Académique Documents
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CHAPTER 18
ACCOUNTING AND REPORTING FOR PRIVATE
NOT-FOR-PROFIT ENTITIES
Chapter Outline
I.
Historically, the financial reporting for private not-for-profit entities has differed significantly
according to the type of organization (such as a health care entity versus a college or
university). The reporting of these entities has now been largely standardized by FASB
pronouncements that focus on (a) the reporting of financial statements for the entity as a
whole and (b) significant events such as the receipt of contributions and the recording of
mergers and acquisitions. However, public colleges and universities and similar
organizations still must follow the standards issued by GASB.
A. This chapter examines the financial reporting for private not-for-profit entities with
special emphasis on private colleges and universities, voluntary health and welfare
entities, and health care operations.
B. Reporting for these entities is usually similar to a business enterprise unless critical
differences exist that impact the needs of financial statement users. Several of these
critical differences can be identified.
1. Many private not-for-profit entities receive a significant amount of their financial
resources from contributions rather than from revenues or capital investments.
2. A significant amount of the financial resources given to a private not-for-profit entity
include donor-imposed restrictions.
3. No single indicator of success is present in the financial reporting. No number such
as net income provides a means for evaluation as it does with a for-profit business.
II. FASB has established the following financial statements for private not-for-profit entities.
A. Statement of Financial Position reports assets, liabilities, and net assets.
B. Statement of Activities reports revenues, expenses, gains, and losses.
C. Statement of Cash Flows
D. A voluntary health and welfare entity is also required to present a Statement of
Functional Expenses which indicates the amount of resources spent for program
services (to meet the goals of the entity) and supporting services (to operate the entity
and raise funds).
III. For reporting purposes, all economic resources held by a private not-for-profit entity are
classified within one of three categories.
A. "Unrestricted net assets" indicates the amount of an entity's resources that are not
subject to external donor restrictions. Entity officials can make whatever use they wish
of these assets.
B. "Temporarily restricted net assets" are restricted by an outside party (often a donor) for
a particular purpose or for use in a future period of time. When the restriction is
eventually satisfied, the classification of these resources is switched to unrestricted net
assets. At that time, on the statement of activities, temporarily restricted net assets are
reclassified as unrestricted net assets when the appropriate time has passed or the
resource is used as stipulated.
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C. "Permanently restricted net assets" are expected to remain restricted for as long as the
entity exists. Income from these assets is normally unrestricted or temporarily restricted
based on the specifications of the donor.
IV. Contributions should be recognized as increases in net assets when received.
A. Restricted contributions are reported either within temporarily restricted net assets or
permanently restricted net assets based on stipulations established by the donor.
B. Donated assets are recorded at fair value. Recognition of art works, historical
treasures, and the like is not required (although allowed) if three conditions are all met.
1. The items are added to a collection for public exhibition, education, or research.
2. The items are protected and preserved.
3. If sold, receipts must be used to acquire other collection items.
C. Unconditional promises to give that are received by a private not-for-profit entity should
be reported immediately as both a receivable and an increase in net assets.
1. If not to be collected within one year, the promise is recorded at the present value of
the future cash flows. Subsequent amortization of the discount is recorded as
contribution rather than as interest.
2. Uncollectible balances are also estimated and deducted.
3. Conditional promises are not recognized until the conditions are met.
D. Services contributed to a not-for-profit entity are recognized as increases in net assets
if the services (1) create or enhance a nonfinancial asset or (2) require a specialized
skill possessed by the donor that would have been purchased if not donated. If the
donated service comes from an affiliated group, the amount is recognized at the cost
paid to the employee by the affiliate. If that cost does not reflect the legitimate value of
the services rendered, the charity has the option of reporting fair value.
E. If a not-for-profit entity accepts a donation that must be conveyed to a separate
individual or other beneficiary, the entity normally records the asset along with an
accompanying liability to reflect the accepted responsibility. However, if the entity is
given variance powers to change the beneficiary, an increase in net assets is
recognized instead of a liability because the donation falls under the entitys control.
V. Education institutions (such as private colleges and universities) record tuition revenue at
the gross amount billed and then show the revenue net of scholarships and financial aid in
the statement of activities
VI. Over the years, mergers and acquisitions have become more common in private not-forprofit entities at least in part because of the economic downturn. The rules for recording
these combinations are different than those applied to a for-profit business because the
transaction can be either an acquisition or a merger.
A. In an acquisition, one entity gains control over another
1. All identifiable assets and liabilities of the acquired company are combined at fair
value on the date of acquisition.
2. If the acquisition value of the acquired company is greater than the sum of the fair
value of all identified assets and liabilities, the difference is often reported as
goodwill.
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3. However, if the acquisition value of the acquired company is greater than the sum
of the fair value of all identified assets and liabilities, the excess is charged off
immediately as a reduction in net assets if the acquired company expects to be
predominantly supported by contributions and investment income in the future.
B. In a merger, two not-for-profits come together to form a new entity with a new governing
board. Identifiable assets and liabilities are not adjusted to fair value but retain their
previous carrying amounts.
VII. Health care entities exhibit some unique reporting features that must be addressed in
not-for-profit accounting.
A. Third-party payors such as Medicare and insurance companies have a significant
impact on the reporting process because of their need for usable financial information
B. A net patient service revenue figure is actually reported by these entities but only after
reduction for contractual adjustments. These adjustments are decreases allowed for
some third-party payors based on the approved cost for a particular service in that
geographic region.
C. Charity care services are not included in receivables or revenues if there is no
expectation of collection. The cost of that charity work must be disclosed.
D. FASB requires the inclusion of performance indicators (such as revenues in excess of
expenses) to help show operational effectiveness because net income is not viewed as
applicable for a not-for-profit entity.
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answer to that question while creditors could have an entirely different response. Once that
question has been addressed, the need for comparability is easier to assess. No ultimate
answer for that query currently exists but students can be asked to develop their own list of
user needs and then note whether the existence of two different sets of GAAP has an adverse
impact on those needs.
Is This Really an Asset?
In theory, accounting for a pledge is a relatively straightforward process. If unconditional, a
receivable is established (at present value if the money is not to be received within the year)
along with an adequate allowance for doubtful collections. However, in practice, the reporting
process might be much more complicated.
In this case, for example, was a pledge actually made or was this just a superfluous statement
spoken at a moment of overwhelming emotions? Is this a promise to give or an intention to
give? Can the donor change his mind? Does this potential donor really own land in Idaho and
can it be sold for $30 million? How can an adequate allowance be determined for this pledge?
If the individual's mother should die, might he lose interest in supporting the hospital? If the
$10 million is reported as a receivable and then is not collected, what is the impact on the
readers of the financial statements? How much time and energy should the hospital invest in
attempting to arrive at a proper method of financial reporting for this item? The accountant
must address all of these questions (and more) to determine the appropriate accounting
treatment.
At a minimum, hospital officials need to contact this donor and have a serious discussion. He
needs to understand their reasons for attempting to establish a valuation of this promise. In
class discussion, students can be asked to identify questions that should be posed to this
person. They would probably include the following:
Does he really plan to give $10 million to the hospital?
When does he project that the land will be sold and the gift conveyed?
How did he establish a $30 million price? Could the land ultimately be sold for less and,
if so, how will that impact on the gift to the hospital?
How does the donor want the $10 million to be used?
Is there any chance that he will change his mind?
What other charities has he supported? Has he previously made such large gifts?
Would he be willing to furnish financial statements as well as a list of references who
could verify his intentions and his ability to carry out those intentions?
Does the hospital have legal recourse to force fulfillment of the promise since it is in
writing and signed?
If this individual has supported other charities over the years, is committed to the work of
Mercy Hospital, has adequate financial resources, and the land appears to be worth $30
million, the hospital should report the pledge as a receivable. However, a large allowance
should probably be established because of the uncertainties involved in collecting this money
over an extended period of time. Conversely, if too much uncertainty exists (a value for the
land cannot be determined or the donor refuses to provide information about his ability to meet
the commitment), the hospital may decide that there is no pledge but merely the promise of a
possible future pledge. In that case, the information should be spelled out in a disclosure note.
Unless clear evidence exists to substantiate the pledge, disclosure is most likely.
Answers to Questions
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1. The Financial Accounting Standards Board (FASB) has authority for establishing
accounting standards for private not-for-profit entities. In addition, audit and accounting
guides produced by the AICPA provide further guidance for the preparation of financial
statements by these entities.
2. If a user of financial statements is a potential donor, that party is interested in assessing
whether a gift to a not-for-profit entity is a wise use of resources. To make that assessment,
the individual needs to know whether the entity uses its resources appropriately to achieve
stated goals. In this way, donors can decide which entity deserves to receive support and
how much will be donated. For this reason, the reported division between the amount
spent on program services and supporting services can be helpful.
If a user of financial statements is a creditor, that company or person is primarily interested
in whether the entity can generate sufficient cash flows to pay its debts as they come due.
3. According to FASB, three financial statements are required to be produced by private
not-for-profit entities: a statement of financial position, a statement of activities, and a
statement of cash flows. A voluntary health and welfare entity must also produce a
statement of functional expenses.
4. Temporarily restricted net assets have been restricted by an external donor or grantor for a
specified purpose or for use at a future point in time. For example, cash might be given to a
charity that had to be spent to buy a bus or that could not be spent for three years. Such
restrictions are eventually lifted when the intended usage is fulfilled or when the time limit
has been met.
5. Permanently restricted net assets have been restricted by an external donor and grantor.
That restriction is expected to last for as long as the entity continues to function. Normally,
any income generated by these assets can be used by the entity although its specific
usage may be restricted. For example, investments worth $3 million might be given to a
private not-for-profit entity with the stipulation that that could never be sold. However, the
income produced by these investments over time could be designated by the donor for the
purchase of computer equipment or might be available to the entitys officials for whatever
purpose they deemed necessary.
6. The two general types of expenses are (a) program service expenses and (b) supporting
service expenses. Program service expenses are those that relate to the goals and
objectives of the not-for-profit entity. Supporting service expenses encompass the costs of
operating the entity (general and administrative) and raising funds.
7. Not-for-profit entities (especially voluntary health and welfare entities) are frequently
evaluated based on the ratio of program service expenses to total expenses. This ratio tells
readers of the statements what portion of each dollar of expense can be attributed to
achieving the goals identified by the entity.
8. A statement of functional expense is produced by a voluntary health and welfare entity to
assist the reader of its financial statements in measuring the entitys efficiency in using
resources. The assumption is that an entity should use a greater portion of those resources
to meet stated goals and a smaller part for administrative costs and fundraising. This
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For example, assume a mailing was sent out by a private not-for-profit blood service asking
all previous blood donors to donate blood during the next six weeks. Assume further that
this call for action was accompanied by a request for monetary donations. All of the direct
mail costs should probably be allocated between program service costs and supporting
service costs.
14. Unconditional promises to give must be recorded immediately by a private not-for-profit
entity at present value (if not to be received within the next year) and net of an allowance
for uncollectible amounts. An unconditional promise is one that requires no future service
or action by the charity.
15. An unconditional promise to give is recorded immediately by the private not-for-profit entity
that anticipates receiving the gift. Conversely, an intention to give is not recorded. In
practice, the difference between the two can be rather subtle. If donors have the ability or
the right to change their minds, the assumption is that they have only expressed their
intention to make a gift at some time in the future but have not yet made an unconditional
promise.
If an action is required of the charity in advance of the gift, the promise is not unconditional.
16. A number of private not-for-profit entities collect dues from their membership and also
receive contributions. Dues are considered earned revenues rather than contributions if the
member receives a benefit in return. That benefit can take the form of a periodic newsletter
or journal or can be the use of the facilities (such as at the YMCA) and services provided
by the entity. However, if nothing of value is really being given to the member, the dues are
considered to be merely donations. Often, an allocation must be made between the
portion of the membership dues that qualifies as revenue and the part that is viewed as a
contribution.
17. If a not-for-profit entity gains control over another entity, combined financial statements
should be prepared. This type of transaction is viewed as an acquisition.
If two not-for-profit entities come together to form a new (third) not-for-profit with a new
governing board, combined statements are also needed. However, this event is viewed as
a merger.
18. Because one party gained control over the other, this transaction is viewed as an
acquisition.
Here, the acquisition value is in excess of the fair value of all identifiable assets and
liabilities by $200,000 ($2.3 million less $2.1 million). In a for-profit consolidation, this
excess is reported as goodwill. The same handling is often true for combined statements
created when a not-for-profit entity gains control over another. However, if the acquired
entity is expected to be predominantly supported by contributions and investment income,
then the extra $200,000 is reported as a reduction in unrestricted net assets on the
statement of activities. In that situation, the amount is not capitalized as goodwill.
19. If Helping Hand acquires Fancy Fingers, then the reported value of the equipment on
consolidated statements is $2.3 million. That figure is the net carrying value reported by
Helping Hand ($1.1 million) plus the fair value of the property held by Fancy Fingers ($1.2
million).
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If Fancy Fingers acquires Helping Hand, then the reported value for the equipment will be
$2.4 million. That figure is the net carrying value reported by Fancy Fingers ($1.0 million)
plus the fair value of the property held by Helping Hand ($1.4 million).
If the two companies are brought together to form a new third entity under a new governing
board, the equipment is reported at $2.1 million. This transaction is a merger and the
carryover method is used. The reported figure is the combination of the net carrying value
of these assets from both sets of financial statements ($1.1 million plus $1.0 million).
20. A third-party payor is any outside entity who assumes responsibility for a portion or even all
of a patient's medical charges. The most commonly encountered third-party payors include
insurance companies, Medicare, and the like. Because third parties bear a significant
portion of the medical costs in this country, they are able to demand extensive as well as
accurate financial information. Health care entities have long been required, therefore, to
develop and maintain accounting systems that provide this needed data.
21. A contractual adjustment refers to a portion of a patient's charged fee that a health care
entity estimates will not be received because of agreements with third-party payors. These
arrangements specify that the provider (the health care entity) is willing to accept an
amount that is less than its normal charge if the third-party payor determines that the lesser
figure is reasonable for the services rendered.
As an example, if a hospital charges $272,000 for a specific service but the third-party
payor responsible for payment remits only $195,000 (based on its determination of
reasonable costs for this service in this area of the world), the hospital must accept that
amount as payment in full. The $77,000 reduction is recorded by the hospital as a
contractual adjustment.
These reductions may take an extended period of time to finalize. Thus, the expected
amount of these reductions is estimated by the health care entity so that they can be
recorded at the time that the original invoice is submitted.
22. Charity care is not recorded by a not-for-profit health care entity because the service was
performed for patients with no real ability to pay. However, the financial impact of that
decision needs to be disclosed. Therefore, the cost of such charity care must be reported
in a disclosure note to the financial statements.
Answers to Problems
1. D (Amounts charged to patients less contractual adjustments and the
provision for bad debts)
2. A
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Education.
14. C (Charity care is not recorded by a not-for-profit health care entity because
the entity provided services for individuals with no ability to pay. The
financial impact of that decision must be disclosed in a note to the financial
statements that provides information about the direct and indirect costs of
these services.)
15. D (The charity must convey the donation to the designated beneficiary. Unless
the charity was given variance powers that allowed it to change the
beneficiary, this donation represents a liability to the Jones family. The gift
is simply being passed through the charity [in the form of furniture] to the
ultimate beneficiary.)
16. B (In this way, no financial benefit accrues to the charity from the sale of the
artifact.)
17. A (Because of the time restriction, the amount spent for playground
equipment remains in temporarily restricted net assets until depreciated.
The equipment was bought at the end of the current year so that no
depreciation was recorded and no reclassification was made. The $80,000
was properly spent on the salaries for the teachers and must be reclassified
from temporarily restricted net assets to unrestricted net assets when the
expense is recognized.)
18. A (The key factor here is that YZ is expected to be predominantly supported
by contributions. Thus, future exchange revenues will likely be minor. The
acquisition value ($1 million) in excess of the fair value of all assets and
liabilities ($700,000) is $300,000. Because most support comes from
contributions and investment income, this $300,000 is charged off against
unrestricted net assets on the statement of activities. No goodwill is
recognized.)
19. A (When two not-for-profit entities come together to form a new not-for-profit
entity with a new governing board, a merger has occurred. In reporting a
merger, the carryover method is used. Thus, book value of individual
assets and liabilities is retained. The $300,000 book value for BCs land
plus the $500,000 book value for OPs land gives a reported land account of
$800,000.)
20. B (This transaction is an acquisition and the acquired entity is not supported
predominantly by contributions or investment income. Thus, the difference
in the acquisition value of Northeast ($980,000) and the fair value of the two
recognized assets ($950,000 or $150,000 plus $800,000) is recognized as
goodwill.)
21. D
22. C
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23. C
24. C (The charity care work should not be recorded in any way because the
entity has no expectation of collection. That reduction drops the reported
amount for patient service revenue to $600,000. The contractual
adjustment is reported as a contra balance to the revenue reducing it to a
net amount of $400,000. Likewise, the provision for bad debts reduces the
net patient service revenue another $100,000 to $300,000.)
25. B (Use of the money is limited to the donors specified purpose.)
26. B (This donated service meets the rules for recognition. The expense and the
contributed support are both reported.)
27. A (Form 990 is the annual informational form that most tax-exempt
organizations are required to file by the IRS.)
28. A (As an educational institution, Belwood University will qualify as a 501(c)(3)
tax-exempt organization.)
29. D (These volunteer services, although important, do not meet the criteria for
recognition. They do not require a specialized skill that would be otherwise
purchased. They do not enhance a nonfinancial asset.)
30. B (The gift was not specifically designated for this particular family so the
entity recognizes both the revenue and expense.)
31. A (The work performed requires a specialized skill that would otherwise have
to be acquired by the not-for-profit entity.)
32. B
33. A (The fundraising costs and administrative salaries are supporting service
expenses.)
34. B
35. D
36. (10 minutes) (Reporting of various account balances by a not-for-profit health
care entity)
Donated medicines = an asset is reported as well as an increase in
unrestricted net assets because of the contribution
Donated services (replacing salaried workers) = the fair value of the services
contributed causes an increase in unrestricted net assets along with an
accompanying decrease in unrestricted net assets because the expense is
also recognized
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Education.
$600,000
(90,000)
$510,000
$306,000
$204,000
b). Both contributed support and salary expense are recognized as $12,000
($20 per hour times 600 hours) within unrestricted net assets. No overall
effect is created on net assets but impact of the donation is reflected.
40. (65 Minutes) (Preparation of statements for a private not-for-profit entity)
a.
Statement of Activities
Public Support
a. Contributions
b. Contribution
Interest
Revenue
c. Membership dues
d. Investment income
Unrestricted
Net Assets
Temporarily Restricted
Net Assets
$210,000
$78,000
3,000
30,000
3,900
9,100
e.
Net assets released from
restriction
72,000
(72,000)
$315,900
Permanently Restricted
Net Assets
$18,100
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(26,500)
(16,000)
(93,000)
(135,500)
(32,000)
(2,000)
(34,000)
Fundraising
k. Salaries
l. Advertising
m. Depreciation
Total
(26,500)
(2,000)
(2,000)
(30,500)
Total Expenses
(200,000)
$115,900
$18,100
-0-
400,000
200,000
$100,000
$515,900
$218,100
$100,000
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40. (continued)
Explanation of Balances
a. Contributions. The balances to be reported are the unrestricted gifts
($210,000) plus present value of unrestricted pledge ($78,000). Pledge is
viewed as temporarily restricted because it will not be collected for three
years.
b. Contribution-Interest. The pledge is recorded at its present value of $78,000.
Interest that is recognized to raise the balance to the pledge amount is
reported as a contribution.
c. Membership dues. The amount received is shown as revenue and not as
public support because rights are being conveyed to the members equal in
value to the amount collected.
d. Investment income. Although this income ($13,000) is earned on permanently
restricted net assets, 70 percent is shown as temporarily restricted because
the donor has specified that it must be spent on advertising. The remaining
30 percent is unrestricted.
e. Net assets released from restriction. Three restricted amounts were properly
spent during the period: $20,000 for salaries, $50,000 for equipment, and
$2,000 for advertising. No implied time restriction was assumed for the
equipment so the entire reclassification was made immediately.
f. Salaries. During the period, $24,000 in salaries were paid (30 percent of
$80,000 was assigned here) and another $2,500 was owed at the end of the
year (50 percent of year-end accrual).
g. Depreciation. Of the total expense ($20,000) for the period, 80 percent was
allocated to program service expenses because that amount of the equipment
was used for that purpose.
h. Supplies. A total of $93,000 was acquired and used during the year.
i. Salaries. Administrative salaries amounted to $32,000 for the year (40 percent
of overall total).
j. Depreciation. Of the total for the period, 10 percent was allocated to general
and administrative expenses.
k. Salaries. During the period, $24,000 was paid in salaries (30 percent of $80,000
was assigned here) and another $2,500 was owed at the end of the year (50
percent of year-end accrual).
l. Advertising. Only $2,000 in advertising costs were incurred during the period.
m. Depreciation. Of the total for the period ($20,000), 10 percent was allocated to
fundraising expenses.
---Because it qualifies as a museum piece, recording of the painting is optional.
Officials do not want to report the painting, and they are not required to do so.
---The $10,000 gift must be conveyed to an outside beneficiary and is reported by
the not-for-profit entity as a liability.
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40. (continued)
b.
Statement of Financial Position
Assets
a. Cash
$738,000
b. Pledge Receivable
81,000
c. Equipment
$300,000
d. Accumulated Depreciation
(20,000)
280,000
Total Assets
Liabilities
e. Salaries Payable
f. Notes Payable
g. Donated Amount Due to Separate
Entity
$1,099,000
$5,000
250,000
10,000
$265,000
$515,900
218,100
100,000
834,000
Explanation of Balances:
a. Cash. The final balance is the beginning cash figure of $700,000 plus $210,000
in contributions, less $80,000 for salaries, less $50,000 for equipment, plus
$30,000 in membership dues, plus $10,000 contribution that must be conveyed
to a separate entity, plus $13,000 investment income, less $2,000 paid for
advertising, and less $93,000 paid for supplies.
b. Pledges receivable. The amount to be reported is the present value as of the
end of the year (the original $78,000 plus the $3,000 interest recognized for the
period).
c. Equipment. Entity acquired $300,000 of equipment during the year.
d. Accumulated Depreciation. The $20,000 amount of depreciation recorded for
this initial year of ownership.
e. Salaries Payable. The amount owed to employees as of the end of the year.
f. Notes Payable. The liability incurred in acquiring equipment.
g. Donated Amount Due to Separate Entity. Amount given by a donor that must
be conveyed to a separate organization. The amount must be shown as a
liability since no mention was made that the entity here had variance powers
that would allow it to change the beneficiary.
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41. (50 Minutes) (Effect of various transactions on unrestricted and restricted net
assets)
a. InvestmentsInternally Restricted ................................
Cash........................................................................
160,000
b. Cash...................................................................................
Contributed Support
Permanently Restricted Net Assets .................
80,000
c. Inventory of Medicines.....................................................
Cash........................................................................
25,000
ReclassificationTemporarily
Restricted Net Assets.................................................
ReclassificationUnrestricted
Net Assets.........................................................
160,000
80,000
25,000
25,000
25,000
d. Accounts ReceivablePatients......................................
Accounts receivableThird-Party
Payors...........................................................................
Patient service revenues.......................................
120,000
e. Depreciation Expense......................................................
Accumulated Depreciation...................................
38,000
f. Cash...................................................................................
Interest Revenue
Unrestricted Net Assets (internally restricted)
15,000
20,000
Contractual Adjustment...................................................
Allowance for Reduced Charges.........................
30,000
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480,000
600,000
38,000
15,000
20,000
30,000
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Education.
41. (continued)
h. Supplies Expense ............................................................
Inventory of Medicines..........................................
25,000
i. Cash ..................................................................................
InvestmentsInternally Restricted......................
Gain on Sale of InvestmentsUnrestricted
Net Assets.........................................................
172,000
Equipment.........................................................................
Cash ($172,000 + $15,000 + $25,000)...................
212,000
ReclassificationTemporarily
Restricted Net Assets.................................................
ReclassificationUnrestricted
Net Assets.........................................................
j. Cash...................................................................................
Pledges Receivable (present value)...............................
Allowance for Uncollectible Pledges...................
Contributed SupportUnrestricted
Net Assets.........................................................
Contributed SupportTemporarily
Restricted Net Assets......................................
18-18
25,000
160,000
12,000
212,000
25,000
25,000
12,600
98,000
9,000
12,600
89,000
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Education.
41. (continued)
a. No change
Unrestricted
Net Assets
b. Donation
Income for
Salaries
c. Stipulation
MetReclassification
80,000
25,000
d. Patient
Services
600,000
e. Depreciation
(38,000)
f. Interest
g. Bad Debts
Contractual
Adjustment
h. Supplies
Expense
i. Gain on
Investments
Stipulation
MetReclassification
j. Pledges
Increase
(Decrease)
In Net
Assets
(25,000)
15,000
(20,000)
(30,000)
(25,000)
12,000
25,000
(25,000)
12,600
89,000
576,600
39,000
18-19
80,000
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Education.
42. (70 minutes) (Produce journal entries for a private university as well as a
statement of activities)
a. Tuition Receivable
Tuition Revenues
1,200,000
1,200,000
b. Investments
ContributionsPermanently
Restricted Net Assets
300,000
c. Cash
ContributionsTemporarily
Restricted Net Assets
700,000
d. ScholarshipsFinancial Aid
Tuition Receivable
100,000
e. Salary Expenses
Cash
310,000
300,000
700,000
100,000
310,000
f. Salary Expense
Contributed Support
Unrestricted Net Assets
80,000
80,000
g. Equipment
Cash
200,000
200,000
200,000
200,000
30,000
30,000
9,000
9,000
32,000
32,000
k. CashInternally Restricted
Cash
42. (continued)
100,000
100,000
l. Pledge Receivable
7,000
18-20
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Education.
ContributionTemporarily
Restricted Net Assets
7,000
212,000
212,000
18-21
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Education.
42. (continued)
University of Danville
Statement of Activities
Unrestricted
Net
Assets
Revenues and Gains
-Tuition
1,200,000
-Scholarships (100,000)
1,100,000
-Unrealized Gain on
Investments
-Dividend Revenue
1,100,000
30,000
707,000
30,000
9,000
300,000
1,007,000
80,000
330,000
2,226,000
80,000
1,189,000
200,000
Totals
Total Expenses
Total
9,000
Contributions
-Cash and Other
Assets
-Services
Operating Expenses
-Salaries
-Depreciation
-Utilities and Other
Expenses
Temporarily Permanently
Restricted
Restricted
Net Assets Net Assets
1,389,000
707,000
(200,000)
507,000
330,000
2,226,000
390,000
390,000
32,000
32,000
212,000
212,000
634,000
634,000
755,000
507,000
Net AssetsBeginning
Of Year
400,000
Net AssetsEnd of
Year
1,155,000
200,000
707,000
330,000
1,592,000
100,000
430,000
700,000
2,292,000
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Education.
have value are conveyed to the members. A not-for-profit entity might also
gain assets from sources such as interest or dividend income. Money derived
in this fashion is not a donation and is, thus, recorded as earned revenue.
b. A statement of functional expenses is required to be included in the financial
statements of voluntary health or welfare entities and is permitted for all other
private not-for-profits. This statement enables readers to determine the
ultimate usage of the money that has been raised. Expenses are separated
according to program service expenses (directed towards activities that relate
to the entitys goals and mission) and supporting service expenses (dealing
with the cost of running the entity and raising funds). This statement permits
interested parties such as potential donors to see the utilization made of the
not-for-profit entitys resources.
c. Some charities (Goodwill Industries and the Salvation Army, for example)
receive a large amount of contributions in the form of donated materials such
as clothing and furniture. If the value of these goods has a clearly measurable
basis, recording the gifts as contributed support is appropriate.
d. A not-for-profit entity may receive gifts (or unconditional promises to give)
from outside parties that (1) must be expended for a particular purpose or (2)
cannot be expended until a particular point in the future. Because the
organization does not have free use of these assets, they are included within
"Temporarily Restricted Net Assets." At the time that the stipulation is met or
the designated time period arrives, the asset is reclassified into the
Unrestricted Net Asset category.
Other gifts may be given where the donor specifies that only subsequent
income can be expended (frequently for a designated purpose). Because the
assets received in the original gift cannot be expended, they are included
within the Permanently Restricted Net Assets."
e. Donated services are extremely common in the operation of many not-forprofit entities. Literally thousands of individuals solicit funds for entities such
as the Heart Fund, Salvation Army, and March of Dimes. In addition,
individuals often voluntarily fill positions of responsibility throughout many of
these not-for-profits. Donated services are formally recognized in the
accounting records but only if one of two specific circumstances are met:
1. The service creates or enhances a nonfinancial asset or
2. The service requires a specialized skill possessed by the donor that the
entity would have had to be purchased if not donated.
f. Prior to 1987, the costs of direct mailings and other solicitations for support
were recorded by private not-for-profit entities as fundraising expenses even
if educational materials were included. In that year, this requirement was
modified so that an allocation of the joint costs could be made between
18-23
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Education.
18-24
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Education.
(220,000)
20,000
( 20,000)
(200,000)
104,000
(net of 120,000)
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Education.
180,000
(180,000)
90,000
( 90,000)
(290,000)
90,000
15,000
(380,000)
( 15,000)
15,000
( 15,000)
12,000
(302,000)
( 12,000)
450,000
50,000
(700,000)
(450,000)
(252,000)
50,000
( 65,000)
50,000
( 65,000)
30,000
(282,000)
( 30,000)
30,000
(312,000)
( 30,000)
43,000
( 12,000)
( 15,000)
( 16,000)
(269,000)
46. (continued)
Cash ............................................................. 30,000
Membership revenueunrestricted net assets
(Membership dues are listed as revenues
and not as contributions because members
receive substantial benefits.)
Cash.............................................................. 30,000
Investment revenueunrestricted net assets
(Income is earned on permanently restricted
net assets but use of the income is unrestricted.)
Rent expense...............................................
Advertising expense ..................................
Utilities expense .........................................
Cash ......................................................
18-27
12,000
15,000
16,000
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Education.
40,000
Interest expense..........................................
Cash ......................................................
15,000
18-28
(269,000)
149,000
(161,000)
(275,000)
6,000
6,000)
40,000
( 40,000)
(660,000)
15,000
( 15,000)
(254,000)
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Education.
46. (continued)
Based on the final balances computed above, the following statements can be
prepared.
WATSON FOUNDATION
STATEMENT OF ACTIVITIES
For Year Ending December 31, 2015
Contributed support
Contributions -- interest
Investment revenue
Membership revenue
Total support and revenues
Net assets released from
restriction
Unrestricted
Net Assets
$ 180,000
20,000
30,000
30,000
$ 260,000
65,000
$ (12,000)
(90,000)
(15,000)
(16,000)
(40,000)
(15,000)
Total expenses
$(188,000)
Temporarily
Restricted
Net Assets
$ 161,000
6,000
_______
$ 167,000
( 65,000)
$ 102,000
$102,000
Permanently
Restricted
Net Assets
________
________
________
-0-
400,000
100,000
$300,000
$537,000
$202,000
$300,000
46. (continued)
b.
18-29
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Education.
WATSON FOUNDATION
STATEMENT OF FINANCIAL POSITION
December 31, 2015
ASSETS
Cash
Contributions receivable (net)
Investments
Land, buildings, and equipment (net)
Total assets
$ 254,000
275,000
300,000
660,000
1,489,000
LIABILITIES
Notes payable
NET ASSETS
- Unrestricted
- Temporarily restricted
- Permanently restricted
450,000
$537,000
202,000
300,000
$1,039,000
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18-31
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48. (10 minutes) (Adjusting totals for incorrectly reported student tuition)
a. The tuition was properly recorded as revenue. However, the financial aid
figure should have been a direct reduction to the tuition revenue rather
than a separate expense. In either case, the aid reduces unrestricted net
assets so the $400,000 total computed at the end of the year is correct.
b. As indicated in (a), the financial aid should not have been an expense but,
rather, a reduction in the tuition revenue. Removing the $140,000 from the
18-32
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Education.
53. (10 minutes) (Reporting a gift that must be transferred to another party)
a. Because the donor can take the money back, the gift is still under the
control of the donor. Consequently, the not-for-profit entity should have
recorded a liability to the donor until a final resolution takes place.
Instead, the charity recorded contributed support which served to
increase Unrestricted Net Assets. That $40,000 should be removed so that
Unrestricted Net Assets are $360,000 and not $400,000.
b. The issue in this problem is about whether contributed service or a
liability should be reported by the entity. The total amount reported as
assets is not in question and is, thus, correctly stated at $900,000.
54. (15 minutes) (Handling of various events by two different charities)
a. Charity A debits repair expense and credits contributed support. These
two changes offset so that unrestricted net assets are not impacted.
18-34
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Education.
Charity B makes no entry at all so that unrestricted net assets are not
impacted. After this reporting, the two charities report the same amount
of unrestricted net assets.
b. Charity A will report the investment income as an increase in unrestricted
net assets and then report salary expense for the same amount. These
two changes offset so that unrestricted net assets are not impacted.
Charity B records the salary expense and then records an increase in
unrestricted net assets because the restricted balance has been released.
These two changes cancel out so that unrestricted net assets are not
impacted. After this reporting, the two charities report the same amount
of unrestricted net assets.
c. The only difference here between Charity A and Charity B is in the
handling of the excess $20,000 acquisition value. Charity A records this
amount as goodwill because the acquired charity gains a significant
amount of its support from exchange transactions. Charity B records this
excess as a reduction in net assets because the acquired charity gets
most of its resources from donations. Because of this reduction, total
unrestricted net assets will be $20,000 lower for Charity B.
d. Charity A records the $100,000 as patient service revenue and then writes
the amount off as uncollectible. The provision for bad debts is a direct
reduction in patient service revenues and not an expense. Charity B
simply records the $100,000 from the beginning because of a lack of any
intention to collect. In either approach, patient service revenue is
reduced by $100,000. The new entities have the same amount of net
patient service revenues.
e. Charity A reports the entire $50 per cake as earned revenue. Charity B
reports $30 per cake as earned revenue and $20 per cake as contributed
support. In both cases, unrestricted net assets are increased by $50 per
cake. The two entities will report the same amount of unrestricted net
assets.
Develop Your Skills
Research Case 1
This assignment is an excellent way to demonstrate the wealth of information
available on the Internet about charities and other not-for-profit entities. Many
individuals want to be generous and help entities that deserve assistance.
Determining whether a specific entity is truly worthy of support is not necessarily
easy. Every charity will claim that it is effectively helping to improve some
element of society that is in need.
18-35
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Obviously, the information that a student finds at this website depends on the
specific charities that are examined. However, some of the information that is
normally available includes:
the entitys stated purpose,
year it was started,
website address,
the existence of any affiliated organizations,
whether this entity has met all of the standards of the group that created
the website and, if not, what was the problem,
a discussion of the charitys programs along with the program expenses,
identification of the chief executive officer (along with compensation),
number of individuals on the board and the number of staff members
working in the entity,
methods used for fundraising,
tax status,
sources of funding, including dollar amounts
From this type of information, a student should be able to write a detailed
overview of the not-for-profit entity and its operations and finances.
Research Case 2
Charity Navigator provides a wealth of information about its methodology that
should help students understand how a charity can be evaluated.
The following outline of information was listed on this website at June 23, 2013,
under methodology:
Charity Navigator works to guide intelligent giving. Our goal is to help people
give to charity with confidence. At the same time, we aim to help charities by
shining lights on truly effective entities. In doing so, we believe we can help
ensure that charitable giving keeps pace with the growing need for charitable
programs.
Our approach to rating charities is driven by those two objectives: helping
givers and celebrating the work of charities. The pages listed below describe how
we select charities to evaluate, how we classify and rate them, and what givers
can conclude based on our ratings.
What Kind of Charities Do We Evaluate?
How Do We Classify Charities?
How Do We Rate Charities?
How Do We Rate Charities' Financial Health?
18-36
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Because of the sheer number and visibility, most not-for-profit entities that
students might research are likely to qualify as Section 501(c)(3) charities.
The available salary information will give students the opportunity to discuss
whether officials of these entities are paid too much or too little. Do the amounts
seem reasonable in comparison to the amount of revenues generated or the
quantity of assets managed? What, for example, would the president of a
comparable-sized for-profit business make in salary and other compensation?
Throughout the chapter, mention was made of the statement of functional
expenses and the amount expended by an entity for program service expenses.
One possibility is to make a list in class of a number of well known charities and
compare their ratio of program service expenses to total expenses just to see the
range present.
Another exercise that can be done is to simply list on the classroom board the
types of information that the students uncover in the Form 990. What data seems
most important and why include each of these items?
Research Case 4
Students often have trouble envisioning the amount of evolution that can take
place in accounting and financial reporting. By comparing the 1987 financial
statements for Georgetown University to the current statements, students should
note how much change has taken place. Here are just a few of the more obvious
examples that students might list.
--The influence of government accounting in 1987 is obvious. These statements
resemble fund financial statements for the Governmental Funds of a state or local
government more than they resemble the current financial statements of a private
not-for-profit entity.
--Instead of a statement of activities, the university reports a statement of
changes in fund balance.
--The statements have multiple columns that include Current Funds, Loan Funds,
and Plant Funds.
--Current funds are separated into unrestricted and restricted but the type of
restriction (temporarily restricted or permanently restricted) is not evident.
--Expenditures are listed rather than expenses.
--Scholarships and fellowships are listed as expenditures and not as reductions
in tuition revenue.
--Transfers between funds are listed.
--There is no statement of cash flows.
Analysis Case 1
18-38
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$278,721,000
(420,451,000)
$(141,730,000)
Many students feel that, because of the high amounts being charged, colleges
and universities should be making a great profit from tuition. Depending on how
education costs are defined, most schools will show a monetary loss (and often a
considerable loss) from the process of educating students. This is one
computation that can really interest a college student.
Communication Case
Under each principle listed for Strong Financial Oversight, the Core Concepts will
include a considerable amount of practical guidance for the accountant of a
private not-for-profit entity. Students will already expect some of these
recommendations based on their education and experiences but much of it may
be new to them. What they focus on will depend on their personal interests.
Here are the Core Concepts for financial records:
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