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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 organizations net assets or change in equity: permanently restricted, temporarily restricted, and unrestricted recognized only in the unrestricted classification Minimum requirements are organization-wide totals, changes in net assets for each class of assets, and all expenses A display of a measure of operations in the statement of activities is permitted With categories similar to regular business enterprises: o o o Operating Investing Financing

Statement of cash flows

Notes to the financial statements

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 Revenues, gains, and losses: Expenses:

The organizations net assets, revenue, expenses, gains, and losses are classified according to the three (3) classes of net assets Can be reported in each net asset class Are reported only in unrestricted net assets class

The three (3)classes are: 1. 2.

Permanently restricted net assets:

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: o o

Are the portion of net assets whose use is limited by donor-imposed stipulations that either: Expire (time restrictions) Can be removed by the organization fulfilling the stipulations (purpose restrictions)


Unrestricted net assets:

Accounting for Hospitals: o o o o

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 not record budgetary accounts or encumbrances on the books Fund accounting is required for Hospitals 1.

Hospitals will use normal accrual accounting methods, including the classification of costs as expenses rather than expenditure, and will

In order to maintain accountability over restricted resources General (unrestricted) fund: operations Note: o o o

In general, there are two (2) types of funds used by a hospital: Account for all resources of the hospital which are not subject to outside restrictions; they are used for day-to-day

Board-designated funds are unrestricted Designation: 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 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 Note:

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

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


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Accounting for Not-For-Profit Organizations

Accounting for Hospitals: o 2.

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

Term endowment fund o

Used by hospital to account for a trust where the principal must be kept specific purpose in accordance with grantors wishes

intact and the income be expanded for either current operations or a 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 plant, and equipment

account for donors contributions that must be used to acquire property, 2. Life income fund

Permanently restricted fund:

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

must be maintained intact in perpetuity and only the income may be used in accordance with o Accounting for Revenues and Expenses: Revenues and gains 1. o o

Patient service revenue:

Include room and board, nursing services, and other professional services amounts that are considered deductions from revenues

Typically are recorded at established (gross) rates as the services are provided but are reported net of 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: 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

Contractual adjustments:


Charity care services provided free of charge to patients who qualify under a hospitals charity care policy are excluded from both gross and net patient service revenues organizations: o o According to the AICPA audit guide and accounting guide, health care Charity care cases do not qualify for recognition as receivables or revenues in the financial statements Managements 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 units of service, or other statistical measure

statement and is measured based on the providers rates, costs 2. 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 The fee is usually a specific fee per member per month

o o o

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


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Accounting for Not-For-Profit Organizations

Accounting for Hospitals: o

Accounting for Revenues and Expenses: Revenues and gains 3. o o o o o o o o o o Other operating revenues:

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 Records revenue not related directly to an entitys principal operations These items are primarily financial in nature Include:

The control account Nonoperating revenues

Unrestricted and donor-restricted pledges 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

Note: o

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

Operating expenses

Operating expenses of hospitals are reported on an accrual basis Classification (Functional categories) of Operating expenses: 1. Nursing services 2. 3. 4. 5. 6. 7. o Medical and surgical Intensive care Nurseries

Other profession services Laboratories Radiology

Operating rooms

Anesthesiology Pharmacy

General services

Housekeeping Maintenance Laundry

Fiscal services

Accounting Cashier Credits and collection Data processing Personnel

Administrative services Purchasing Insurance

Interest provisions

Governing board


Depreciation provisions Although accounts are maintained for employee and contractual allowances, these items are not expenses at net patient service revenue reported in the statement of operations

They are revenue deductions that are subtracted from gross patient service revenues to arrive

o o

Provision for bad debts is an expense

What is the difference between charity care and bad debts expense? meet certain financial criteria

Charity care results from the hospitals policy of providing health care to individuals who Health care services provided as charity care were never intended to provide cash flows

Bad debts result from extending credit


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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. o o o Current funds

Account for resources of the institution that will be used in carrying out the primary objectives: instruction, research, extension, and public service Restricted current funds have been restricted by donors or grantors to specific purposes Unrestricted current funds are not subject to outside restraints on usage Since they lack externally-imposed restrictions Resources designated by the BOTs are still considered unrestricted


Loan funds o o o o

Are established for resources that are to be loaned to students, faculty or staff Not for loans, notes, or bonds payable to others Designed to hold assets, not liabilities Restricted amounts

Fund balances should separately report restricted and unrestricted amounts: Represent resources which outside parties provided to the university on condition that it will be used for loans

Unrestricted amounts

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


Endowment and similar funds o Endowment funds: o o

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

Term endowment funds:

Quasi-endowment funds:

May be spent after a specific period of time has passed or a certain event has occurred Arent actually restricted but have been designated by the BORs to be retained and invested


Annuity and Life income funds o Annuity funds: o

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

Life income funds:

Require distribution of all earnings to a specified person, upon whose death the balance becomes expendable by the university


Plant funds o o

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. 2. 3. 4. Unexpended plant funds

Funds for renewals and replacements Funds for retirement of indebtedness

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

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


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 o o o Accrual accounting is used

Investment in plant fund balance isnt 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 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


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Accounting for Not-For-Profit Organizations

Accounting for Colleges and Universities o Revenues include:

Accounting for Revenues and Expenses: Tuition fees

Government appropriations

Government grants and contracts Endowment income

Private gifts, grants, and contracts 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) Educational and general expenditures Auxiliary enterprises Hospitals

Expenditures include:

Independent operations

Accounting for Voluntary Health and Welfare Organizations o o

Voluntary health and welfare organizations adhere to the accrual basis of accounting Sources and uses of funds are not merely classified as revenues and expenses However, but are instead broken down into categories: Donations of services o o Pledges o o Donated property

Revenues are generally recognized when earned and expenses are shown when the related services of the organization are provided

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 credit on the balance sheet

Pledges or cash donations that will not be spendable until a future period should be shown as a deferred

Voluntary health and welfare organizations must also provide a Statement of Functional Expenses This statement reports expenses by both: Function (program and supporting)

The five (5) funds used by the Voluntary health and welfare organizations include: 1. Current fund unrestricted: 2. 3.

Natural classification (salary expenses, depreciation expenses, etc)

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

Current fund restricted: Example: o

Used for operations, but only in accordance with a donor or grantors specifications Restricted pledges to be used to promote the adoption of handicapped children

Land, building, and equipment fund: o o o

This fund is used to account for:

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


Endowment fund:

Used to account for: o o

Permanently restricted endowment principal Temporary restricted term endowments

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


Custodian fund:

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


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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 transactions Include: o o o o

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

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

Supporting services

Relate to the expenses incurred in providing the organizations social service activities Consist of:

Administrative expenses Fund-raising costs

In reporting expenses in the Statement of Activities, the functional classifications might appear as follows: o Expenses: Program services (focus on social services) Research Public education

Professional education Community services

Supporting services (focus on administration and fund-raising activities) Management and general Fund raising


Public support: o o

Is the inflow of resources from voluntary donors who receive no direct, personal benefit from the organizations usual programs in exchange for their contributions 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 Examples:

A wide variety of other organizations have the option of using fund accounting Research and scientific organizations Social and country clubs Religious organizations Museums


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Accounting for Not-For-Profit Organizations

Accounting for Voluntary Health and Welfare Organizations (VHWOs) and Other Not-For-Profit Organizations o Financial statements: 1. All not-for-profit organizations, including VHWOs, to present three (3) general-purpose financial statements: Statement of financial position o o Presented for the entire entity o o

Its purpose is to provide relevant information about the organizations assets, liabilities, and net assets statement

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

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. term purposes Cash or other assets that have restrictions imposed by the donor, limiting the use of those assets to longShould be segregated from other assets that are unrestricted Unrestricted

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

The nature and timing of donor restrictions must be disclosed board-designated funds may be disclosed Assets may be permanently restricted:

Permanently restricted

Voluntary restrictions of unrestricted net assets by the entitys governing body, resulting in

Different types of restrictions that may be placed on assets: 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 Examples: o o o o

Assets may be unrestricted:

Assets resulting from operations

Unrestricted gifts of cash and other assets provisions

Temporarily restricted assets released due to satisfaction of the donors Governing board - designated funds


Statement of activities o o

Also presented for the entity as a whole Primary focus is to provide relevant information about: nature of net assets The effects of transactions and other events and circumstances that change the amount and The relationships of those transactions and other events and circumstances to each other How the organizations resources are used in providing various programs or services


Statement of cash flows o o o enterprise

A not-for-profit organization presents a statement of cash flows similar to that presented by a business They may use either direct or indirect method of presenting operating cash flows organization during the period

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

In addition, VHWOs must present: o o

Statement of functional expenses

Has no parallel in business Salaries

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

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



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Accounting for Not-For-Profit Organizations


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 o Academic o Financial o o o

Responsibilities for a not-for-profit university may be classified as: Instruction Research Public service Management

Student services

Reporting of business Admissions Records Counseling Communication and establishment of goodwill

Public relations

A university levies tuition fees but these tuition fees are not sufficient to cover total operational costs Thus, other sources are essential: 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



Plant funds of public universities include four (4) separate, self-balancing subgroups: 1. 2. 3. 4. Unexpended plant fund Plant fund for renewals and replacements Plant fund for retirement of indebtedness Investment in plant fund

o o o

Trust and agency funds

Accounting for private colleges and universities 1. 2. 3. o

Shift away from a fund group focus to an organization-wide focus Instead of fund balances, three (3) net asset classes are used: Unrestricted Temporarily restricted

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

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

Permanently restricted

Financial statements o

The three (3) principal financial statements for public and private universities are: Public universities 1. 2. 3. 1. 2. 3. Statement of current funds, revenues, expenditures, and other changes Balance sheet Statement of changes in fund balance Statement of activities Balance sheet Statement of cash flows

Private universities


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Accounting for Not-For-Profit Organizations

Accounting for health care providers o o o o o o o o o o o o 1. 2. Hospitals Clinics

Health care entities include:

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

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

Research aspect

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

Public service aspect

Donor-restricted funds

Which account for resources available for general purposes Which account for temporarily and permanently restricted resources such as: Specific purpose funds Endowment funds Plant replacement and expansion funds Other donor-restricted funds

Assets and liabilities of a health care provider are sequenced by their liquidity and are classified as current or non-current o 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 o They may be operating if: They are related to the principal activity They are from activities that are incidental or from events beyond the entitys control

They may be non-operating if:

Financial statements o Include:

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 o o o

To qualify as a voluntary health and welfare organization:

The organizations 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 1. 2. 3. Unrestricted

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

Financial statements o 1. 2. 3. 4.

Permanently restricted

The four (4) financial statements for VHWOs are as follows: Statement of financial position Statement of activities Statement of cash flows

Statement of functional expenses

Which supplements the operating statement

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


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Accounting for Not-For-Profit Organizations

Accounting for other not-for-profit organizations o o o o o o

Organizations that have restricted resources may use fund accounting for internal control and management reporting purposes Net assets are classified as: Unrestricted In order to demonstrate compliance with externally imposed restrictions

Temporarily restricted

Financial statements Include:

Permanently restricted Report organization-wide totals for all assets and liabilities Statement of financial position Statement of activities Statement of cash flows


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