CHAPTER 26 NOT-FOR-PROFIT ORGANIZATIONS: INTRODUCTION & PRIVATE NPOs

CHAPTER 26

NOT-FOR-PROFIT ORGANIZATIONS:

INTRODUCTION & PRIVATE NPOs

FOCUS OF CHAPTER 26

• Types of Not-for-Profits Organizations• Characteristics of Not-for-Profit

Organizations• FASB Guidance Versus GASB Guidance• Accounting for Private Not-for-Profit

Organizations

Types of Not-for-Profit Organizations

• Health Care Organizations

• Colleges and Universities

• Voluntary Health and Welfare

• Organizations

• Certain (or “all other”) Nonprofit Organizations

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.

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

The Dependence on Contributions:And Federal Handouts

• Nonprofit religious, charitable, and educational groups receive roughly $40 billion annually in federal government grants.

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.

$

Tax-Exempt Status

• Additional 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.

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).

The Matching Concept: It Applies to NPOs

• REVENUES AND SUPPORT may be and are compared with EXPENSES—even though:– 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

The Reporting Model: Private NPOs

• The Flow of ECONOMIC RESOURCES—it requires the use of:– The accrual basis of accounting.– The recognition of depreciation expense

in the operating statement.• The use of this reporting model (the same one

used in the commercial sector) reveals:– The improvement or deterioration in the

NPO’s financial condition for the period.

Contributions: Scope of FAS 116

• FAS 116, “Accounting for Contributions” applies to ALL 4 types of Private NPOs.

FAS 116

HCOs

C&Us

VHWOs

CNOs

Contributions: The Basic Requirements

• WHAT: Report almost ALL unrestricted and unrestricted contributions (including contributions that establish endowments).

• WHERE: In the REVENUES AND GAINS category of the statement of activities.

• WHEN: When they are received [defined later].

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.

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 B/S, (subject to an allowance for uncollectibles).

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.

Contributions: “Conditional” Promises to Give

• CONDITIONAL promises to give are:– 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.

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.”• Stated differently:

Event not likely to occur = Conditional Event likely to occur = Unconditional

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.

Contributions: Manner of Reporting By Category

• Contributions are reported in the statement of activities (the operating statement) by category:– Unrestricted.– Temporarily restricted.– Permanently restricted.

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 O/S.

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)

Contributions: Temporary Restrictions

• Contributed assets that are restricted as to either:– Purpose or– Time period,– Are classified as temporarily

restricted assets.

Contributions: Fixed Assets

• Contributed fixed assets are classified (as unrestricted, temporarily restricted, or permanently restricted) based on either:– Donor stipulations or

Policy Manual (last resort)Donor Agreement

– The NPO’s ACCOUNTING POLICY in the absence of donor

stipulations.

Contributions: Fixed Assets

• When donor stipulations are absent on a contributed fixed asset:– The NPO must establish an accounting

policy as to whether a TIME RESTRICTION EXISTS.• If YES: Classify fixed asset as

restricted (temporarily or permanently).

• If NO: Classify as unrestricted—when placed in service.

Contributions:Expirations of Restrictions

• Restrictions on long-lived assets classified as temporarily restricted (that have been placed in service):– Expire over the estimated useful lives

of the assets.– As DEPRECIATION occurs.

Contributions:Expirations of Restrictions

• Manner of Reporting Expirationsof Restrictions:– Where: In the statement of activities.– How: As a separate line item

reclassification as shown below.

Temporarily Unrestricted RestrictedExpirations of restrictions... $77,000 $(77,000)

Contributions: Delayed Discussionof 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

Financial Statements:Scope of FAS 117

• FAS 117, “Financial Statements of Not-for-profit Organizations” applies to ALL 4 types of Private NPOs.

FAS 117

HCOs

C&Us

VHWOs

CNOs

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.

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.– VHWOs must also report—in a

separate statement—EXPENSES BY NATURAL CLASSIFICATION in a matrix format.

Financial Statements:Stringency

• AICPA Audit Guides are fairly prescriptive.• In contrast, FAS 117 imposes no more

stringent reporting standards than those that exist for commercial entities.

• Thus NPOs have the option to present an intermediate measure of “operating income.”

If presented, it must be done in a statement that also reports the change in unrestrictednet assets (equity) for the period.

Financial Statements:Financial Flexibility

• FAS 117 mandates the use of certain classifications to provide information on financial flexibility.

• An NPOs net assets (equity) are classified based on:– Whether donor-imposed restrictions

exist and– The type of donor-imposed

restrictions.

Financial Statements:The 3 Classifications of Net Assets

• The 3 mandated classifications of net assets are:– Unrestricted.– Temporarily restricted.– Permanently restricted.

• Note that these are the same 3 classifications used for reporting contributions.

Financial Statements:The Statement of Financial Position

• Its Purpose:– To focus on the NPO as a whole.– To show amounts for the NPO’s total

assets, total liabilities, and total net assets (equity).

• The net assets (equity) section must show the total amount for each class of net assets.

If a fund structure is used, it is not displayed.

Financial Statements:The Statement of Financial Position

• Additional Points:– Information about liquidity may be

shown in any of several ways:– Disclosures about the nature and

amount of donor-imposed restrictions must be made.

The term “fund balance” is not used in any of the statements prescribed by FAS 117.

Financial Statements:The Statement of Activities

• Its Purpose:– To show revenues, gains, and other

support by category (unrestricted, temporarily restricted, and permanently restricted).

– Expirations of restrictions are to be reported separately in this statement.

– ALL EXPENSES are to be shown in the unrestricted category.

Financial Statements:The Statement of Activities

• Additional Points:– The amount of the change in each

classification of net assets must be shown for the NPO as a whole.

– Gross amounts must be reported for revenues and expenses (including special events) with limited exceptions.

If fund accounting is used for internal record keeping purposes, an aggregating worksheet will be needed toarrive at amounts to be presented for external reporting.

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.


• 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.


• Contributed Services:– Recognize as revenues only if:

• Nonfinancial assets are created orenhanced.

• Specialized skills are provided byindividuals possessing these skills (e.g., carpenters, electricians, plumbers, lawyers, CPAs).


• Contributed Services—Required Disclosures:– A description of the nature and extent.– The amounts recognized as revenues.– The programs or activities in which the

services were used.


• 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.


• “COLLECTION ITEMS” (the exception):– Consist of contributed works of art, historical

treasures, and similar assets.– NEED NOT be recognized in the financial

statements if 3 conditions are satisfied [how used, how cared for, & use of proceeds upon sale].

– CANNOT be capitalized on a selective or arbitrary basis.

Recognizing Depreciationon Long-Lived Assets

• SAS 93 addresses depreciation. NPOs:– Must recognize depreciation on long-

lived assets in the statement of activities.– Need not depreciate “collection items.”– Must disclose:

• Depreciation methods and the expense for the period.

• The major classes of depreciable assets and accumulated depreciation.

Investments (in General): Manner of Valuation

• FAS 124 addresses investments. NPOs:– Must value the following securities at their

fair value in the financial statements:• Investments in equity securities that

have a readily determinable fair value(excluding investments accounted forunder the equity method).

• ALL investments in debt securities.

Investments (in General): Manner of Reporting Income, Gains, and Losses

• Report currently in the Statement of Activities all:– Investment income:

• Interest• Dividends• Other investment income

– Gains and losses:• Realized• Unrealized

End of Chapter 26 (Appendices 26A, 26B & 26C follow)

• Time to Clear Things Up—Any Questions?

ACCOUNTING FOR ENDOWMENTS

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Classifying Endowment Gains and Losses

• Determination Hierarchy for Treatment as to Whether UR, TR, or PR Net Assets:– First: See if the donor has stipulated

the treatment.– Second: If no donor stipulation exists,

refer to state law.– Third (last resort): Follow rules of FAS

124, “Accounting for Investments.”

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Accounting for Endowment Investment Income, Gains, and Losses

• Specific Donated Assets to be Held in Perpetuity:

• Unrealized gains and losses are reported as changes to PR net assets.

• Specific Donated Assets to be Heldfor a Stipulated Time Period:

• Unrealized gains and losses are reported as changes to TR net assets.

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• Principal (or Corpus) [nonspecific donated assets] to be Held in Perpetuity:– Earnings Restricted to a Specific

Program:• Income and any net unrealized gains

both increase TR net assets.

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• Principal (or Corpus) [nonspecific donated assets] to be Held in Perpetuity (cont.):– Earnings Restricted to a Specific Program:

• Total of income and any net unrealized losses:

– If positive, increase TR net assets.–If negative, decrease UR net assets—

but only after eliminating any positive balance in TR net assets from prior years.

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PUBLIC HEALTH CAREORGANIZATIONS (HCOs)

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FOCUS OF APPENDIX 26B

• Accounting for Public Health CareOrganizations

• The AICPA’s New HCO Audit & Accounting Guide

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Public HCOs:

The GASB Guidance

• Financial reporting for public HCOs falls under GASB’s jurisdiction. GASB guidance encompasses both:– GASB pronouncements

and– AICPA’s 1996 HCO Audit and

Accounting Guide (cleared by both FASB and GASB).

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Public HCOs: The AICPA’s 1996 HCO Audit Guide

• The AICPA’s 1996 HCO Audit guide:– Applies to both:

• Private HCOs

and• Public HCOs.

– Is to be read in conjunction with the reporting requirements of FAS 117, “Financial Statements of Not-for-Profit Organizations.”

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Public HCOs: The AICPA’s 1996 HCO Audit Guide

• SAS 117 (para. 3) allows AICPA’s 1996 audit guide to provide more specific accounting guidance than that set forth in FAS 117.

• Thus allowable differences exist between the two documents.

• Furthermore, slight terminology differences exist in the financial statements between public HCOs and private HCOs.

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Public HCOs: An Overview• Measurement focus: Flow of economic

resources• Basis of accounting: Accrual basis• Financial reporting: Aggregated basis

• Description of outflows: Expenses• Depreciation recorded: Yes• Title of the operating Statement of

statement: Operations

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Public HCOs:Financial Statements Used

• Required Financial Statements—ALL On An AGGREGATED Basis:– A balance sheet.– A statement of operations.– A statement of changes in fund balances.– A statement of cash flows—2 categories

of cash flows from financing activities:• Capital and related financing activities.• Noncapital financing activities.

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Public HCOs:Balance Sheet—Unique Aspects

• Compared to private NPOs (Ch. 30), the major balance sheet differences are:– “Fund Balance” is used instead of “net

assets”—even though the B/S is presented on an aggregated basis.

– The fund balance section may show only 2 categories (restricted and unrestricted) rather than 3 categories (UR, TR, and PR).

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Public HCOs:Operating Statement—Unique Aspects

• Compared to private NPOs (Ch. 30) the major OPERATING STATEMENT differences are:– Inflows and outflows for the restricted

funds are NOT shown.– Restriction expirations are reported

in the revenues section (e.g. as grant revenue)—NOT in a separate category called “Net Assets Released from Restrictions.”

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Public HCOs:Operating Statement—Other Aspects

– The statement of operations must includea “performance indicator.” Examples are: • Revenues over expenses.• Revenues & gains over expenses

& losses. – The “bottom line” in the statement of

operations must be the total increase or decrease in the unrestricted net assets.

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Public HCOs: Operating Statement—Unique Aspects

• Nonoperating items must be reported separately from operating results:– Extraordinary items, cum. effect of

account-ing changes, & discontinued operations.

– Net change in fair value of investments.– Equity transfers to/from affiliates.– Unrestricted long-lived asset

contributions (and assets released from donor restrictions related to long-lived assets).

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Public HCOs: Statement of Changes in Fund Balance

Private NPOs Public HCOs Statement of changes in net assets or fund balance used.. NO YESExplanation: (not needed) (needed) 1. Private NPOs use a statement of activities that shows (a) ALL categories of net assets AND (b) the change in net assets for the period (an all-inclusive approach). 2. Public HCOs use a statement of operations that EXCLUDES the restricted funds. Thus the additional statement is needed (at least for the excluded funds).

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Public HCOs: Statement of Changes in Fund Balance—A Item of Duplicity

• The change in the UNRESTRICTED FUND BALANCE for the period is shown in BOTH:– The statement of operations AND– The statement of changes in fund

balance.• However, the unrestricted fund balance at

the BEGINNING and the END of the period is shown ONLY in:– The statement of changes in fund

balance.

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Public HCOs: Receipt of Restricted Contributions

• Receipt of Restricted Contributions (both temporary and permanent):– When RECEIVED, report as increases in

the restricted column(s) of the statement of changes in fund balances.• Do NOT report in the statement of

operations when they are received.• Report in the statement of operations

LATER when TR restrictions expire.

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Public HCOs: Expirations of Restrictions

• As restrictions expire on temporary restrictions, they are reported as:– DECREASES in the restricted column of

the statement of changes in fund balances AND

– INCREASES in the revenues section of the statement of operations by their nature.

• The caption “net assets released from restrictions” is NOT used by public HCOs.

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Public HCOs:Bad Debts and Contractual Adjustments

• Bad Debts:– Must be reported as EXPENSES in the

statement of revenues and expenses.• Cannot be reported as an adjustment

to patient service revenues.• Contractual Adjustments (such as discounts

given to third-party payers):– Must be reported as an adjustment to

PATIENT SERVICE REVENUES (netted).

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Public HCOs:Charity Care

• Charity Care: Health care that is provided free—NOT expected to result in cash inflows. – Nonrecognition: The value of charity

care is NOT recognized in the financial statements as receivables or revenues (because no cash inflow is expected).

– Disclosures required: • HCO’s policy for providing charity care.• Level of charity care provided.

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Public HCOs: Investments—Summary of GAS 31

• Value investments at their FAIR VALUE.– Exception: Most money market investments

with a maturity of one year or less at time of purchase may be valued at amortized cost.

• Report ALL investment income (includes mar-ket adjustments) in the operating statement.– Make no distinction between realized and

unrealized gains and losses in presenting the “net change in fair value of investments.”

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Public HCOs: Investments—Summary of GAS 31

• Investments in equity securities to which GAS 31 does NOT apply:– Equity securities not having a readily

determinable fair value.– Equity securities accounted for under the

equity method of accounting.

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PUBLIC COLLEGES AND UNIVERSITIES (C&Us)

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FOCUS OF APPENDIX 26C

• Accounting for Public Colleges & Universities

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Public C&Us:

The GASB Guidance (GAS 35)• Must follow one of the two sets of guidance for

“special purpose governments” that are set forth in GAS 34. Guidance for when:– Guidance Set #1: Engaged only in

business-type activities (almost all private C&Us will use this guidance).

– Guidance Set #2: Engaged only in governmental activities or engaged in both governmental activities and business-type activities (few private C&Us will use this guidance).

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Public C&Us:

The GASB Guidance (GAS 35)• Guidance Set #1: Engaged only in

business-type activities. Must present:– Management’s Discussion and Analysis

(MDA).– Financial statements required for

Enterprise Funds.– Required Supplementary Information

(RSI), if applicable.

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Public C&Us:


business-type activities. Enterprise Funds:– Use accrual basis.– Report depreciation expense in

operating statement.– Use the all-inclusive format in the

operating statement (the entire change in net assets for the period).

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Public C&Us:


business-type activities. Operating statement categories:– Revenues.– Expenses.– Nonoperating revenues and expenses– Specified items

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Public C&Us:


business-type activities. Nonoperating revenues and expenses include:– Noncapital appropriations– Noncapital gifts.– Investment income– Interest expense on capital asset-

related debt.– Other nonoperating revenues.

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Public C&Us:


business-type activities. Specified items include:– Capital appropriations.– Capital grants.– Capital gifts.– Additions to permanent endowments.

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Public C&Us:


governmental activities or engaged in both governmental activities and business-type activities. Must report:

• In the same manner as state and local governments. Thus must present both:– Fund-based financial statements.– Government-wide financial

statements.

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Public C&Us: Investments

• The two slides that discuss GAS 31 that are at the end of PART I (slides 19 and 20) apply to C&Us as well as to HCOs.

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End of APPENDICES 26A, 26B & 26C

• Time to Clear Things Up—Any Questions?

Documents

CHAPTER 26 NOT-FOR-PROFIT ORGANIZATIONS: INTRODUCTION & PRIVATE NPOs