Introduction to NonProfit Accounting and Financial Reporting Governmental - GASB Private - FASB AICPA Audit Guides IRS - Tax Exempt

u Nongovernmental u FASB 116 and 117 AICPA Audit Guides u Governmental u may not apply FASB 117 and 117 u may apply u government model u AICPA SOP78-10 or VHWO Audit Guide* *guidance modified to conform to GASB standards

* FASB Statements 116 & : “Accounting for Contributions Received and Contributions Made” 117: “Financial Statements of Not-for-Profit Organizations”

Scope - for FASB 116/117 All Non-Governmental NFPs F Voluntary Health and Welfare F Higher Education F Other Nonprofits F Healthcare Providers

Effective Date F Issued in June 1993 F Generally, effective for fiscal years beginning after December 15, 1994 F Effective for fiscal years beginning after December 15, 1995 for small organizations

FASB 116 Overview F Affects three broad areas: u Recognition of Contributions u Classification of Contributions u Expiration of Donor Restrictions

Definitions of Terms Nonreciprocal Transfer u A transaction in which an entity incurs a liability or transfers an asset to another entity without directly receiving value in exchange Condition u A donor imposed stipulation or uncertainty regarding a future event that must occur or be resolved before a contribution is recognized Restriction u A donor imposed specification regarding the use of the funds that is more specific than the organization’s mission

Types of Transactions defined in FASB 116 Contribution u Transfer of assets to an entity or a cancellation or its liabilities in a voluntary nonreciprocal transfer by another entity acting other than as an owner Exchange u A reciprocal transfer of assets in exchange for other assets or services Agency u A receipt of assets (as an agent) on behalf of a designated third party

Types of Contributions F Unconditional gifts F Conditional gifts F Unconditional promises to give F Conditional promises to give F Contributed services F Contributed collection items

Recognition of Contributions Unconditional contributions u recognized in the period received u set up allowance for uncollectible promises u use present value if collection is in future u Exceptions: u Contributed services u Collection items Conditional contributions u not recognized until condition is met u footnote pledge or record cash received as refundable deposit

Contributed Services Contributed services should be recognized if the services received: F Create or enhance nonfinancial assets, or F Require specialized skills and would typically need to be purchased if not provided by donation

Contributed Collections Contributed collection items need not be recognized if the donated items: F Are held for public exhibition, education, or research, and F Are preserved, and F Are subject to a policy requiring sale proceeds to be reinvested in the collection

Contributions may be restricted or unrestricted F Permanently restricted support F Temporarily restricted support F Unrestricted support F Exceptions: u simultaneous period contributions u implied time restrictions

Expiration of Donor Restrictions F Recognized as a reclassification F Recognized in the period of satisfaction F Use of restricted before unrestricted funds F Exception: u Restrictions on long-lived assets

Restrictions on Long-Lived Assets F Reclassified when put in service F Reclassified over the useful life

Examples: u Exchange transaction: Cashxx Revenuexx u Contribution: Cashxx Temporarily Restricted Contribution xx u Release from Restriction: Reclassification Out - Temporarily Restricted - Satisfaction of Program Restrictionxx Reclassification In - Unrestricted - Satisfaction of Program Restrictionxx

Required Disclosures F Unconditional/Conditional promises u Total Amount due u The amount receivable in: u less than one year; u one to five years; and u more than five years u Allowance for uncollectible promises (unconditional) F Contributed services u Nature and extent of services received u Programs for which the services were received u Amount of services recognized as revenues

Transition F Retroactive application F Prospective application: u cumulative effect of change

FASB 117 Overview F Establishes uniform standards for financial reporting F Financial statements should focus on the entity as a whole F Specifies how to report balances and transactions F Financial statements should include a statement of cash flows

Approach F Does not prescribe or prohibit any particular display format F overriding display characteristics is flexibility F Establishes minimum display requirements

Basic Financial Statements F Statement of Financial Position F Statement of Activities F Statement of Cash Flows F Notes to financial statements

Statement of Financial Position F Minimum display: u Total amounts for assets, liabilities, and net assets for the organization as a whole u Totals for each of the three classes of net assets - unrestricted, temporarily restricted, permanently restricted u Disclosure of the nature and amount of restrictions u Liquidity - Sequence accounts according to maturity, classify as current and noncurrent, disclose in the notes

Statement of Activities (a) F Minimum display: u Amount of change in net assets for the organization as a whole u Amount of change in each of the three classes of net assets u Amount of net assets released from restrictions

Statement of Activities (b) F Alternative presentation permitted: u Single column statement format u Multi-column format u Two-statement approach

Statement of Activities (c) F Revenues and expenses generally reported gross: F Netting of investment revenue & related expenses permitted (disclose expenses) F Gains & losses may be netted

Statement of Activities (d) F All expenses are reported as a decrease in unrestricted net assets F Expirations of donor restrictions recorded as reclassifications of net assets F Gains and losses increase or decrease unrestricted net assets unless their use is limited by donor- imposed restricted or law

Statement of Activities (e) F Expenses must be reported by their functional classification either in the statement or in the footnotes F Disclosure of expenses by natural classification is required for Voluntary Health and Welfare Organizations

Statement of Activities (f) F Functional Classifications: F Program Services F Supporting Services F Management & General activities F Fund-raising activities F Membership-development activities F Joint Cost Allocation follow AICPA SOP 87-2

Statement of Cash Flows F Amends SFAS 95 to apply it to not-for-profit organizations F Requires the financing activity classification for contributions restricted for long-term purposes F Disclosures required for gifts of investments and long-term assets

Transition F Restate any previous annual or interim financial statements presented F Disclose the nature of the restatements and their effect, if any, on the change in net assets for each year presented

What about the funds? u FASB 117 permits continued use of fund accounting for internal recordkeeping and external financial reporting u if not-for-profits continue to use fund accounting each fund balance must be classified as - u unrestricted, temporarily restricted, or permanently restricted net assets

Net Asset Classifications

* New Audit Guides (EDs) F Exposure Draft: Proposed Audit and Accounting Guide Not-for-Profit Organizations F dated 4/14/95 F Exposure Draft: Proposed Audit and Accounting Guide Health Care Organizations F dated 4/14/95

New AICPA Audit and Accounting Guidance F for nongovernmental not-for-profits F supersedes AICPA Industry Audit Guides and SOPs F including, joint costs, federal awards, related entities F incorporates FASB 116 and 117

* Governmental Not-for-Profit Entities F GASB 29 “The Use of Not-for-Profit Accounting and Financial Reporting Principles by Governmental Entities ” (August 1995) F government entities should not apply FASB 116 and 117 or new AICPA audit guide F permits SOP78-10 pending GASB pronouncements or current governmental model F clarifies para 7 of GASB No. 20 ‘only new FASB statements and interpretations developed for business enterprises”

Accounting for Health Care GASB - Government owned FASB - private for profit and private nonprofit

Current GAAP u AICPA Audit Guide as superseded by FASB 116 and 117 u GASB - ok to apply Audit Guide with special provisions for govt. sector

Funds Structure u General Funds - only one fund u Restricted Funds - u specific purpose fund u plant replacement and expansion fund u endowment funds

Financial Statements u Statement of Financial Position u Statement of Activities u Statement of Cash Flows

Revenue u Operating Revenue - ongoing major/central u Patient Service Revenue u Resident Service Revenue u Other Operating Revenue u Nonoperating Revenue - peripheral u gains, gifts, grants,investment income

Expenses u Nursing Services Expense u Other Professional Services Expense u General Services Expense u Fiscal Services Expense u Administrative Services Expense u Depreciation Expense - if not already allocated. u Interest Expense - if not already allocated. u Provision for Bad Debts - if not already allocated.

Examples u Text u Handout ( with or without funds )

Major differences u Timing of recognition of revenue for contributions - governments can wait u Financial statements - may be some differences in terminology and format

New Standards u Govt: In Specific Purpose Fund: Cashxx Fund Balancexx Cashxx In General Funds: Cashxx Other Operating Revenue/ Nonoperating Revenue xx u Private: In Specific Purpose Fund: Cash xx Other Oper Revenue- TR- Contrib. xx Reclassif Out -TR xx Cash xx In General Funds: Cash xx Reclassif In - Unrestrxx

Analysis u Consistency Between Goals/Resources u Intergenerational Equity u Match Between Sources and Uses of Resources u Resource Sustainability u Comparative Statistics

Southeast Hospice Center Juanita Morales, a partner in a regional CPA firm, has been in-charge of the audit and tax responsibilities for the Southeast Hospice Center for several years. This client provides health and counseling care to patients near death who choose to die at home and their families. The Health Center’s Board of Directors has recently instituted a Total Quality Management program in the Center. The Board has asked the help of Juanita and her CPA firm in selecting output measures to be used in measuring the organization’s performance. What kind of entity is this? What are the elements of this nonprofit organization’s Total Quality Management program that may differ from that of a profit organization? How can the GASB’s project on Service Efforts and Accomplishments be helpful in identifying output performance measures? Which specific outcome measures might be useful for this hospice organization?

Discussion u wide set of interested parties u accounting software capabilities u GASB Concepts No. 2

SEA Measures u Input: u Expenditures used to provide services u Output: u Number of patients admitted to program u Number of referrals from hospitals u Outcome: u Rates u Efficiency: u Cost per patient u Projected health care costs saved

College and University Accounting GASB FASB AICPA Audit Guide

GASB u Governmentally owned (public) u traditional AICPA model - 2 yr. schools u governmental model (Chpts. 1-13) - most

Funds u Current funds (unrestricted & restricted) u Loan funds u Endowment and similar funds u Annuity and life income funds u Agency funds u Plant funds

Current Funds u Revenues u Expenditures u Transfers u Assets, Liabilities, Fund Balances

Endowment & Similar Funds u Permanent u Term u Quasi-endowment

Annuity and Life Income u actuarial assumptions u IRS regulation

Agency Funds u agent of others u collection, custodianship, disbursement u no Fund Balances

Plant Funds Group u Unexpended Plant Funds u Funds for Renewals and Replacements u Funds for Retirement of Indebtedness u Investment in Plant

Illustrative Transactions & Financial Statements (AICPA model) u Balance Sheet u Statement of Current Funds Revenue, Expenditures, and Other Changes u Statement of Changes in Fund Balances

Private Colleges and Universities u FASB Statement No depreciation u FASB Statement No contributions u FASB Statement No Financial Statements

FASB No. 116 u recognition of revenues (expenses) for contributions received (made) u Collection u Conditional Promise to Give u Contribution u Donor-Imposed Condition u Donor-Imposed Restriction u Nonreciprocal Transfer u Promise to Give u Unconditional Promise to Give

FASB No. 117 u Statement of Financial Position u Statement of Activities u Statement of Cash Flows