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.
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 entity’s 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-for-profit 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.
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.
Answers to Discussion Questions
Are Two Sets of GAAP Really Needed for Colleges and Universities?
Over the years, a number of differences have appeared between the accounting for public colleges and universities and for those that are private. GASB holds authority over the reporting of public schools whereas FASB has authority over private educational institutions. Consequently, GASB statements do not apply to private schools and FASB Statements do not apply to pubic schools unless specifically made applicable by GASB. For this reason, FASB pronouncements on depreciation, pledges, contributions, and financial statement format for not-for-private entities do not affect public schools until and unless so stated by GASB. Because of this division of responsibility, the financial statements for these two types of schools have developed independently. GASB states that public schools must follow the guidelines of GASB 34 which created appropriate financial statements for state and local governments. However, these guidelines are not as radically different from private schools as might be imagined. Public colleges and universities are allowed to identify themselves as solely Enterprise Funds if they meet the required criteria. If this decision is made, the school need report only fund financial statements as would be produced by a proprietary fund. These statements have a definite resemblance to the statements prepared by private schools.
However, important distinctions do continue to exist. Students can be asked to address the question of whether a public and a private school need to have comparable financial
statements. Net income is not an issue, rather the sources and utilization of resources is usually emphasized. Is the adoption of a single set of generally accepted accounting principles necessarily essential? Will a decision-maker care if the University of North Carolina at Chapel Hill (a public school) has one statement format while Duke University (a private school) has another? Should the financial statements for the College of William and Mary (a public school) reflect the same reporting as the University of Richmond (a private school)?
This controversy leads to the important question of user needs. Why does a company or individual look at the financial statements of a college or university? Donors might have one
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.
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 entity’s 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 entity’s 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
statement provides a simple way of evaluating one not-for-profit entity in comparison to another.
9. When a donor conveys a gift to a private not-for-profit entity (such as the United Way) that must be conveyed to a separate beneficiary, a question arises as to the recording of the expense and the contribution. Under normal circumstances, the original donor records an expense at the time of the conveyance while the charity reports both an asset and a liability until the gift can be conveyed to the beneficiary. At the same time, the eventual beneficiary should record a receivable and an increase in net assets because action has been taken that will lead to the receipt of this gift. In this way, the entity that initially collected and then conveyed the gift recorded neither expense nor an increase in net assets because the resources cannot really be used. They simply pass through to the beneficiary.
Other possibilities do exist if the donor has given the initial charity variance powers that allow for a possible change in beneficiaries.
10. If a donor makes a contribution to a charity for conveyance to a separate beneficiary but can still revoke or redirect the gift before it is made, the donor records a receivable (rather than an expense) until the gift is actually transferred to the beneficiary. At that point, the receivable is reclassified as an expense. The charity initially receiving the gift shows a liability but, in this situation, the balance is directed back to the donor and not to the beneficiary. Because the beneficiary is not completely certain that the gift will be received, no recording is made until the time of receipt. The donor has retained a significant degree of control which impacts the method by which the gift is reported.
11. If a donor makes a contribution to a charity for conveyance to a separate beneficiary but grants it variance powers to change the identity of the beneficiary, the donor reports an expense immediately. Because control of the gift now lies with the charity, that party should record contribution revenue instead of a liability. The beneficiary makes no entry until the gift is received because of the uncertainty involved. The identity of the ultimate recipient may still change. Here, the charity initially receiving the gift records both revenue and, eventually, an expense for the contribution even though it was not the original donor. 12. The value of donated services is recognized by a private not-for-profit entity if the service
(a) creates or enhances a nonfinancial asset (such as adding a room to a building) or (b) requires a specialized skill possessed by the donor that would have been purchased by the organization except for the gift. An example of this second criterion is the donation of medical services by a surgeon to a children’s hospital.
If the service is donated by an affiliated entity, recognition is still necessary based usually on the cost paid to those workers.
13. Except in specified situations, the costs of a direct mailing that contains a solicitation for funds is classified entirely as a fundraising (supporting services) expense. However, within certain guidelines, these costs can be allocated in a logical manner between supporting services and program services. Allocation becomes necessary when the mailing has a specific call for action that would have been made even without the fundraising solicitation. This call for action must further the mission of the entity and the appeal cannot be made purely to potential donors.
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).
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)
3. B (Private NFPs report depreciation expense. A public university is normally reported as an Enterprise Fund. Enterprise Funds also record depreciation expense.)
4. B (Permanently restricted net assets have increased by only $120,000.)
5. B (Because the donor continues to have control, an asset [a receivable] will be reported until the gift is conveyed to Charity Two. As a result of this
uncertainty, Charity Two reports nothing until the money is actually received.)
6. B (For private schools, financial aid is shown as a direct reduction to the tuition revenue so that revenues and support here should total only $780,000.)
7. C (The work of the librarian does not enhance a nonfinancial asset nor does it require a specialized skill that would be purchased if not donated.)
8. D (If the other information that is included contains a call for a specific action that will help accomplish the mission of the charity and if the mailing is not directed solely to potential donors, a portion of the costs can be allocated to program service expenses. Otherwise, all of the cost is assigned to supporting services.)
9. A (In its original standards for not-for-profit entities, FASB wanted to get away from financial reporting based on fund accounting. The statements were designed to provide information about the private not-for-profit entity as a whole.)
10.C (The money to be used for the building is temporarily restricted for that purpose whereas the other $2 million is permanently restricted so that only the subsequent income earned can be used.)
11. C (Although an investment was sold to generate this cash, that asset was received from a donor and was liquidated almost immediately upon receipt. FASB has held that this is an operating activity cash inflow.
12. C (Because the accountant has a specialized skill that would otherwise have to be acquired, the donated service is reported. The amount paid by the affiliated entity is used for recording purpose since it mirrors fair value here.)
13. A (Patient service revenue is reduced by any charity care services. That amount is not recorded because the entity does not expect to be paid. In addition, a direct reduction is shown for the provision for doubtful
accounts. Thus, net patient service revenue is $1 million less $94,000 and $200,000 or $706,000.)
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 BC’s land plus the $500,000 book value for OP’s 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
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 donor’s 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
Donated services (not replacing salaried workers) = not recorded Interest income = revenue is an increase in unrestricted net assets
Charges to patients = increase in unrestricted net assets shown as net patient service revenues
Charity care = not recorded if the entity has no intention of seeking collection; if an amount has been recorded, it must be removed from the receivable and the revenue.
Provision for bad debts = amount is anticipated and this provision for bad debts is reported as a direct reduction in patient service revenues to arrive at net patient service revenues.
37. (15 Minutes) (Series of questions about the reporting of health care entities) a. A third-party payor is an entity (such as Medicare or an insurance company) that pays a portion, or all, of a patient's medical expenses. They are common due to the extremely high cost of medical care. Because of their need for accurate financial information, such third party payors have exerted pressure on health care entities over the decades to develop adequate accounting principles and reliable accounting systems.
b. A contractual adjustment is a reduction to patient service revenues created when a lesser amount is paid by a third-party payor than the billed amount but is still accepted as payment in full by a health care entity. These outside parties often establish contractual arrangements whereby the health care entity agrees to accept a lower amount for a service if the third party determines the figure to be reasonable in that particular area. These contractual adjustments create an accounting problem for the health care entity because the amount that eventually will be collected is not always known. Thus, the entity recognizes the full amount of the invoice as patient service revenue at the time the service is performed. The entity then estimates and establishes an offsetting Contractual Adjustment account to reduce the net reported revenue to the amount anticipated as being collected.
c. At the time that materials are donated to a health care entity (or any private not-for-profit entity), the asset is recorded at fair value. Because of the donation, the contribution is recognized as an increase in unrestricted net assets. If the asset has a finite life, officials can assume a time restriction on the use of the asset so that the contribution is reported initially as an increase in temporarily restricted net assets. An amount is also reclassified to
unrestricted net assets each period equal to depreciation expense.
Donated services are recorded as a contribution increasing unrestricted net assets and as salary expense also within unrestricted net assets. FASB
requires private not-for-profit entities to recognize donated services but only if they (a) enhance nonfinancial assets or (b) require specialized skills, are provided by individuals possessing those skills, and would need to be purchased if not provided by donation. If the donated service enhances a
nonfinancial asset, an increase in the asset’s reported balance is recognized rather than as salary expense.
38.(6 Minutes) (Reporting of various accounts by a not-for-profit entity)
Only $7.6 million is reported as patient service revenues. Charity care of $1.4 million is not recorded because no attempt at collection is anticipated. Then, the $800,000 contractual adjustment is netted with the revenue to leave the hospital with a net patient service revenue figure to report of $6.8 million. The supplies are recorded at their $4,000 value with an offsetting increase in unrestricted net assets as a result of the contribution. As the supplies are used, the $4,000 asset will be reclassified as an expense.
39. a). (8 Minutes) (Recording donations by a voluntary health and welfare entity)
Pledges ... $600,000
Anticipated Amount Deemed to be Uncollectible (15%) (90,000 )
Net Pledge Balance... $510,000 Increase in Unrestricted Net Assets in 2015—
Contributed Support (60% of above)... $306,000
Increase in Temporarily Restricted Net Assets in
2015—Contributed Support (40% of above)... $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
Unrestricted
Net Assets Temporarily RestrictedNet Assets Permanently RestrictedNet Assets Public Support a. Contributions $210,000 $78,000 b. Contribution— Interest 3,000 Revenue c. Membership dues 30,000 d. Investment income 3,900 9,100 e.
Net assets released from
restriction 72,000 (72,000)
Total Public Support and
Expenses
Program service expenses —Cure disease
f. Salaries (26,500)
g. Depreciation (16,000)
h. Supplies (93,000)
Total (135,500)
Supporting service expenses – General and administrative
i. Salaries (32,000) j. Depreciation (2,000) Total (34,000) – Fundraising k. Salaries (26,500) l. Advertising (2,000) m. Depreciation (2,000) Total (30,500) Total Expenses (200,000)
Change in Net Assets $115,900 $18,100
-0-Net Assets - Beginning
of Year 400,000 200,000 $100,000
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.
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 $1,099,000 Liabilities e. Salaries Payable $5,000 f. Notes Payable 250,000
g. Donated Amount Due to Separate
Entity 10,000 $265,000
Net Assets (see Statement of Activities)
Unrestricted $515,900
Temporarily Restricted 218,100
Permanently Restricted 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.
41.(50 Minutes) (Effect of various transactions on unrestricted and restricted net assets) a. Investments—Internally Restricted ... 160,000 Cash... 160,000 b. Cash... 80,000 Contributed Support—
Permanently Restricted Net Assets ... 80,000
c. Inventory of Medicines... 25,000
Cash... 25,000 Reclassification—Temporarily
Restricted Net Assets... 25,000 Reclassification—Unrestricted
Net Assets... 25,000
d. Accounts Receivable—Patients... 120,000
Accounts receivable—Third-Party
Payors... 480,000
Patient service revenues... 600,000
e. Depreciation Expense... 38,000
Accumulated Depreciation... 38,000
f. Cash... 15,000 Interest Revenue—
Unrestricted Net Assets (internally restricted) 15,000
g. Provision for Bad Debts... 20,000 Allowance for Uncollectible
Accounts... 20,000
Contractual Adjustment... 30,000
41.(continued)
h. Supplies Expense ... 25,000
Inventory of Medicines... 25,000
i. Cash ... 172,000
Investments—Internally Restricted... 160,000
Gain on Sale of Investments—Unrestricted
Net Assets... 12,000
Equipment... 212,000
Cash ($172,000 + $15,000 + $25,000)... 212,000
Reclassification—Temporarily
Restricted Net Assets... 25,000 Reclassification—Unrestricted
Net Assets... 25,000
j. Cash... 12,600
Pledges Receivable (present value)... 98,000
Allowance for Uncollectible Pledges... 9,000
Contributed Support—Unrestricted
Net Assets... 12,600
Contributed Support—Temporarily
41. (continued)
Calculation of Changes in Net Assets
Unrestricted Temporarily Restricted Permanently Restricted
Net Assets Net Assets Net Assets
a. No change b. Donation— Income for Salaries 80,000 c. Stipulation Met—Reclass-ification 25,000 (25,000) d. Patient Services 600,000 e. Depreciation (38,000) f. Interest 15,000 g. Bad Debts (20,000) Contractual Adjustment (30,000) h. Supplies Expense (25,000) i. Gain on Investments 12,000 Stipulation Met—Reclas-sification 25,000 (25,000) j. Pledges 12,600 89,000 Increase (Decrease) In Net Assets 576,600 39,000 80,000
42. (70 minutes) (Produce journal entries for a private university as well as a statement of activities) a. Tuition Receivable 1,200,000 Tuition Revenues 1,200,000 b. Investments 300,000 Contributions—Permanently
Restricted Net Assets 300,000 c. Cash 700,000
Contributions—Temporarily
Restricted Net Assets 700,000
d. Scholarships—Financial Aid 100,000 Tuition Receivable 100,000 e. Salary Expenses 310,000 Cash 310,000 f. Salary Expense 80,000 Contributed Support—
Unrestricted Net Assets 80,000
g. Equipment 200,000
Cash 200,000 Temporarily Restricted Net Assets—
Reclassification 200,000
Unrestricted Net Assets—
Reclassification 200,000
h. Investments 30,000
Unrealized Gain on Investments—
Permanently Restricted Net Assets 30,000 i. Cash 9,000 Dividend Revenue—Unrestricted Net Assets 9,000 j. Depreciation Expense 32,000 Accumulated Depreciation 32,000 k. Cash—Internally Restricted 100,000 Cash 100,000 42. (continued) l. Pledge Receivable 7,000
Contribution—Temporarily
Restricted Net Assets 7,000 m. No entry because of choice made by officials
n. Utilities and Other Expenses 212,000
Cash 212,000 o. No entry—does not require a specialized skill.
42. (continued)
University of Danville Statement of Activities
Unrestricted Temporarily Permanently Total Net Restricted Restricted
Assets Net Assets Net Assets Revenues and Gains
-Tuition 1,200,000 -Scholarships (100,000) 1,100,000 1,100,000 -Unrealized Gain on Investments 30,000 30,000 -Dividend Revenue 9,000 9,000 Contributions -Cash and Other
Assets 707,000 300,000 1,007,000
-Services 80,000 80,000
Total Revenues, Gains,
And Contributions 1,189,000 707,000 330,000 2,226,000 Net Assets Released
From Restriction 200,000 (200,000 )
Totals 1,389,000 507,000 330,000 2,226,000 Operating Expenses
-Salaries 390,000 390,000 -Depreciation 32,000 32,000 -Utilities and Other
Expenses 212,000 212,000
Total Expenses 634,000 634,000
Increase in Net Assets 755,000 507,000 330,000 1,592,000 Net Assets—Beginning
Of Year 400,000 200,000 100,000 700,000 Net Assets—End of
Year 1,155,000 707,000 430,000 2,292,000
43.(30 Minutes) (Series of questions about private not-for-profit entities)
a. Many private non-for-profit entities depend heavily on gifts and grants from outside parties. An earning process is not present in connection with such conveyances. Asset inflows are simply created by donations. Such amounts are reported as public (or contributed) support. These same entities, however, do sometimes earn (in an accounting sense) some of the funds that are
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 entity’s 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 entity’s 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-for-profit 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
educational expenses (a program service cost) and fundraising (a supporting service cost). Some entities took advantage of this rule. They included
educational materials with their fundraising appeals because they could allocate part of the mailing and other distribution costs to program services which made their statements look like these entities were spending more to meet their goals. In 1998, the AICPA issued its Statement of Position 98-2 “Accounting for Costs of Activities of Not-for-Profit Organizations and State and Local Governmental Entities That Include Fund-Raising” which is now part of the FASB Accounting Standards Codification. This rule stated that direct mailing costs should be assigned entirely to fundraising costs unless a specific call for action was being included that was not limited to potential donors. This call for action had to be one that would further the mission of the not-for-profit. If these requirements were met, a logical portion of the direct mailing costs could be assigned to program service expenses. Otherwise, the entire cost is included within fundraising.
g. Donated materials are normally reported as assets at their fair value
accompanied by an increase in unrestricted net assets (see answer [c] above). However, the recording of art works, historical treasures, museum pieces, and the like is optional. An item qualifies for such treatment if (1) it is part of a collection for public exhibition, education, or research, (2) it is protected and preserved, and (3) if sold, the money received must be used to acquire other collection items. If these criteria are all met, no recording is required
(although recording is allowed).
44. (25 Minutes) (Determine impact of various transactions on a private college.) (1)---False. The January 1, Year 1, restriction is an internal action and, therefore, causes no changes in the amount of unrestricted net assets. Such changes can only be created by external donors.
(2)---True. The stipulation of the April 1, Year 1, gift is that only subsequent cash income can be used for the designated purpose. Therefore, changes in value are shown as adjustments to the permanently restricted net assets. The interest income earned during the year is temporarily restricted
(3)---True. As indicated in (2), the donor has indicated that only cash income can be used for the football stadium. The change in value increases (or decreases) the amount held as permanently restricted net assets.
(4)---True. The school has properly spent the $500,000 earned on the donated investments. The school has not set a policy that assumes a time restriction on the use of this stadium. Therefore, the reclassification to unrestricted net assets is made immediately at the time of proper expenditure. Spending of the board-designated $1.9 million does not change the amount of net unrestricted assets— just the composition.
(5)---False. Depreciation expense is appropriate for all long-lived assets with a finite life regardless of the policy of the school. A time restriction indicates when any related donations for this project are released from restriction.
(6)---False. This is the same answer as in (5). Depreciation expense is
appropriate for all long-lived assets with a finite life regardless of the policy of the school about use of the property.
(7)---True. The acquisition of the football stadium seat has two effects. Because the value of that seat for watching football games is $12,000, the school should recognize that amount as revenue. Dr. Johnson paid an extra $18,000, apparently as a gift to the school.
(8)---True. This answer is the same as in (7). Dr. Johnson paid an extra $18,000, apparently as a gift to the school.
(9)---True. These donated services meet the requirement for being reported so that contributed service support as well as a salary expense are recognized for the $14,000 value.
(10)---False. Based on the information given, both the contributed support and the expense must be reported. “Might” implies an option which is not available for this type of donation. If a donated service meets the criteria, it is reported. (11)---False. This answer is the same as in (10). Both the contributed support and the expense must be reported. Unrestricted net assets both go up (for the contribution support) and go down (for the salary expense).
(12)---False. If this painting does not qualify as a work of art, the school must record the asset at $30,000 along with a contribution of that same amount.
However, if the painting qualifies as a work of art, the school can either make this entry or simply make no entry. Therefore, under one set of circumstances,
recognition of a contribution is not required.
(13)---False. As in answer (12), the handling depends on whether this painting qualifies as a work of art. However, if the value of the donated gift is $30,000, no situation can exist where the school is not allowed to recognize revenue.
45. (30 Minutes) (Determine changes in net asset balances for several different types of transactions)
Part (1)
--Unrestricted Net Assets – No net change. When the $22,000 in designated funds is spent as designated, a reclassification of that amount is made into Unrestricted Net Assets. At that time, though, a faculty salary expense of the same amount is also recognized. The two amounts balance out for no net impact on Unrestricted Net Assets.
--Temporarily Restricted Net Assets – Category increases by $9,000. The $31,000 of investment income increases this category because its use is restricted. However, it is then reduced by the $22,000 reclassified into Unrestricted Net Assets because that amount is properly spent.
--Permanently Restricted Net Assets – Category increases by $400,000. The current donation increases this category. Because subsequent income must be spent for salaries, it increases Temporarily Restricted Net Assets.
Part (2)
--Unrestricted Net Assets – No net change. Because of the restriction on the use of the machine for this period of time, the $200,000 gift is initially reported as an increase in Temporarily Restricted Net Assets. At the end of the year, the asset balance will be reduced by $20,000 in depreciation. Thus, a $20,000 reclassification moves $20,000 from Temporarily Restricted Net Assets to
Unrestricted Net Assets. That $20,000 increase will exactly offset the $20,000 in depreciation expense also recognized within Unrestricted Net Assets.
--Temporarily Restricted Net Assets – Category Increases by $180,000. Because of the restriction on the time use of the asset, the $200,000 is initially recorded in Temporarily Restricted Net Assets. The $20,000 reclassification discussed above reduces that net increase to $180,000.
--Operating Expenses – Category increases by the $20,000 in depreciation expense for the year.
Part (3)
--Unrestricted Net Assets – Category increases by $1.6 million. The tuition revenue of $2 milion is reduced by the $700,000 in financial aid for a net increase of $1.3 million. However, because $300,000 of previously restricted net assets was used here, a reclassification of that amount from Temporarily Restricted Net Assets to Unrestricted Net Assets causes the overall increase to be $1.6 million. --Operating Expenses – There are no operating expenses. Financial aid is a reduction to tuition revenue and not an operating expense.
--Temporarily Restricted Net Assets – Category decreases by $300,000. Money that had previously been restricted was properly utilized. Thus, a reclassification of this amount is reported.
46. (65 Minutes) (Prepare financial statements for a private not-for-profit entity.) a. Entries for this not-for-profit entity are presented below. The numbers in
parenthesis indicate account totals at that point in time. This method is used as an easy way to monitor account balances.
Contributions receivable... 20,000 (220,000)
Contributed support—interest--unrestricted
net assets... 20,000 ( 20,000)
Cash ... 100,000 (200,000)
Allowance for uncollectible pledges... 4,000
Cash ... 180,000 (380,000) Contributed support—unrestricted
net assets... 180,000 (180,000)
Salary expense... 90,000 ( 90,000)
Cash ... 90,000 (290,000)
Reclassification - temporarily restricted
net assets... 15,000 ( 15,000)
Reclassification - unrestricted net
assets... 15,000 ( 15,000)
Cash ... 12,000 (302,000)
Contributed support—temporarily restricted 12,000 ( 12,000)
(To record gift to go to a specified beneficiary. Entity records this contribution because it holds variance powers.)
Land, buildings, and equipment ... 500,000 (700,000)
Note payable... 450,000 (450,000)
Cash ... 50,000 (252,000)
Reclassification - temporarily restricted
net assets... 50,000 ( 65,000)
Reclassification - unrestricted net
assets... 50,000 ( 65,000)
(To record reclassification of restricted amount properly spent.)
46. (continued)
Cash ... 30,000 (282,000)
Membership revenue—unrestricted net assets 30,000 ( 30,000)
(Membership dues are listed as revenues and not as contributions because members receive substantial benefits.)
Cash... 30,000 (312,000)
Investment revenue—unrestricted net assets 30,000 ( 30,000)
(Income is earned on permanently restricted net assets but use of the income is unrestricted.)
Rent expense... 12,000 ( 12,000)
Advertising expense ... 15,000 ( 15,000)
Utilities expense ... 16,000 ( 16,000)
Contributions receivable... 149,000 (269,000) Contributed support—temporarily restricted
net assets ... 149,000 (161,000)
(Although pledge is unrestricted, it will not be collected for five years and, therefore, the proceeds are viewed as temporarily restricted.)
Contributions receivable... 6,000 (275,000)
Contributed support—interest--temporarily
restricted net assets ... 6,000 ( 6,000)
Depreciation expense ... 40,000 ( 40,000)
Land, buildings, and equipment ... 40,000 (660,000)
Interest expense... 15,000 ( 15,000)
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
Temporarily Permanently
Unrestricted Restricted Restricted
Net Assets Net Assets Net Assets
Contributed support $ 180,000 $ 161,000
Contributions -- interest 20,000 6,000
Investment revenue 30,000
Membership revenue 30,000 _______ ________
Total support and revenues $ 260,000 $ 167,000
Net assets released from
restriction 65,000 ( 65,000) ________
Total support, revenues, and net
Assets released from restriction $ 325,000 $ 102,000 ________
Expenses:
General and administrative
—Rent $ (12,000) —Salary (90,000) —Advertising (15,000) —Utilities (16,000) —Depreciation (40,000) —Interest (15,000) Total expenses $(188,000)
Excess of total support, revenues and net assets released from
restriction over expenses $137,000 $102,000
-0-Net assets at beginning of year 400,000 100,000 $300,000
Net assets at end of year $537,000 $202,000 $300,000
46. (continued) b.
WATSON FOUNDATION
STATEMENT OF FINANCIAL POSITION December 31, 2015
ASSETS
Cash $ 254,000
Contributions receivable (net) 275,000
Investments 300,000
Land, buildings, and equipment (net) 660,000
Total assets 1,489,000 LIABILITIES Notes payable 450,000 NET ASSETS - Unrestricted $537,000 - Temporarily restricted 202,000 - Permanently restricted 300,000 $1,039,000
47. (40 minutes) (Accounting for mergers and acquisitions)
a. In an acquisition, the assets and liabilities of the acquired entity are included at fair value. Thus, the buildings and equipment reported by Swim For Safety must be increased by $140,000 from $590,000 to
$730,000. Because the acquisition value ($1 million) exceeds the total fair value recognized for the individual assets and liabilities ($1,470,000 plus $140,000 less $690,000 or $920,000), the excess ($80,000 in this case) is reported as goodwill. Goodwill is reported because Swim For Safety is primarily supported by contributions and investment income.
Cash held by Help & Save must be reduced by the $1 million payment as must the balance shown for its unrestricted net assets.
The increases in the buildings & equipment ($140,000) as well as the increase in goodwill ($80,000) are reflected by increases in unrestricted net assets since no external restriction is in place for these assets.
Balances To Be Reported:
--Cash - $1,100,000 ($1,600,000 less $1,000,000 plus $500,000) --Contributions receivable (net) - $280,000 ($70,000 plus $210,000) --Investments - $470,000 ($300,000 plus $170,000)
--Buildings & equipment - $1,430,000 ($700,000 plus $730,000) 47. (continued)
--Goodwill - $80,000 (above)
--Total assets - $3,360,000 (summation)
