Chapter 22

Accounting for
Not-for-Profit
Organizations
Not-for-Profits: Objectives

1. Learn about the four main categories of not-for-

profit organizations.
2. Differentiate between governmental and
nongovernmental not-for-profit organizations.
3. Introduce FASB not-for-profit accounting
principles.

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Not-for-Profits: Objectives (cont.)

4. Apply not-for-profit accounting principles

to voluntary health and welfare
organizations.
5. Apply not-for-profit accounting principles
to hospitals and other health care
organizations.
6. Apply not-for-profit accounting principles
to private not-for-profit colleges and
universities.

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 Accounting for Not-for-Profit Organizations

1: CATEGORIES OF NOT-
FOR-PROFITS

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Characteristics
Not-for-profit characteristics
Contributions without expected commensurate
returns
Purpose is other than providing goods or services
at a profit
Lacks ownership interests
Accounting for not-for-profits
Governmental: follow GASB
Nongovernmental: follow FASB

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 Categories of NFPs
1. Voluntary health and welfare
2. Hospitals and health care
3. Colleges and universities
4. Other not-for-profits
Churches
Museums
Other NFPs are similar to voluntary health
and welfare, without requiring a statement
of functional expenses.

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 Accounting for Not-for-Profit Organizations

2: GOVERNMENTAL AND
NONGOVERNMENTAL NOT-
FOR-PROFITS

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Governmental NFPs

Governmental not-for-profits are NFPs with

Officers elected or appointed by government
Government that can unilaterally dissolve and
assets revert to government
Power to enact/enforce taxes

Follow GASB

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Nongovernmental NFPs
NFPs that lack the governmental element

Follow FASB

FASB ASC 958 incorporates the two previous

FASB Statements which provided guidance
for Nongovernmental Not-for-Profits:
FASB Statement No. 116
Contributions
FASB Statement No. 117
Financial statements

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 Accounting for Not-for-Profit Organizations

3: ACCOUNTING
PRINCIPLES

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 Financial Statements
Statement of financial position
Statement of activities
Replace with "Statement of operations" and
"Statement of changes in net assets" for
hospitals and health care
Statement of cash flows
Statement of functional expenses
Required only for voluntary health and
welfare organizations

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 Net Assets
Three categories
1. Permanently restricted net assets
Asset use is limited
Donor imposed stipulations that do not
expire/ cannot be removed by entity
2. Temporarily restricted net assets
Donor imposed restrictions that expire
(time restrictions)
Can be removed by entity fulfilling
stipulations (purpose restrictions)
3. Unrestricted net assets

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Statement of Activities
Changes in net assets shown separately for
Unrestricted net assets
Temporarily restricted net assets
Permanently restricted net assets
Revenues and contributions are shown in all three
categories, but expenses are shown only in
unrestricted net assets.
Reclassifications
Move amounts from temporarily restricted to
unrestricted net assets
- Expiration of time restrictions
- Fulfillment of purpose restrictions

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Expenses

Expenses are classified into one of two major

categories.
Program services
These are the activities the NFP provides
Examples: Research expense, Educational
expense, Food bank expense, Recreational
expense
Supporting services
Management and general Fund-raising
Membership development

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Contributions

Contributions of cash
Contribution revenue
Conditional promise to give
Will be contribution revenue and
receivable when conditions are
substantially met
Unconditional promise to give
Contribution revenue and receivable
when pledged, but is temporarily
restricted (time)

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Contributions (cont.)

Contributions (cash, pledge, other assets)

with donor-imposed restrictions
Contribution revenue as temporarily
restricted (time or purpose) or
permanently restricted
When temporary restriction is met,
reclassify temporarily restricted net
assets as unrestricted net assets
Gifts of long-lived assets
Temporarily restricted net assets if
donor imposed or board designated
as such

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Transfers (Non-contribution)
Exchange transactions: Revenues
Sales of products or services
"Donations" with gift of same approximate value
- Exchange is unrestricted
Agency transactions
No revenue or contribution
Increase (decrease) both assets and liabilities
Gifts in kind
Contribution revenue (restricted or unrestricted)
- Create or enhance nonfinancial assets
- Specialized skills that would otherwise have
been purchased

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Other Accounting Issues
Measurement
Contributions at fair value
Fair value at time of pledge
- Don't recognize increases
- Decreases change net assets
Collections (art work, historical treasures)
Capitalization encouraged
- Contributions are revenues
Fund accounting
Not required
Fund financial statements may be presented as
supplemental information

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 Accounting for Not-for-Profit Organizations

4: VOLUNTARY HEALTH
AND WELFARE

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Fund Raising

Expenses - supporting services - fund raising 145

Cash 145
Cash 1,950
Unrestricted gains special event 1,950
Unrestricted gains special event 250
Cash 250
Pay general fund-raising expenses.
Special event fund raisers (two entries)
Receive $1,950 in contributions: gains
Pay fund raising costs of special event $250
- Special events are disclosed net of costs
- Therefore, the term "gain," not revenue

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Cash Donations and Pledges
Cash 4,000
Contributions receivable 6,000
Allowance for uncollectibles 600
Unrestricted support contributions 7,600

Temporarily restricted support - contributions 1,800

Receive cash and pledge (no purpose restrictions)

Cash is unrestricted
$1,800 of $6,000 pledges are to be
collected next year: creates a time
restriction
Support contributions (restricted or not) is revenue
Revenue accounts are closed to net assets
(temporarily, permanently, or unrestricted)
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Collect a Time-Restricted
Pledge
Cash 1,800

Contributions receivable 1,800

Temporarily restricted net asset - reclassification

out 1,800

Unrestricted net assets - reclassification in 1,800

Two entries
Cash collection
Reclassification for expiration of time
restriction
Reclassification accounts are temporary accounts
closed to their respective net asset accounts

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 Receive Cash with Purpose
Restriction
Cash 1,000

Temporarily restricted support contributions 1,000

Expenses - program services research 900
Cash 900

Temporarily restricted net asset - reclassification out 900

Unrestricted net assets - reclassification in 900

Receive cash for research.

Pay research costs fulfills purpose restriction.
Two entries: record expenses, reclassify net
assets
If cash was for buying equipment, reclassify as it is
depreciated.
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Receive Equipment and Use It
Equipment 1,500
Temporarily restricted net assets
contributions 1,500
Depreciation expense - program services -
community service 500
Accumulated depreciation equipment 500
Temporarily restricted net asset - reclassification
out 500
Unrestricted net assets - reclassification in 500

Contribution of equipment is temporarily restricted (in

the sense that it gets used up).
As depreciation is recorded, net assets are reclassified
from temporarily restricted to unrestricted.

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Receive Donated Services
Expenses - support services - management
and general 500

Unrestricted support - donated services 500

Construction in process 1,200

Unrestricted support - donated services 1,200

Specialized services (accounting) that would

have to be purchased: record as both expense
and revenue.
General services (non-specialized) that result in
nonfinancial assets: record asset and revenue.
Services of other general labor (door-to-door
collections): not recorded.
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Statement of Financial Position

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Statement of Activities

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Statement of Activities (cont.)

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Statement of Cash Flows

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Statement of Functional
Expenses
Statement of
Activities

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 Accounting for Not-for-Profit Organizations

5: HOSPITALS AND OTHER

HEALTH CARE

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Hospitals and Health Care

Applies to nongovernmental, not-for-profit

hospitals and health care agencies, including
Clinics
Ambulatory care organizations
Continuing-care retirement communities
Health maintenance organizations
Home health agencies
Nursing homes
Accounting is governed by
- Governmental: GASB
- Private, for-profit: FASB as for
businesses
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Revenues and Other Receipts

Unrestricted:
Patient revenues is net of
Courtesy discounts
Contractual adjustments
Premium (subscriber or capitation) fees
Other operating revenue, tuition, cafeteria,
gift shops, in-room TV/phone
Non-operating gains, gifts and bequests
Temporarily or Permanently restricted:
"T" or "P" restricted support, donated assets,
investments, gifts, bequests
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Hospital Expenses

Classify by function
Nursing services expense
Other professional expense
General services
Fiscal services
Administrative services
Medical malpractice costs
Provision for bad debts
Depreciation expense

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Patient Revenue
Patient accounts receivable 1,300
Patient service revenues unrestricted 1,300
Courtesy discounts 9
Contractual adjustments 300
Patient accounts receivable 309
Bad debt expense 26
Allowance for uncollectibles 26

The full amount is charged to the patient bill

Upon approval, the bill is reduced for courtesy
discounts and contractual adjustments
Contra-revenue accounts
Uncollectibles are estimated and written off as needed,
similar to businesses

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Cash Contributions
Cash 275
Unrestricted support - nonoperating gains 25
Temporarily restricted support 250
Nursing services expense 250
Cash 250
Temporarily restricted net asset - reclassification
out 250
Unrestricted net assets - reclassification in 250
Cash contributions can be unrestricted, temporarily or
permanently restricted
"Support" accounts are revenues/gains
When cash restricted for nursing services is spent in that
manner, reclassify net assets as unrestricted.

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Receive Donated
Assets/Services
Inventory of materials and supplies 130
Unrestricted support - donated supplies 130
Nursing services expenses 70
Unrestricted support - donated services 70

Donated supplies are unrestricted support

Record as inventory and expense as
used
Donated specialized services that would
otherwise be purchased
Record as both expense and revenue
Nursing services expense will be the full cost of
running the hospital, whether services are donated or
purchased. The donated services are clearly definable.

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Hospital Statements
Statement of net assets
Statement of operations
Statement of changes in net assets
Statement of cash flows

The NFP "Statement of activities" includes

changes to unrestricted, temporarily and
permanently restricted net assets.
The Hospital's "Statement of Operations"
and "Statement of changes in net assets"
together, provide that information.

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Statement of Operations: Hospital

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Statement of Changes in Net
Assets: Hospital

Shows the net changes in unrestricted net

assets from the Statement of operations.
Shows the details on temporarily and
permanently restricted net assets.

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 Accounting for Not-for-Profit Organizations

6: COLLEGES AND
UNIVERSITIES

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Colleges and Universities

Applies to nongovernmental, not-for-profit

colleges and universities
Governmental: GASB
Private, for-profit: FASB as for
businesses

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Tuition and Scholarships
Tuition and fees: revenue at gross amount
Tuition waivers: contra revenue
Reported tuition revenue is reduced by
employee discounts and non-employment
fellowships.
Scholarships
From outside sources: collect the account
receivable from the donor
Awarded by the college itself: reduce
accounts receivable and record "Expenses
Educational and general student aid"

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College Expenses
Expenses are only in the unrestricted net
assets. Classify by function:
Instruction expense
Research expense
Public service expense
Academic support
Student services
Institutional support
Operation and maintenance of plant
Student aid

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Tuition Revenues
Accounts receivable 1,000

Unrestricted revenues - tuition and fees 1,000

Tuition reduction: unrestricted - student aid 50

Accounts receivable 50
Expenses - educational and general -
institutional support 30
Allowance for uncollectibles 30

Tuition is recorded at gross amount

Tuition waivers are contra-revenues
Bad debts are recorded as for businesses
Grouped with institutional support expenses

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Receive Appropriations
Cash 700
Unrestricted support - state
appropriation 700

Appropriations received from governments and

other sources are support revenue
Unrestricted
- For general operations
- College board has ability to designate as
unrestricted
Restricted
- Temporary or permanently restricted

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Funds Held for Students
Cash 150
Grant funds held for students 150
Grant funds held for students 150
Cash 150

Receive cash that is to be distributed to

students.
Grant funds held for students is a
liability
Distribute cash to appropriate students.

If some of those funds are applied to student

accounts, the second entry would credit accounts
receivable rather than cash.
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Endowments
Cash 50
Permanently restricted revenues -
endowment contribution 50
Cash 4
Temporarily restricted revenues - endowment
income 4
Expenses - unrestricted - student aid 2.5
Cash 2.5
Temporarily restricted net assets -
reclassifications out 2.5
Receive cash for
Unrestricted netpermanent endowment,inwith income 2.5
assets - reclassifications
restricted to student aid
Receive income on endowment
Classify as temporarily restricted
Spend cash on student aid
Reclassify net assets
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Auxiliary Services
Cash 60.8
Revenues - auxiliary enterprises 60.8
Expenses - auxiliary enterprises 28
Cash 28

Auxiliary services: residence halls, food services, intercollegiate

athletics
Unrestricted revenues and expenses
Statement of activities: total revenues and total expenses for
auxiliary services

Subsidiary records are maintained.

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 Statement of Activities: Colleges

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State. of Activities: Colleges (cont.)

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