2 Advanced Accounting, Fourth Edition 19AccountingFor NongovernmentNonbusinessOrganizations: CollegesAnd Universities, HospitalsAnd Other Health CareOrganizationsAdvanced Accounting, Fourth Edition
3 Learning ObjectivesDescribe the source of accounting standards for nongovernment nonbusiness organizations (NNOs).Identify the three basic statements for NNOs.Describe the basic funds used by nongovernment nonbusiness organizations.Distinguish between a current restricted fund and an unrestricted fund.Explain the term “assets whose use is limited.”Distinguish between a mandatory and a nonmandatory transfer.Explain how contributions are recorded by NNOs.
4 Learning Objectives Understand how donated services are recorded. Describe the funds used to account for property, plant and equipment.Explain the basic accounting used by endowment funds.Indicate how equity investments are reported in the financial statements.Explain the change in accounting for loan funds brought about by new standards.Understand the use of an annuity or life income fund.Discuss the special reporting issues of hospitals.
5 Nongovernment Nonbusiness Organizations (NNOs) Four Major Classifications of NNOs:Nonprofit institutions of higher education.Hospitals and other health care providers.Voluntary health and welfare organizations (VHWOs).Other nongovernment nonbusiness organizations (ONNOs).
6 Hierarchy of Reporting Standards (NNOs) NNOs other than government-owned special entities (same as business organizations).U.S. GAAP Hierarchy (SFAS No. 168)—effective September 2009Authoritative: Included in the FASB Accounting Standards CodificationNon-Authoritative: Not-included in the FASB Accounting Standards Codification
7 Hierarchy of Reporting Standards (NNOs) Most guidance for NNOs is found in Audit and Accounting Guides of the AICPA and in publications of industry:Colleges and UniversitiesAudits of Colleges and Universities, 2nd ed. (AICPA, 1975)Financial Accounting and Reporting Manual for Higher EducationHospitals and Other Health Care ProvidersAudits of Providers of Health Care Services (AICPA, 1989)Voluntary Health and Welfare Organizations (VHWOs)Audits of Voluntary Health and Welfare Organizations (AICPA, 1988)Other Nongovernment Nonbusiness OrganizationsAudits of Certain Nonprofit Organizations, second edition (AICPA, 1987).
8 Financial Reporting for Not-for-Profit Three Basic Financial Statements required:Statement of financial positionNet Asset categories:Unrestricted net assetsTemporarily restricted net assetsPermanently restricted net assetsStatement of activitiesStatement of cash flows
9 Fund AccountingMost NNOs use fund accounting for recordkeeping and reporting purposes.Six funds commonly used:Current Fund (restricted and unrestricted).Plant Fund.Endowment Fund.Loan Fund.Agency or Custodial Fund.Annuity and Life Income Fund.
10 Accrual Basis of Accounting Financial statements for NNOs (accrual basis)Revenues are reported when earned and realized or realizable, andExpenditures are reported when materials or services are received.For external reporting purposes,Revenues are classified by source, andExpenses and expenditures are classified by function or activity.
11 Accounting for Current Funds Current Unrestricted FundsFinancial resources that may be expended at the discretion of the governing boardCurrent Restricted FundsResources restricted because of legal, contractual, or external restrictions on their use.Current unrestricted resources may be expended at the discretion of the governing board, whereas current restricted resources may be expended only in accordance with externally imposed restrictions.
12 Accounting for Current Funds Accounting for Board Designated FundsPart of current unrestricted fund.Resources designated by governing board for specific purposes, projects, or investments.To limit discretion of management.Governing board can modify designations.Hospitals = classified as assets whose use is limited.
13 Accounting for Current Funds Colleges and UniversitiesBoard designated funds for specific current operating purposes are accounted for by footnote or by reclassification of the Unrestricted Current Fund Balance.Some board-restricted current resources can be transferred to other funds.
14 Accounting for Current Funds Mandatory and Nonmandatory TransfersUnique to colleges and universitiesMandatory transfersTransfers from current funds group to other fund groups arising frombinding legal agreementsgrant agreementsNonmandatory transfersTransfers from current funds group to other fund groups at discretion of governing board.
15 ContributionsSFAS No. 116, requires contributions to be recognized as revenue in the period received.Contributions include gifts of cash, pledges, donated services, and gifts of noncash assets.Conditional promises to give are recognized when they become unconditional.Pledges are recorded as revenues when a promise to give is nonrevocable and unconditional, at present value of expected receipts.
16 ContributionsExercise 19-6: A well-known celebrity sponsored a telethon for the Help for the Blind Foundation on November 1, Pledges in the amount of $1,000,000 were called in. Using similar telethon campaigns as a basis, it is estimated that 25% of the pledges will be uncollectible. During 2009, $700,000 of contributions from these pledges were collected. The remainder were uncollectible.Required: Identify the appropriate fund(s) and prepare the journal entries necessary in 2008 and 2009 to record these transactions.
17 ContributionsExercise 19-6: Prepare the journal entries necessary in 2008.Pledges Receivable 1,000,000Revenue - Contributions 1,000,000Provision for Uncollectible Pledges 250,000Allowance for Uncollectible Pledges 250,000
18 ContributionsExercise 19-6: Prepare the journal entries necessary in 2009.Cash 700,000Pledges Receivable 700,000Provision for Uncollectible Pledges 50,000Allowance for Uncollectible Pledges 250,000Pledges Receivable 300,000
19 Contributions Donated Services Recognized only if the services received:1. Create or enhance nonfinancial assets, or2. a. Require specialized skills,b. Are provided by individuals possessing those skills, andc. Would need to be purchased if not provided by donation.Recorded as revenue or support with an amount equal to the revenue recognized as an expense in the appropriate expense account.
20 ContributionsExercise 19-2: During 2008 volunteer pinstripers donated their services to General Hospital at no cost. The staff at General Hospital was in control of the pinstripers’ duties. If regular employees had provided the services rendered by the volunteers, their salaries would have totaled $6,000. While working for the hospital, the pinstripers received complimentary meals from the cafeteria, which normally would have cost $500. Required: Prepare the journal entry necessary in the General Fund to record the donated services on the books of General Hospital.General Services Expense 5,500Donated Services (Nonoperating Revenue) 5,500
21 Donor-imposed Restricted Contributions Recorded as contribution revenues in period received, thus increasing either temporarily or permanently restricted net assets.When expenditures are made, or restriction expires, net assets are reported as unrestricted net assets on the Statement of Activities.
22 ContributionsExercise 19-3: The Franklin Public Library received a restricted contribution of $300,000 in The donor specified that the money must be used to acquire books of poetry written in the sixteenth century. As of December 31, 2008, only $100,000 of the restricted resources had been expended.Required: Prepare the journal entries necessary to record these events during Indicate the fund in which each journal entry is recorded.
23 ContributionsExercise 19-3: Prepare the journal entries necessary to record these events during 2008.Restricted Current FundCash 300,000Contribution Revenue – Poetry Collection ,000Net Assets Released from Restrictions 100,000Cash ,000Unrestricted Current FundCash 100,000Net Assets Released from Restrictions ,000Expenses – Poetry Collection ,000Cash ,000
24 Accounting for Plant Funds The plant fund is used to account forproperty, plant and equipment (PP&E) owned by the organization and the net investment,accumulation of financial resources for acquisition or replacement of PP&E,acquisition and disposal of PP&E,liabilities relating to acquisition of PP&E, anddepreciation expense and accumulated depreciation.
25 Accounting for Plant Funds College and UniversitiesDivided into four separate self-balancing subgroups:Unexpended Plant FundFunds for Renewals and ReplacementsFunds for Retirement of IndebtednessInvestment in PlantBoth board-designated funds and externally restricted funds are accounted for in the plant fund; therefore, a distinction is made between restricted and unrestricted fund balances.
26 Accounting for Plant Funds Exercise 19-8: The After the election of a prominent political figure, the principal from a term endowment fund was expendable by Crandall University. The official was elected this year. The fund was restricted to the construction of a Political Science building annex. The following transactions occurred because of this event.Required: For each of the following transactions, record the journal entries and identify the fund or fund subgroup in which each entry is recorded.
27 Accounting for Plant Funds Exercise 19-8:1. A transfer of $3,000,000 is made from the Endowment Fund (Term) to the Unexpended Plant Fund.Endowment FundEndowment fund balance 3,000,000Cash 3,000,000Unexpended Plant FundCash 3,000,000Fund Balance - Restricted 3,000,000
28 Accounting for Plant Funds Exercise 19-8:2. Construction is begun on the Political Science annex. Costs of construction during the year amounted to $1,000,000, of which $30,000 remained unpaid at the end of the year. (The financial controller does not record transfers to the Investment in Plant subgroup until a project has been completed.)Unexpended Plant FundConstruction in process 1,000,000Cash 970,000Accounts payable 30,000
29 Accounting for Plant Funds Exercise 19-8:3. By the end of the following year, the annex is completed at an additional cost of $2,100,000. All costs have been paid.Unexpended Plant FundConstruction in process 2,100,000Accounts payable 30,000Cash 2,130,000Building 3,100,000Work in process 3,100,000
30 Accounting for Plant Funds Exercise 19-8:4. The completed building is recorded in the Investment in Plant subgroup.Net Investment in Plant FundBuilding 3,100,000Net investment in plant 3,100,000
31 Accounting for Plant Funds HospitalsProperty, plant and equipment (PP&E) transactions are accounted for in the General Fund.Contributed resources restricted to acquire PP&E are accounted for in a plant replacement and expansion (restricted) fund.Upon expenditure, the assets acquired and the related fund balance are transferred to the General Fund.
32 Accounting for Plant Funds Voluntary Health and Welfare and ONNOsSingle Plant Fund and report the fund balance in two classifications:Expended Fund Balance is equal to the organization’s net investment in PP&E.Unexpended Fund Balance represents the amount of resources available to replace or acquire additional PP&E.
33 Accounting for Endowment Funds Pure Endowment Fund - donated funds have been given in perpetuity.Term Endowment Fund - donor has specified a particular date or event after which the principal of the endowment fund may be expended.Income from endowment funds generally may be expended as earned either for specified purposes or at the discretion of the governing board.
34 Accounting for Endowment Funds Exercise 19-7 (partial): Jefferson Hospital received money from a donor to set up an endowment fund. The following information pertains to this contribution. Prepare the journal entries necessary to record the events in the endowment fund.
35 Accounting for Endowment Funds Exercise 19-7 (partial): During 20081. $2,000,000 was received to establish the fund. The requirements were (a) $100,000 of the endowment fund’s income must be used for research grants each year. (b) The remainder of income is under the discretion of the governing board. (c) The principal is expendable after the donor’s death. It shall be used to purchase equipment.Cash 2,000,000Revenue Contribution - Restricted 2,000,000
36 Accounting for Endowment Funds Exercise 19-7 (partial): During 20082. The cash received was invested in a number of securities.Investment 2,000,000Cash 2,000,000
37 Accounting for Endowment Funds Exercise 19-7 (partial): During 20093. Dividends of $100,000 and interest of $300,000 were received.Cash 400,000Due to General Fund 300,000Due to Specific Purpose Fund 100,000
38 Accounting for Endowment Funds Exercise 19-7 (partial): During 20094. The income was transferred to the appropriate funds.Due to General Fund 300,000Due to Specific Purpose Fund 100,000Cash 400,000
39 Accounting for Endowment Funds Exercise 19-7 (partial): During 20108. The was notified of the donor death.Transfer to Plant Replacement and Expansion Fund 2,000,000Cash 2,000,000
40 Accounting for Investments SFAS No. 124, “Accounting for Certain Investments Held by Not-for-Profit Organizations,”Requires NPOs to report investments in equity securities with readily determinable fair values and all debt securities at fair value in unrestricted, temporarily restricted, or permanently restricted net assets.Unrealized and realized gains and losses are to be recognized in the Statement of Activities.To improve effectiveness and flexibility, NNOs often pool investments of different funds into a single portfolio.
41 Accounting for Loan Funds Loans to:Students and staff of colleges and universities,Employees of hospitals, andBeneficiaries of the interests of certain ONNOs. (for example, loans to music students by symphony orchestra societies).
42 Accounting for Loan Funds Exercise 19-4: The following events relate to Grearson University Loan Fund:1. $100,000 is received from an estate to establish a faculty and student loan fund. Annual interest rates range from 8% for students to 10% for faculty.2. Loans to students totaled $60,000, and $40,000 was disbursed to faculty members (of the total loans made, 10% are estimated to be uncollectible).3. Grearson wrote off a $1,000 student loan as uncollectible.4. The following loans were repaid.Principal Interest Faculty $ 5, $500 Student ,
43 Accounting for Loan Funds Exercise 19-4: Prepare the journal entries necessary to record these transactions.1. $100,000 is received from an estate to establish a faculty and student loan fund. Annual interest rates range from 8% for students to 10% for faculty.Cash 100,000Revenue – Contributions Restricted 100,000
44 Accounting for Loan Funds Exercise 19-4: Prepare the journal entries necessary to record these transactions.2. Loans to students totaled $60,000, and $40,000 was disbursed to faculty members (of the total loans made, 10% are estimated to be uncollectible).Loans Receivable – Students 60,000Loans Receivable – Faculty 40,000Cash 100,000Bad Debt Expense 10,000Allowance for Uncollectible–Students 6,000Allowance for Uncollectible–Faculty 4,000
45 Accounting for Loan Funds Exercise 19-4: Prepare the journal entries necessary to record these transactions.3. Grearson wrote off a $1,000 student loan as uncollectible.Allowance for Uncollectible–Students 100,000Loans Receivable – Students 100,000
46 Accounting for Loan Funds Exercise 19-4: Prepare the journal entries necessary to record these transactions.4. The following loans were repaid.Principal Interest Faculty $ 5, $500 Student ,Cash 16,300Loans Receivable – Students 10,000Loans Receivable – Faculty 5,000Interest Income 1,300
47 Accounting for Agency (Custodial) Funds Account for assets held by NNO as custodian for others.Unless significant amounts are involved, resources held by an NNO as an agent for others are often accounted for as assets and liabilities in the unrestricted or general fund rather than in a separate agency fund.
48 Accounting for Annuity and Life Income Funds Contribution to the organization on the condition that the organization make annuity payments to a specified recipient for a specified period of time (annuity fund) or that the organization pay the income earned on the contributed assets to a specified recipient during his or her lifetime (life income fund).At the end of the annuity or on the death of the life income beneficiary, the unexpended assets of the fund are transferred to the unrestricted fund or to an endowment fund, loan fund, plant fund, or other fund specified by the donor.
49 Accounting for Annuity and Life Income Funds Annuity Fund - Annuity payments made to a specified recipient for a specified period of time.Life Income Fund - Income earned on contributed assets is paid to a specified recipient during his or her lifetime.At the end of the annuity or on the death of the life income beneficiary, the unexpended assets of the fund are transferred to the unrestricted fund or to an endowment fund, loan fund, plant fund, or other fund specified by the donor.
50 Issues Relating to Colleges and Universities Recognition of Service Fee RevenueOperating versus Nonoperating IncomeIssues Relating to HospitalsCharity careContractual allowancesCapitation revenuesMalpractice