2. Advanced Accounting, Fourth Edition19
Accounting
For Nongovernment
Nonbusiness
Organizations: Colleges
And Universities, Hospitals
And Other Health Care
Organizations
Advanced Accounting, Fourth Edition

3. 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).

4. 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 Universities
Audits of Colleges and Universities, 2nd ed. (AICPA, 1975)
Financial Accounting and Reporting Manual for Higher Education
Hospitals and Other Health Care Providers
Audits 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 Organizations
Audits of Certain Nonprofit Organizations, second edition (AICPA, 1987).

5. Hierarchy of Reporting Standards (NNOs)
Most guidance for NNOs is found in Audit and Accounting Guides of the AICPA and in publications of industry:
LINK to Audit and Accounting Guides

6. Financial Reporting for Not-for-Profit
Three Basic Financial Statements required:
Statement of financial position
Net Asset categories:
Unrestricted net assets
Temporarily restricted net assets
Permanently restricted net assets
Statement of activities
Statement of cash flows

7. Fund Accounting
Most 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.

8. Accrual Basis of Accounting
Financial statements for NNOs (accrual basis)
Revenues are reported when earned and realized or realizable, and
Expenditures are reported when materials or services are received.
For external reporting purposes,
Revenues are classified by source, and
Expenses and expenditures are classified by function or activity.

9. Accounting for Current Funds
Current Unrestricted Funds
Financial resources that may be expended at the discretion of the governing board
Current Restricted Funds
Resources restricted because of legal, contractual, or external restrictions on their use.

10. Accounting for Current Funds
Accounting for Board Designated Funds
Part 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.

11. Accounting for Current Funds
Colleges and Universities
Board 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.

12. Accounting for Current Funds
Mandatory and Nonmandatory Transfers
Unique to colleges and universities
Mandatory transfers
Transfers from current funds group to other fund groups arising from
binding legal agreements
grant agreements
Nonmandatory transfers
Transfers from current funds group to other fund groups at discretion of governing board.

13. Contributions
SFAS 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.

14. Contributions
Exercise 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.

15. Contributions
Exercise 19-6: Prepare the journal entries necessary in 2008.
Pledges Receivable 1,000,000
Revenue - Contributions 1,000,000
Provision for Uncollectible Pledges 250,000
Allowance for Uncollectible Pledges 250,000

16. Contributions
Exercise 19-6: Prepare the journal entries necessary in 2009.
Cash 700,000
Pledges Receivable 700,000
Provision for Uncollectible Pledges 50,000
Allowance for Uncollectible Pledges 250,000
Pledges Receivable 300,000

17. Contributions Donated Services
Recognized only if the services received:
1. Create or enhance nonfinancial assets, or
2. a. Require specialized skills,
b. Are provided by individuals possessing those skills, and
c. 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.

18. Contributions General Services Expense 5,500
Exercise 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 5,500
Donated Services (Nonoperating Revenue) 5,500

19. Contributions 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.

20. Contributions
Exercise 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.

21. Contributions
Exercise 19-3: Prepare the journal entries necessary to record these events during 2008.
Restricted Current Fund
Cash 300,000
Contribution Revenue – Poetry Collection ,000
Net Assets Released from Restrictions 100,000
Cash ,000
Unrestricted Current Fund
Cash 100,000
Net Assets Released from Restrictions ,000
Expenses – Poetry Collection ,000
Cash ,000

22. Accounting for Plant Funds
The plant fund is used to account for
property, 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, and
depreciation expense and accumulated depreciation.

23. Accounting for Plant Funds
College and Universities
Divided into four separate self-balancing subgroups:
Unexpended Plant Fund
Funds for Renewals and Replacements
Funds for Retirement of Indebtedness
Investment in Plant
Both 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.

24. Accounting for Plant Funds
Exercise 19-8: 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.

25. 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 Fund
Endowment fund balance 3,000,000
Cash 3,000,000
Unexpended Plant Fund
Cash 3,000,000
Fund Balance - Restricted 3,000,000

26. 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 Fund
Construction in process 1,000,000
Cash 970,000
Accounts payable 30,000

27. 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 Fund
Construction in process 2,100,000
Accounts payable 30,000
Cash 2,130,000
Building 3,100,000
Work in process 3,100,000

28. Accounting for Plant Funds
Exercise 19-8:
4. The completed building is recorded in the Investment in Plant subgroup.
Net Investment in Plant Fund
Building 3,100,000
Net investment in plant 3,100,000

29. Accounting for Plant Funds
Hospitals
Property, 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.

30. Accounting for Plant Funds
Voluntary Health and Welfare and ONNOs
Single 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.

31. 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.

32. 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.

33. Accounting for Endowment Funds
Exercise 19-7 (partial): During 2008
1. $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 2,000,000
Revenue Contribution - Restricted 2,000,000

34. Accounting for Endowment Funds
Exercise 19-7 (partial): During 2008
2. The cash received was invested in a number of securities.
Investment 2,000,000
Cash 2,000,000

35. Accounting for Endowment Funds
Exercise 19-7 (partial): During 2009
3. Dividends of $100,000 and interest of $300,000 were received.
Cash 400,000
Due to General Fund 300,000
Due to Specific Purpose Fund 100,000

36. Accounting for Endowment Funds
Exercise 19-7 (partial): During 2009
4. The income was transferred to the appropriate funds.
Due to General Fund 300,000
Due to Specific Purpose Fund 100,000
Cash 400,000

37. Accounting for Endowment Funds
Exercise 19-7 (partial): During 2010
8. The was notified of the donor death.
Transfer to Plant Replacement and Expansion Fund 2,000,000
Cash 2,000,000

38. 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.

39. Accounting for Loan Funds
Loans to:
Students and staff of colleges and universities,
Employees of hospitals, and
Beneficiaries of the interests of certain ONNOs. (for example, loans to music students by symphony orchestra societies).

40. 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 ,

41. 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 100,000
Revenue – Contributions Restricted 100,000

42. 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 60,000
Loans Receivable – Faculty 40,000
Cash 100,000
Bad Debt Expense 10,000
Allowance for Uncollectible–Students 6,000
Allowance for Uncollectible–Faculty 4,000

43. 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 100,000
Loans Receivable – Students 100,000

44. 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 16,300
Loans Receivable – Students 10,000
Loans Receivable – Faculty 5,000
Interest Income 1,300

45. 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.

46. 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.

47. Issues Relating to Colleges and Universities
Recognition of Service Fee Revenue
Operating versus Nonoperating Income
Issues Relating to Hospitals
Charity care
Contractual allowances
Capitation revenues
Malpractice

48. Copyright
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