Chapter 19

Not-For-Profit
Entities

McGraw-Hill/Irwin Copyright © 2005 by The McGraw-Hill Companies, Inc. All rights reserved.
Not-For-Profit (NFP)
• This chapter presents the accounting and
financial reporting principles used by both
governmental (public) and nongovernmental
(private) colleges and universities, and by
health care providers.

• Health care providers would include: hospitals

and nursing homes, voluntary health and
welfare organizations such as the Red Cross
and United Way, and other not-for-profit
organizations such as professional or
fraternal associations.
19-2
NFP--GASB and FASB

• The accounting and financial reporting for

governmental, nonprofit entities is controlled
by the GASB.

• Accounting and financial reporting for

nongovernmental, non profit entities is
controlled by the FASB.

• Thus, it is important to determine the role

the government has in the organization.
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Private NFP Entities

• Private, not-for-profit entities follow the

accounting and reporting standards
established by the FASB.

• Private, not-for-profit entities must report

their net assets in accordance with Financial
Accounting Concepts Statement No. 6,
“Elements for Financial Statements” (FAC 6).

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 Private NFP Entities

• FAC 6 specifies three mutually exclusive classes

of net assets (assets less liabilities):
• Unrestricted Net Assets
• Temporarily Restricted Net Assets
• Permanently Restricted Net Assets
• It is very important to properly account for, and
report, each class of net assets.

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 Private NFP Entities

• Unrestricted net assets are used for the general

operations of the entity.

• Unrestricted net assets include all assets and

liabilities that do not have externally imposed
restrictions on their use, that is, this class of net
assets is not restricted by a donor.

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 Private NFP Entities

• Temporarily restricted net assets have donor-

imposed time or purpose restrictions.

• A time restriction means that the assets will not

be available for use until after a specific time
has passed.

• A purpose restriction means that the resources

may be used only for specific purposes.

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 Private NFP Entities

• Permanently restricted net assets—This class

of net assets includes permanently restricted
contributions (such as regular endowments) for
which the principal must be preserved into
perpetuity.

19-8
Private NFP Entities

• Some NFP entities use a fund structure to

account for each type of net asset class to
obtain the account discipline that fund
accounting provides.

• These entities would have funds such as the

general fund, specific purpose fund, building
fund, endowment fund, and so on.
• But, other NFP entities only maintain an
accounting record to show the amounts in
each net asset class.
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 Private NFP Entities

• The specific identification of any restricted asset

must be made at the time the asset comes into
the entity, generally by donation or bequest.

• The gifting agreement must be examined fully to

determine if there are any donor-imposed
restrictions on the principal of the gift, and/or on
the income generated from the principal.

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Private NFP Entities

• A key concept is that revenue should be

recognized only once, and only by the
appropriate receiving net asset class.

• Some NFP entities use the terms “net assets

released from restriction” instead of
“reclassification” when the resources are
released from a restricted net asset class and
assigned or transferred to another asset class.

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 Private NFP Entities
• It is very important to note that the restricted
asset classes, either temporarily or permanently,
do not report expenses on the organization’s
statement of activities.
• The restricted asset classes (temporarily or
permanently) would report restricted contribution
revenue and any restricted investment
income/losses, but cannot report any expenses.
• Expenses are reported only in the unrestricted
asset class.
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Private NFP Entities

• The FASB has issued five standards that have

direct applicability to private, not-for-profit
entities (continued on next slide):

• FASB 93, which guides depreciation.

• FASB116, which guides accounting for

contributions.

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 Private NFP Entities

• FASB 117, which establishes financial display

requirements.

• FASB 124, which establishes the accounting for

investments.

• FASB136, which guides the accounting for

transfers of assets to a not-for-profit organization
that raises or holds contributions for others.

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 Private NFP Entities

• Depreciation must be recognized on long-lived

tangible assets, other than works of art or
historical treasures that have cultural, aesthetic,
or historical value that is worth preserving
perpetually and whose holders have the ability
to preserve that value and are so doing.

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 Private NFP Entities
• The depreciation is reported as an expenditure
of the fund that uses the tangible long-lived
assets during the period.

• FASB 93 requires disclosure of the following

items: (1) depreciation for the period, (2) the
balance of the major classes of depreciable
assets, (3) the accumulated depreciation at the
balance sheet date, and (4) the method used to
compute depreciation for the major classes of
depreciable assets.
19-16
 Private NFP Entities

• Contributions can be of cash, other assets, or a

promise to give (a pledge).

• The general rule is that contributions received

are measured at their fair value and are
recognized as revenues or gains in the period
received.

• The contributions are reported as unrestricted

support or, if there are donor-imposed
restrictions, as restricted support
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 Private NFP Entities

• A private not-for-profit entity does not need to

recognize contributions of works of art, historical
treasures, and similar assets if the donated
items are added to collections that (1) are held
for public exhibition, education, or research; (2)
are protected, cared for, and preserved; and (3)
has an organizational policy in existence that
proceeds from the sales of collection items are
to be used to acquire other items for collections.

19-18
Private NFP Entities
• Contributions of services are recognized as a
revenue, with an equivalent amount recorded
as an expenditure, if the services received (1)
create or enhance nonfinancial assets or (2)
require specialized skills, are provided by
individuals possessing those skills, and would
typically need to be purchased if not provided
by donation.

• Examples of contributed services would be

specialized skills provided by accountants,
architects, doctors, teachers, and other
professionals.
19-19
 Private NFP Entities

• Some religious-based colleges record revenue,

with an offsetting amount to an expenditure, for
the fair value of contributed lay teaching
services.

• This recognition is made to report the full cost of

the teaching mission of these private colleges.

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 Private NFP Entities
• FASB 124 extended to not-for-profit
organizations the basic standard of fair value
for investments that was presented in FASB
115 on investments.

• FASB 124 specifies that fair value should be the

measurement basis for investments in all debt
securities and in equity securities that have
readily determinable fair values (other than
those equity securities that are accounted for
under the equity method in accordance with
APB 18).
19-21
 Private NFP Entities

• Note that FASB 124 requires that debt securities

should be valued at fair value.

• Changes in fair value of investments in

temporarily restricted or permanently restricted
net assets should be recognized in accordance
with donor restrictions as to the income.

• Otherwise, investment income would be

reported as a change in unrestricted net assets.
19-22
 Private NFP Entities
• FASB 117 specifies the financial display
standards for private not-for-profit entities.

• The three major financial statements are (1) a

statement of financial position, (2) a statement
of activities, and (3) a statement of cash flows.

• The unique features of the statement of financial

position and statement of activities for not-for-
profit organizations will be presented in greater
detail in the following discussions.

19-23
 Private NFP Entities

• While some flexibility exists in the presentation

of financial statements under FASB 117, a major
feature of the statement of financial position is
the combined presentation of all assets and
equities in a single, simplified statement.
• In addition , the net assets are separated into
those that are (1) unrestricted, (2) temporarily
restricted, and (3) permanently restricted.

19-24
 Private NFP Entities

• FASB 136, issued in 1999, establishes the

accounting for contributions made to foundations
or other similar organizations that raise
resources for not-for-profit entities. FASB 136
defines three parties to the typical contribution
process: the donor; the recipient organization;
and, the beneficiary.

19-25
 Private NFP Entities

• The donor is the initial provider of the resources.

The recipient organization received the assets
from the donor. And the beneficiary is the entity
that that eventually receives the assets through
the recipient organization, as specified by the
donor.

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 Private NFP Entities

• Many not-for-profit, private colleges and

universities have a foundation that is responsible
for raising financial support from alumni and
other donors. Typically, these foundations are
institutionally related to the college or university
and uses its assets for the benefit of the college
or university.

19-27
 Private NFP Entities

• In most cases, at the time of the contribution of

assets for the donor to the foundation (the
recipient organizations), the foundation will
record an increase in assets and a contribution
revenue for the fair value of the donation.
Usually these assets are temporarily restricted
until the foundation transfers them to the college
or university.

19-28
 Private NFP Entities

• Some recipient organizations, such as United

Way, do fundraising that will benefit a number of
not-or-profit organizations. Donors may direct
the specific recipient of their gifts, or the donor
may give to United Way without a restriction as
to where the gift should be used.

19-29
 Private NFP Entities

• In those cases in which the donor specifies the

beneficiary, then United Way would recognize an
increase in its assets and record a liability to the
specified beneficiary. The organization specified
by the donor would record an increase in its net
assets, usually as a receivable, and record
contribution revenue at the time of the donation.

19-30
 Private NFP Entities

• For those donations that are unrestricted, and

for which United Way may determine the best
uses of the resources, United Way would record
an increase in its assets and record the
unrestricted gifts as contribution revenue. Then,
when the assets are distributed, United Way
would record the expense and the decrease in
its assets, and the beneficiary would record
contribution revenue for the fair value of the
assets transferred.

19-31
 Private NFP Entities

• Therefore, the key issues are the relationship

between the recipient organization and the
beneficiary, and whether or not the donor placed
any use restrictions on the donation. In the case
of nonfinancial assets such as artwork, the
recipient organizations may choose whether or
not to record the fair value of these nonfinancial
assets in its books. However, all financial assets
must be recorded at their fair values.

19-32
Colleges and Universities

There are more than 3,000 colleges and

universities in the United States. Public colleges
and universities receive a significant portion of
their operating resources from state
governments. Private not-for-profit colleges and
universities receive most of their resources from
tuition and fees.

19-33
 Tuition and Fees

• In college and university accounting, the full

amount of the standard rate for tuition and fees
is recognized as revenue. If a student receives
a university-sponsored scholarship that does not
require any employment-type of work to be
given to the university, then the university
accounts for this as a deduction from revenue
(i.e., reduces revenue). In contrast, if the
student must provide employment-type work to
the university, then the university accounts for
the scholarship as an expense.
19-34
 Tuition and Fees-Continued

• Colleges and universities account for

reimbursements of tuition and fees as a
reduction of revenue. Also, colleges and
universities account for the tuition and fees
collected for a term of instruction as revenue in
the fiscal year in which the term is predominantly
conducted, along with all expenses incurred to
finance that term.

19-35
 Public Colleges and Universities

• The accounting and reporting for public colleges

and universities is specified by the GASB 35.

• GASB 35 requires that these institutions 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, thus
GASB 34 applies.

19-36
 Private Colleges and Universities

• The FASB specifies the accounting and financial

reporting standards for private colleges and
universities. Although many private colleges
and universities are not-for-profit entities, some
private colleges are profit-seeking, such as the
University of Phoenix. Accounting for profit-
seeking educational entities is similar to
accounting for any commercial entity and is not
covered in this chapter.

19-37
 Health Care Providers

• The health care environment is currently

undergoing a revolution.

• Rapidly growing costs of providing medical care

are forcing hospitals to merge at an increasing
rate in order to consolidate the types of services
offered.

• The cost of new technology is also requiring

health care providers to reevaluate their
missions to the communities they serve.
19-38
Health Care Providers

• Although the major focus of this section of this

chapter is on hospitals, the accounting and
financial reporting guidelines for hospitals are
the same as those used by all health care
providers included within the scope of the
AICPA’s audit and accounting guide for Health
Care Organizations.

19-39
 Health Care Providers

• The AICPA periodically revises its audit and

accounting guides for specialized industries. The
2001 Audit and Accounting Guide for Health
Care Organizations, which includes hospitals,
revises and supersedes the earlier audit guides
for hospitals.

19-40
 Hospitals

• Hospitals may be classified as (a) investor-

owned businesses, or (b) not-for-profit entities
that cover their costs by generating fees from
their activities, or (c) governmental entities.

• Private-sector hospitals use the FASB’s

accounting guidelines and requirements while
public-sector (governmental) hospitals follow the
GASB’s accounting guidance.

19-41
 Hospitals

• In this chapter, it is assumed that the hospital is

a separate, not-for-profit reporting entity, and is
not a component unit of any government.

• The focus of this chapter is on not-for-profit

hospitals because of the large number of these
hospitals and because of their special
accounting and financial reporting issues.

19-42
 Hospital Accounting/Reporting

• The major operating activities of a hospital 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.

• The accrual basis of accounting is used in the

general fund to fully measure the revenue and
costs of providing health care.

19-43
Hospital Accounting/Reporting

• Patient services revenue is reported at gross

amounts measured at standard billing rates.

• A deduction for contractual adjustments is then

made to arrive at net patient services revenue.

• Other revenue is recognized for ongoing non-

patient services, such as cafeteria sales and
television rentals, and donated supplies and
medicines.
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 Hospital Accounting/Reporting

• Charity care services are presented only in the

footnotes; no revenue is recognized for them.

• 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.

19-45
 Hospital Accounting/Reporting

• Donated property and equipment is typically

recorded in a restricted fund, such as plant fund,
until placed into service, at which time it is
transferred to the general fund.

• Donated assets are recorded at their fair market

values at the date of gift.

19-46
 Voluntary Health and Welfare
Organizations (VHWOs)

• Voluntary health and welfare organizations

(VHWOs) provide a variety of social services.
• Examples of such organizations are the United
Way, the American Heart Association, the March
of Dimes, the American Cancer Society, the Red
Cross, and the Salvation Army.

• These organizations solicit funds from the

community at large and typically provide their
services for no fee, or they may charge a
nominal fee to those with the ability to pay.
19-47
VHWOs—Accounting/Reporting

• Primary activities of the VHWO are reported in

the unrestricted asset class.

• Resources restricted by the donor for specific

operating purposes or future periods are
reported as temporarily restricted assets.

• Those assets contributed by the donor with

permanent restrictions are reported as
permanently restricted assets.
19-48
 VHWOs—Accounting/Reporting
• The accrual basis of accounting is used for
financial reporting purposes.

• A VHWO provides four financial statements: (1)

statement of financial position, (2) statement of
activities, (3) cash flow statement, and (4)
statement of functional expenses.

• The statement of functional expenses is required

of all VHWOs as a means of providing an
analysis of all expenses for the organization,
including depreciation.
19-49
 Other Not-For-Profit Entities

• There are many types of not-for-profit entities in

addition to hospitals and voluntary health and
welfare organizations.

• Examples: fraternal organizations and social

clubs; labor unions and professional
associations; political and trade associations;
libraries and private elementary and secondary
schools; research and scientific organizations;
and, zoological and botanical societies.

19-50
 Other Not-For-Profit Entities

• Accounting for ONPOs is similar to accounting

for VHWOs.

• The accrual basis of accounting is used for

financial reporting purposes.

• A statement of financial position, a statement of

activities, and a statement of cash flows are
required for financial reporting purposes.

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You Will Survive This Chapter !!!

• I bet that you never thought that

fund accounting would be this fun !!!

19-52
 Chapter 19

End of Chapter

McGraw-Hill/Irwin Copyright © 2005 by The McGraw-Hill Companies, Inc. All rights reserved.