Chapter 19

1. Chapter 19 Not-For-Profit Entities

2. 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.

3. 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.

4. 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).

5. 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.

6. 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.

7. 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.

8. 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.

9. 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.

10. 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.

11. 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.

12. 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.

13. 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.

14. 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.

15. 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.

16. 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.

17. 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

18. 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. 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.

20. 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.

21. 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).

22. 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.

23. 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.

24. 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.

25. 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.

26. 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.

27. 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.

28. 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.

29. 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.

30. 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.

31. 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.

32. 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.

33. 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.

34. 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.

35. 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.

36. 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.

37. 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.

38. 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.

39. 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.

40. 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.

41. 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.

42. 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.

43. 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.

44. 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.

45. 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.

46. 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.

47. 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.

48. 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.

49. 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.

50. 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.