Professional Documents
Culture Documents
Not-for-Profit Entities
McGraw-Hill/Irwin Copyright 2011 by The McGraw-Hill Companies, Inc. All rights reserved.
Learning Objective 1
Understand financial reporting rules and make basic journal entries for private, not-for-profit entities.
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Excluded Entities The following entities are not NPOs because they solely serve the economic interests of their owners, members, participants, or trust beneficiaries:
A dependence on significant levels of contributions A significant level of assets that are restricted as to use because of donor stipulations Tax-exempt status. IRS Form 990, 990A, or 990PF
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Not-for-profit religious, charitable, and educational groups receive roughly $40 billion annually in federal government grants.
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Tax-Exempt Status Advantages to Tax-Exempt Status for U.S. Income Tax Reporting Purposes (in most states):
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Tax-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.
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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).
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Differences between NPOs and Businesses Revenues and support are often compared to expenses. However, remember that
Expenses 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.
Who Makes the Rules for Not-for-Profits Entities? The accounting and financial reporting for governmental not-forprofit entities Accounting and financial reporting for nongovernmental notfor-profit entities
GASB
FASB
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Financial Reporting for Private, Not-for-Profit Entities Private, not-for-profit entities must report their net assets in accordance with FAC 6. FAC 6 specifies three mutually exclusive classes of net assets:
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SFAS 93 guides depreciation SFAS 116 guides accounting for contributions SFAS 117 establishes financial display requirements SFAS 124 establishes the accounting for investments
SFAS 136 guides the accounting for transfers of assets to a not-for-profit organization that raises or holds contributions for others
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Financial Reporting for Private, Not-for-Profit Entities Some 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.
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Financial Reporting for Private, Not-for-Profit Entities Mergers and acquisitionsExposure drafts The proposed standards
Require the recognition of identifiable assets acquired and liabilities assumed at their fair values at the date of the acquisition
Require that intangible assets other than goodwill and goodwill be assigned to reporting units that are acquired Approaches to evaluating goodwill impairment
Contributions: Scope of FAS 116 FAS 116, Accounting for Contributions applies to ALL 4 types of Private NPOs.
Health Care Organizations
FASB 116
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Contributions: Promises, Promises Unconditional transfers include unconditional promises to give cash or other assets in the future. Promises may be
Oral or
Written
Unconditional promises result in reporting Contributions Receivable in the balance sheet (subject to an allowance for uncollectibles).
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Contributions: Recognizing Unconditional Promises Recognizing unconditional promises in the financial statements requires
having sufficient evidence in the form of verifiable documentation that a promise was made
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The conceptual opposite of unconditional promises to give Not contributions (as defined by FAS 116) Depend on the occurrence of a specified future and uncertain event that
Must occur to bind the promissor and Thus transform the promise from conditional to unconditional status.
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The possibility that the future event will not be met [occur] is remote.
Conditional Unconditional
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Contributions: Conditional Use of Assets Received If 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.
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Contributions are reported in the Statement of Activities (the operating statement) by category
Permanently restricted
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Donor-restricted contributions whose conditions are fulfilled in the same period in which the contribution is recognized
May be reported in the unrestricted category of the operating statement (O/S) if the entity:
Note: This option negates the need to show transfers between categories in the Operating Statement.
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Income on Endowments
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Contributed Assets
that are restricted as to either
Purpose
or
Time Period
Temporarily Restricted Assets
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are classified as
Where: In the statement of activities. How: As a separate line item reclassification as shown below.
Unrestricted Temporarily Restricted $(77,000)
Expirations of restrictions
$77,000
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Are covered after we discuss FAS 117 Financial Statements of Not-for-Profit Organizations So that you may more readily see the close interrelation-ship that exists between FAS 116 and FAS 117.
Collection items
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Financial Statements: Scope of FAS 117 FAS 117, Financial Statements of Notfor-profit Organizations applies to ALL 4 types of Private NPOs.
Health Care Organizations
FASB 117
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Financial Statements: Which Financial Statements FAS 117 requires for the NPO as a whole:
A Statement of Activities
A Statement of Cash Flows. In a separate statement Expenses by Natural Classification in a matrix format.
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Financial Statements: The Three Classifications of Net Assets The three mandated classifications of net assets are:
Note that these are the same three classifications used for reporting contributions.
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Contributions: Additional Issues Contributions of monetary and nonmonetary assets are valued at the fair value of the assets received. Determining the fair value may require
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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.
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Nonfinancial assets are created or enhanced. Specialized skills are provided by individuals possessing these skills (e.g., carpenters, electricians, plumbers, lawyers, CPAs).
A description of the nature and extent The amounts recognized as revenues The programs or activities in which the services were used
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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:
asset enhancement
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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.
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Learning Objective 2
Understand financial reporting rules and make basic journal entries for not-for-profit colleges and universities.
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The full amount of the standard rate for tuition and fees is recognized as revenue Accounting for university-sponsored scholarships, fellowships, tuition and fee remissions or waivers depends on whether the recipient provides any services to the university
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Accounted for as a reduction of revenue Accounted for as revenue in the fiscal year in which the term is predominantly conducted, along with all expenses incurred NACUBO recommended the use of the accrual basis of accounting
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The 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.
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Accounting 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 businesstype activities. These entities present only the financial statements required for enterprise funds and then are included as component units of the state government.
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The FASB specifies the accounting and financial reporting standards. The three financial statements required are:
The Statement of Financial Position The Statement of Activities The Statement of Cash Flows
They are free to select any account structure that best serves their management and financial reporting needs.
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Learning Objective 3
Understand financial reporting rules and make basic journal entries for not-for-profit health care providers.
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Investor-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.
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Although 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.
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The Balance Sheet The Statement of Operations The Statement of Changes in Net Assets The Statement of Cash Flows
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Presents the total assets, liabilities, and net assets of the organization as a whole Receivables Investments
Major accounts
Initially recorded at cost if purchased or at fair value at the date of receipt if received as a gift Property, plant, and equipment reported with any accumulated depreciation
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Plant assets
Separate disclosure should be made for assets that have restrictions placed on their use The hospital must also account for its long-term debt and pay the principal and interest as it becomes due
Long-term debt
Net Assets
1. Unrestricted net assets available 2. Temporarily restricted net assets available for use 3. Permanently restricted net assets
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Health Care Providers Not-for-profit hospital: Major accounts in The Statement of Operations
Donations
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Health Care Providers Not-for-profit hospital: The Statement of Changes in Net Assets
Major 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.
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A 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.
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Operating 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.
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Learning Objective 4
Understand financial reporting rules and make basic journal entries for not-for-profit voluntary health and welfare organizations.
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Voluntary Health and Welfare Organizations Voluntary health and welfare organizations (VH&WOs) provide a variety of social services
They solicit funds from the community at large and typically provide their services for no fee.
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Similar 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.
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The statements are designed primarily for those who are interested in the organization as outsiders.
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Voluntary Health and Welfare Organizations The Statement of financial position for a VH&WO
Pledges from donors Investments Land, buildings, and equipment Liabilities Net assets
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The 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.
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Public support
The 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. Funds received in exchange for services provided or other activities Gain or loss on sale of investments and other assets
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Revenues
Gains
Should be recorded at fair value when received Information about the major costs of providing services to the public, fund-raising, and general and administrative costs
Expenses
Many VH&WOs prefer to classify such costs as program rather than fund-raising
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Details the items reported in the expenses section of the statement of activities
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Voluntary Health and Welfare Organizations Summary of Accounting and Financial Reporting for VH&WOs
Reporting 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.
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Voluntary Health and Welfare Organizations Summary of Accounting and Financial Reporting for VH&WOs
Resources 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.
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Learning Objective 5
Understand financial reporting rules and make basic journal entries for other not-for-profit organizations.
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Cemetery organizations Civic organizations Fraternal organizations Labor unions Libraries Museums Other cultural institutions Performing arts organizations Political parties Private and community foundations
Private elementary and secondary schools Professional associations Public broadcasting stations Religious organizations Research and scientific organizations Social and country clubs Trade associations Zoological and botanical societies
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In 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.
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With 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 assets
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Explains 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 requires 1. A Statement of Financial Position 2. A Statement of Activities, and 3. A Statement of Cash Flows
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Conclusion
The End
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