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Copyright © 2011 by The McGraw-Hill Companies, Inc. All rights reserved. McGraw-Hill/Irwin Chapter 19 Not-for-Profit Entities.

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Presentation on theme: "Copyright © 2011 by The McGraw-Hill Companies, Inc. All rights reserved. McGraw-Hill/Irwin Chapter 19 Not-for-Profit Entities."— Presentation transcript:

1 Copyright © 2011 by The McGraw-Hill Companies, Inc. All rights reserved. McGraw-Hill/Irwin Chapter 19 Not-for-Profit Entities

2 19-2 Learning Objective 1 Understand financial reporting rules and make basic journal entries for private, not-for-profit entities.

3 19-3 Types of Not-for-Profit Organizations  Colleges and Universities  Health Care Organizations  Voluntary Health and Welfare Organizations  Certain (or “all other”) Not-for-profit Organizations

4 19-4 Excluded Entities  The following entities are not NPOs because they solely serve the economic interests of their owners, members, participants, or trust beneficiaries: Credit unions and mutual banks Employee benefit and pension plans Mutual insurance companies Farms and rural cooperatives Trusts

5 19-5 Characteristics of NPOs  No outside ownership interest  A mission to provide services To their users, patients, society as a whole, or members But NOT at a profit  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

6 19-6 Dependence on Contributions and Federal Funding  Not-for-profit religious, charitable, and educational groups receive roughly $40 billion annually in federal government grants.

7 19-7 Tax-Exempt Status  Advantages to Tax-Exempt Status for U.S. Income Tax Reporting Purposes (in most states): No state income tax No local property taxes No sales taxes on purchases

8 19-8 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. Does not function for political purposes.

9 19-9 Tax-Exempt Status  IRS Audits of Tax-Exempt Groups: 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).

10 19-10 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. ROE = Not Applicable

11 19-11 The Reporting Model: Private NPOs  The reporting model Focuses on the flow of all economic resources Uses the accrual basis of accounting Recognizes depreciation expense in the operating statement  The use of this reporting model reveals The improvement or deterioration in the NPO’s financial condition for the period and Is similar to the model used in the commercial sector

12 19-12 Who Makes the Rules for Not-for-Profits Entities? The accounting and financial reporting for governmental not-for- profit entities GASB FASB Accounting and financial reporting for nongovernmental not- for-profit entities

13 19-13 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: Unrestricted net assets Temporarily restricted net assets Permanently restricted net assets

14 19-14 Financial Reporting for Private, Not-for-Profit Entities  Important FASB Standards 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

15 19-15 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.

16 19-16 Financial Reporting for Private, Not-for-Profit Entities  Mergers and acquisitions—Exposure 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 Qualitative Evaluation Method Fair-Value-Based Evaluation

17 19-17 Contributions: Scope of FAS 116  FAS 116, “Accounting for Contributions” applies to ALL 4 types of Private NPOs. Health Care Organizations Colleges and Universities Voluntary Health and Welfare Organizations Certain Other NPOs FASB 116

18 19-18 Contributions: Defined  Contribution An unconditional (no strings attached) transfer of 1.Cash or 2.Other Assets In a voluntary, nonreciprocal transfer. By a person or entity acting other than as an owner of the NPO Examples of Other Assets: Equipment, vehicles, land, and promises of cash.

19 19-19 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).

20 19-20 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

21 19-21 Contributions: “Conditional” Promises to Give  Conditional promises 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.

22 19-22 Contributions: “Conditional” Promises That May Be Deemed “Unconditional”  A conditional promise may be deemed unconditional if: “The possibility that the future event will not be met [occur] is remote.” Event not likely to occur=Conditional Event likely to occur=Unconditional

23 19-23 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.

24 19-24 Contributions: Manner of Reporting By Category  Contributions are reported in the Statement of Activities (the operating statement) by category Unrestricted Temporarily restricted Permanently restricted

25 19-25 Contributions: Manner of Reporting By Category  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: Consistently follows this policy and Discloses this policy. Note: This option negates the need to show transfers between categories in the Operating Statement.

26 19-26 Contributions: Endowments  Endowments A contribution that cannot be spent. The unspendable amount is called the principal—it is invested in perpetuity.  Income on Endowments Donor stipulations dictate the reporting classification (unrestricted, temporarily restricted or permanently restricted).

27 19-27 Contributions: Temporary Restrictions Contributed Assets that are restricted as to either or Temporarily Restricted Assets are classified as PurposeTime Period

28 19-28 Contributions: Expirations of Restrictions  Manner of Reporting Expirations of Restrictions: Where: In the statement of activities. How: As a separate line item reclassification as shown below. Temporarily UnrestrictedRestricted Expirations of restrictions$77,000$(77,000)

29 19-29 Contributions: Delayed Discussion of Additional Issues  The following issues 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. Valuation Contributed services Collection items

30 19-30 Financial Statements: Scope of FAS 117  FAS 117, “Financial Statements of Not- for-profit Organizations” applies to ALL 4 types of Private NPOs. Health Care Organizations Colleges and Universities Voluntary Health and Welfare Organizations Certain Other NPOs FASB 117

31 19-31 Financial Statements: FAS 117—The Basic Requirements  FAS 117 specifies: What financial statements are to be presented. What specific information, as a minimum, is to be shown.

32 19-32 Financial Statements: Which Financial Statements  FAS 117 requires for the NPO as a whole: A Statement of Financial Position A Statement of Activities A Statement of Cash Flows.  VH&WOs must also report In a separate statement Expenses by Natural Classification in a matrix format.

33 19-33 Financial Statements: The Three Classifications of Net Assets  The three mandated classifications of net assets are: Unrestricted. Temporarily restricted. Permanently restricted.  Note that these are the same three classifications used for reporting contributions.

34 19-34 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 Obtaining quoted market prices. Using independent appraisals. Using other appropriate methods.

35 19-35 Contributions: Additional Issues  Use of Present Value Procedures: 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 income—not as interest income.

36 19-36 Contributions: Additional Issues  Contributed Services Recognize as revenues only if: Nonfinancial assets are created or enhanced. Specialized skills are provided by individuals possessing these skills (e.g., carpenters, electricians, plumbers, lawyers, CPAs).  Required Disclosures for Contributed Services: A description of the nature and extent The amounts recognized as revenues The programs or activities in which the services were used

37 19-37 Contributions: Additional Issues  Contributed Services: 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: May value at the fair value of  the asset created or  asset enhancement

38 19-38  “Collection items” (the exception): 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. Contributions: Additional Issues

39 19-39 Practice Quiz Question #1 How do not-for-profit entities differ from for- profit businesses: a.Not for profit entities are prohibited from charging more than cost for goods or services provided while for-profit businesses may include a mark up. b.Both for-profit businesses and not-for- profit organizations are tax exempt. c.Not-for-profit entities rely heavily on contributions and grants while for-profit businesses rely on profitable operations for survival. How do not-for-profit entities differ from for- profit businesses: a.Not for profit entities are prohibited from charging more than cost for goods or services provided while for-profit businesses may include a mark up. b.Both for-profit businesses and not-for- profit organizations are tax exempt. c.Not-for-profit entities rely heavily on contributions and grants while for-profit businesses rely on profitable operations for survival.

40 19-40 Learning Objective 2 Understand financial reporting rules and make basic journal entries for not-for-profit colleges and universities. Understand financial reporting rules and make basic journal entries for not-for-profit colleges and universities.

41 19-41 Colleges and Universities  Special conventions of revenue and expenditure recognition Tuition and fee remissions/waivers and uncollectible accounts 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

42 19-42 Colleges and Universities  Special conventions of revenue and expenditure recognition Tuition and fee reimbursements for withdrawals from coursework Accounted for as a reduction of revenue Academic terms that span two fiscal periods 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

43 19-43 Colleges and Universities  Board-designated funds 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.

44 19-44 Colleges and Universities  Public colleges and universities 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 business- type activities. These entities present only the financial statements required for enterprise funds and then are included as component units of the state government.

45 19-45 Colleges and Universities  Private colleges and universities 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.

46 19-46 Colleges and Universities Overview of the Accounting and Reporting of Colleges and Universities

47 19-47 Colleges and Universities Overview of the Accounting and Reporting of Colleges and Universities

48 19-48 Practice Quiz Question #2 Which of the following statements accurately describes differences between the accounting public and private universities? a.Both public and private universities follow FASB rules. b.Both public and private universities follow GASB rules. c.Public universities follow GASB rules while private universities follow FASB rules. d.Public universities follow FASB rules while private universities follow GASB rules. Which of the following statements accurately describes differences between the accounting public and private universities? a.Both public and private universities follow FASB rules. b.Both public and private universities follow GASB rules. c.Public universities follow GASB rules while private universities follow FASB rules. d.Public universities follow FASB rules while private universities follow GASB rules.

49 19-49 Learning Objective 3 Understand financial reporting rules and make basic journal entries for not-for-profit health care providers. Understand financial reporting rules and make basic journal entries for not-for-profit health care providers.

50 19-50 Health Care Providers  Hospital accounting 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 GASB’s accounting and reporting requirements and are considered special-purpose entities engaged in business-type activities.

51 19-51 Health Care Providers  Hospital fund structure 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.

52 19-52 Health Care Providers Overview of the Hospital Accounting and Reporting

53 19-53 Health Care Providers  Financial statements for a not-for-profit hospital Separate, not-for-profit hospitals issue four basic financial statements The Balance Sheet The Statement of Operations The Statement of Changes in Net Assets The Statement of Cash Flows

54 19-54 Health Care Providers  Not-for-profit hospital: The Balance Sheet Presents the total assets, liabilities, and net assets of the organization as a whole  Major accounts Receivables Investments Initially recorded at cost if purchased or at fair value at the date of receipt if received as a gift Plant assets Property, plant, and equipment reported with any accumulated depreciation

55 19-55 Health Care Providers  Not-for-profit hospital: The Balance Sheet Assets whose use is limited Separate disclosure should be made for assets that have restrictions placed on their use Long-term debt The hospital must also account for its long-term debt and pay the principal and interest as it becomes due Net Assets 1.Unrestricted net assets available 2.Temporarily restricted net assets available for use 3.Permanently restricted net assets

56 19-56 Health Care Providers  Not-for-profit hospital: The Statement of Operations Also often termed “the statement of activities” Includes the revenues, expenses, gains and losses, and other transactions affecting the unrestricted net assets during the period Only general fund transactions are reported Should report an operating performance indicator

57 19-57 Health Care Providers  Not-for-profit hospital: Major accounts in The Statement of Operations Net patient service revenue Contractual adjustments Income from ancillary programs Interfund transfers General fund expenses Donations

58 19-58 Health Care Providers  Not-for-profit hospital: The Statement of Changes in Net Assets It presents the changes in all three categories of net assets Unrestricted Temporarily restricted Permanently restricted  Statement of Cash Flows Its format is similar to that for commercial entities

59 19-59 Health Care Providers  Summary of hospital accounting and financial reporting 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.

60 19-60 Health Care Providers  Summary of hospital accounting and financial reporting 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.

61 19-61 Health Care Providers  Summary of hospital accounting and financial reporting 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.

62 19-62 Practice Quiz Question #3 Which of the following is false with respect to not-for-profit hospital accounting? a.Not-for-profit hospitals follow FASB rules. b.Not-for-profit hospitals usually use fund accounting. c.Not-for-profit hospitals do not prepare a statement of cash flows. d.The general fund of not-for-profit hospitals uses the accrual basis of accounting. Which of the following is false with respect to not-for-profit hospital accounting? a.Not-for-profit hospitals follow FASB rules. b.Not-for-profit hospitals usually use fund accounting. c.Not-for-profit hospitals do not prepare a statement of cash flows. d.The general fund of not-for-profit hospitals uses the accrual basis of accounting.

63 19-63 Learning Objective 4 Understand financial reporting rules and make basic journal entries for not-for-profit voluntary health and welfare organizations.

64 19-64 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. VH&WOs are typically audited. The federal government normally provides them tax-exempt status.

65 19-65 Voluntary Health and Welfare Organizations  Accounting for a VH&WO 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.

66 19-66 Voluntary Health and Welfare Organizations  Financial statements for a VH&WO Statement of Financial Position Statement of Activities Statement of Cash Flows Statement of Functional Expenses  The statements are designed primarily for those who are interested in the organization as “outsiders.”

67 19-67 Voluntary Health and Welfare Organizations  The Statement of financial position for a VH&WO Major balance sheet accounts: Pledges from donors Investments Land, buildings, and equipment Liabilities Net assets

68 19-68 Voluntary Health and Welfare Organizations  Statement of activities 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.

69 19-69 Voluntary Health and Welfare Organizations  Statement of activities 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. Revenues Funds received in exchange for services provided or other activities Gains Gain or loss on sale of investments and other assets

70 19-70 Voluntary Health and Welfare Organizations  Statement of activities Donated materials and services Should be recorded at fair value when received Expenses Information about the major costs of providing services to the public, fund-raising, and general and administrative costs Costs of informational materials that include a fund-raising appeal Many VH&WOs prefer to classify such costs as program rather than fund-raising

71 19-71 Voluntary Health and Welfare Organizations  Statement of Cash Flows The format of this statement is similar to that for hospitals.  Statement of Functional Expenses Details the items reported in the expenses section of the statement of activities

72 19-72 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.

73 19-73 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.

74 19-74 Practice Quiz Question #4 Which of the following is false with respect to the accounting for voluntary health and welfare organizations? a.VH&WOs solicit funds from the community and typically provide their services for no fee. b.VH&WOs use the modified accrual basis of accounting. c.VH&WOs must provide a statement of cash flows. d.VH&WOs primary activities are reported in the unrestricted asset class. Which of the following is false with respect to the accounting for voluntary health and welfare organizations? a.VH&WOs solicit funds from the community and typically provide their services for no fee. b.VH&WOs use the modified accrual basis of accounting. c.VH&WOs must provide a statement of cash flows. d.VH&WOs primary activities are reported in the unrestricted asset class.

75 19-75 Learning Objective 5 Understand financial reporting rules and make basic journal entries for other not-for-profit organizations. Understand financial reporting rules and make basic journal entries for other not-for-profit organizations.

76 19-76 Other Not-for-Profit Entities Examples of other not-for-profit organizations (ONPOs): 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 Cemetery organizations Civic organizations Fraternal organizations Labor unions Libraries Museums Other cultural institutions Performing arts organizations Political parties Private and community foundations

77 19-77 Other Not-for-Profit Entities  Accounting for ONPOs 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.

78 19-78 Other Not-for-Profit Entities  Accounting for ONPOs 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

79 19-79 Other Not-for-Profit Entities  Financial Statements of ONPOs 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

80 19-80 Other Not-for-Profit Entities  Summary of Accounting and Financial Reporting Accounting is similar to that for VH&WOs. The accrual basis of accounting is used. When a large number of programs or a number of very different types of programs are part of the operations, it may be desirable to prepare a statement of expenses by functional area or major program as well. As a result of FASB 116 and FASB 117, the reporting requirements of ONPOs are substantially the same as VH&WOs.

81 19-81 Practice Quiz Question #4 Which of the following is false with respect to the accounting other not-for-profit organizations? a.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. b. Accounting is similar to that for VH&WOs. c. ONPOs may account for all transactions in a single entity or by establishing separate accounts for unrestricted, temporarily, and permanently restricted net assets d.ONPOs follow GASB rules. Which of the following is false with respect to the accounting other not-for-profit organizations? a.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. b. Accounting is similar to that for VH&WOs. c. ONPOs may account for all transactions in a single entity or by establishing separate accounts for unrestricted, temporarily, and permanently restricted net assets d.ONPOs follow GASB rules.

82 Conclusion The End 19-82


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