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Chapter 22

ACCOUNTING FOR NOT-FOR_PROFIT ORGANIZATIONS


Questions
1

The financial statements required for nongovernmental not-for-profit entities include a statement of
financial position, a statement of activities, and a cash flow statement. Voluntary health and welfare
organizations also provide a statement of functional expenses.

Each hospital, college, and voluntary health and welfare organization (and other not-for-profit
organizations as well) must be evaluated to determine whether it meets the definition of a government in
the authoritative literature. Those that meet the definition of a government must apply the government
GAAP hierarchy. GASB standards are the most authoritative guidance for these entities. All other entities
are to apply FASB standards.

The AICPA guides became nonauthoritative GAAP in 2009 with changes at both FASB and GASB. FASB
162 issued in 2008 specified the hierarchy of GAAP for nongovernmental organizations to be moved from
SAS 69 (i.e. the auditing standards) to FASB (i.e. the accounting standards). Similarly, GASB 55 issued in
2009 specified the hierarchy of GAAP for governmental entities to be moved from SAS 69 to GASB.
Subsequently, FASB 168 issued in 2009 the last FASB Statement issued created the codification of
GAAP in the Accounting Standards Codification as the sole authoritative source of GAAP for
nongovernmental organizations. FASB now has two categories, the ASC which is authoritative and
everything else is non-authoritative. GASB 55 keeps the prior hierarchy whereby the AICPA audit and
accounting guides are level b just beneath GASB Statements and Interpretations.

A conditional promise to give depends on the occurrence of a specified future and uncertain event to bind
the promisor. An unconditional promise to give depends only on the passage of time or demand by the
promisee for performance.
Organizations recognize conditional promises to give as contribution revenue and receivables when the
conditions are substantially met (in other words, when the conditional promise to give becomes
unconditional); however, they account for a conditional gift of cash or other asset that may have to be
returned to the donor if the condition is not met as a refundable advance (liability). Organizations
recognize unconditional promises to give as restricted or unrestricted contribution revenue and receivables
in the period in which the promise is received.

A donor-imposed condition provides that the donor will have his resources returned (or will be released
from the promise to give) if the condition is not met. A donor-imposed restriction only limits the purpose or
timing of use of the contributed assets.

Unconditional promises to give with payments due in the next period are reported as restricted support (net
of an appropriate allowance for uncollectible accounts) that increase temporarily restricted net assets, even
if the resources are not restricted for specific purposes.

When a time restriction is met, temporarily restricted net assets are reclassified as unrestricted net assets.
The entry includes a debit to temporarily restricted net assetsreclassifications out and a credit to
unrestricted net assetsreclassifications in. (Different account titles, such as amounts released from
restrictions, are permitted as well.)

Gifts in kind are reported as unrestricted support that increases unrestricted net assets if the not-for-profit
entity has discretion over the disposition of the resources and a fair value can be reasonably determined. If
fair value cannot be determined, the items are recorded as sales revenue when they are sold. If the not-for-

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22-2
profit entity has little or no discretion over disposition of the items, the gifts in kind should be accounted
for as agency transactions.
9

Program services of voluntary health and welfare organizations are expenses incurred in meeting the social
service objectives of the organization. Examples are research, public education, community services, and
patient services. Supporting services consist of the organizations administrative and fund-raising costs, and
expenses for these items are so classified in the statement of activities.

10

The statement of functional expenses for voluntary health and welfare organizations is intended to
reconcile the functional classification of expenses (which results in highly aggregated data) with basic
object-of-expenditure classifications that are less aggregated and easier for many users to understand.

11

Contributed services are recognized only if the services (a) create or enhance nonfinancial assets of the
organization or (b) require specialized skills, are provided by individuals possessing those skills, and would
typically need to be purchased if not provided by donation.

12

Charity care is excluded from both gross patient service revenue and from expense. The hospitals policy
for providing charity care and the level of charity care provided are disclosed in notes to the financial
statements.

13

Net patient service revenues of hospitals are measured by deducting courtesy allowances and contractual
adjustments from gross patient revenues. Uncollectible accounts expenses are not deducted in computing
net patient service revenues. Net patient service revenues are reported in the statement of activities.

14

The three major revenue groupings used by hospitals are patient service revenues, other operating revenue,
and nonoperating gains. Examples are:
Patient service revenuesroutine care, emergency room, recovery room, pharmacy
Other operating revenuestuition from educational programs, research grants for specific purposes, gift
shop sales
Nonoperating gainsunrestricted gifts, unrestricted endowment income, gain on sale of plant assets, rents
from property not used in hospital operations
(Premium fees also are significant for many hospitals today. They would be reported as a separate line item
under operating revenues.)

15

Both the provision for bad debts (other than for charity care, which is not recorded as revenue) and
depreciation are expenses of a hospital. Hospitals use full accrual accounting procedures.

16

FASB Statement No. 117 (now codified in FASB ASC 958) requires private not-for-profit universities to
provide a set of financial statements that includes a statement of financial position, statement of activities,
statement of cash flows, and accompanying notes. Governmental universities are considered specialpurpose governments under GASB Statements No. 34 and 35. Special-purpose governments with more
than one governmental program or both governmental and business-type activities present both
government-wide and fund financial statements, as well as the MD&A, notes, and required supplementary
information. Special-purpose governments with only one governmental program may combine fund and
government-wide statements, whereas those with only business-type activities should report only the
financial statements required for enterprise funds, as well as the MD&A, notes, and required supplementary
information.

17

Government colleges and universities no longer have the option of using the AICPA college guide;
however, many organizations may have retained AICPA model features for internal accounting and control
purposes.

18

Much guidance comes from the Financial Accounting and Reporting Manual, an accounting manual
prepared by the National Association of College and University Business Officers (NACUBO) which is
available as an online subscription service.

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22-3
GASB Statements No. 34 and 35 require special-purpose government with more than one governmental
program or both governmental and business-type activities to present both government-wide and fund
financial statements, as well as the MD&A, notes, and required supplementary information. Specialpurpose governments with only one governmental program may combine fund and government-wide
statements, whereas those with only business-type activities should report only the financial statements
required for enterprise funds, as well as the MD&A, notes and required supplementary information.
Functional classifications include the following:

Instruction. Expenses for the educational programs


Resource. Expenses to produce research outcome
Public Service. Expenses for activities to provide noninstructional services to external groups
Academic support. Expenses to provide support for instruction, research, and publications
Student Services. Amounts expended for admissions and registrar, and amounts expended for
students emotional, social, and physical well-being
Institutional support. Amounts expended for administration and the long-range planning of the
university
Operation and maintenance of plant. Expenses for operating and maintaining the physical plant
(net of amounts to auxiliary enterprises and university hospitals)
Student aid. Expenses from restricted or unrestricted funds in the form of grants, scholarships, or
fellowships to students.

21

Property, plant, and equipment acquired by a not-for-profit organization with unrestricted or restricted
resources may be recorded at acquisition as unrestricted or temporarily restricted. If temporarily restricted,
the assets are reclassified when depreciation is recognized.

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22-4
EXERCISES
E22-1
1
2
3
4
5

d
a
d
c
b

E22-2
1
2
3
4
5

b
a
d
b
c

E22-3
1
2
3
4
5

b
b
c
d
a

E22-4
1
2
3
4
5

a
b
a
a
c

E22-5
1
2
3
4
5

b
b
c
c
d

E22-6
1
2
3
4
5

b
a
a
c
b

E22-7
1
2
3
4
5

b
a
c
a
d

E22-8
Program services:
Education
Public Health
Research

$20,400
15,700
12,000

$48,100

Supporting services:
Fund raising
Management and general

$11,400
5,500

$16,900

E22-9
1) Contributions receivable
Allowance for uncollectible contributions
Unrestricted support contributions
Restricted support contributions
To record contribution revenues and an allowance for uncollectible accounts.

20,000
600
13,580
5,820

Contributions that are not due until the next period imply a time restriction unless the donor explicitly
stipulates that the pledge is for current expenditures. Thus, unrestricted net assets are increased by $13,580
and temporarily restricted net assets are increased by $5,820.
2) Cash

200
Restricted support contributions
To record a gift restricted to a special project. (Recall that some NFPs may record as unrestricted if the
restriction is met in the same period.)
Expenses community service [program services]
Cash
To record expenditures for restricted purpose.

200

200

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200

22-5
Temporarily restricted net assets reclassifications out
Unrestricted net assets reclassifications in
To record satisfaction of temporary restriction.
3) Equipment

200
200

6,000

Unrestricted support Contributions


To record receipt of donated equipment.
Depreciation expense community services
Accumulated depreciation equipment
To record depreciation expense for the year on unrestricted long-lived assets.

6,000

1,500
1,500

The organization may also adopt an accounting policy that implies a time restriction that expires over the
useful life of the donated asset. If the gift is reported as restricted support in temporarily restricted net
assets, depreciation is recorded as an expense in unrestricted net assets, which results in a reclassification
for the amount of the depreciation from temporarily restricted to unrestricted net assets.
4) Cash

8,000

Restricted support contributions


To record receipt of donation restricted to the purchase of a truck.
Accrued interest receivable
Restricted revenue investment income
To record accrual of interest on funds restricted for the purchase of a truck.

8,000

215
215

The contribution of cash restricted for long-lived asset purchases increased temporarily restricted net assets,
as did the donor-restricted investment income on those funds.
5) Accounts receivable
Unrestricted revenues tuition and fees
To record tuition and fees.

Tuition reduction: unrestrictedstudent aid


Accounts receivable
To record tuition reductions.
Expenseseducational and generalinstitutional support
Allowance for uncollectible accounts
To record allowance for uncollectible accounts.
6) Cash

735,000
735,000

65,000
65,000

7,350
7,350

3,000,000

Temporarily restricted contribution tobacco research


To record receipt of restricted grant.

3,000,000

Expenses tobacco research


Cash
To record expenses for tobacco research.

1,200,000

Temporarily restricted contribution tobacco research


Contribution (unrestricted)
To reclassify the contribution as unrestricted.

1,200,000

1,200,000

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1,200,000

22-6
PROBLEMS
P22-1
Voluntary Health and Welfare Organization gift
a
Cash
1
Unrestricted supportcontributions
To record cash contribution received.
b

Expenses (by function)


Cash
To record operating expenses paid.

Private University Gift


a
Cash
2

5,000,000
5,000,000

2,300,000
2,300,000

5,000,000
Restricted supportcontributions research
To record restricted cash gift received.

5,000,000

Expensesresearch
Cash
To record research expenses.

2,300,000

Temporarily restricted net assets reclassifications out


Unrestricted net assets reclassifications in
To record release of assets from temporary restrictions.

2,300,000

Local Hospital Gift


a
Cash
3

2,300,000

2,300,000

5,000,000
Restricted support contributions
To record cash gift restricted for capital additions.

5,000,000

Construction in progress
Cash
To record construction costs incurred.

2,300,000

Temporarily restricted net assets reclassifications out


Unrestricted net assets reclassifications in
To record release of assets from temporary restrictions.

2,300,000

2,300,000

2,300,000

P22-2
Payment of salaries
Expenses management and general
2,920
Expenses community service
11,680
Cash
To record payment of salaries allocated 20% to management and general services and 80% to
program services.
Donated services
Expenses management and general
Unrestricted support donated services
To record donated services.

14,600

900

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900

22-7
Donated facilities
Expenses management and general
600
Expenses community service
2,400
Unrestricted support donated facilities
To record allocation of donated facilities 20% to management and general and 80% to program
services.
Payment of utilities
Expenses management and general
360
Expenses community service
1,440
Cash
To record payment of utilities allocated 20% to management and general and 80% to program
services.
Purchase and use of supplies
Supplies inventory
Cash
To record purchase of supplies.

3,000

1,800

300
300

Expenses management and general


60
Expenses community service
240
Supplies inventory
To record allocation of supplies expense 20% to management and general and 80% to program
services.
Administration and other expenses
Expenses management and general
1,200
Expenses community service
4,800
Cash
To record payment of recordkeeping expenses allocated 20% to management and general and 80%
to program services.

300

6,000

Gifts in kind are reported as contributions since Share Shop has discretion over their distribution and a fair
value is determinable. When gifts in kind are distributed to recipients, they are recorded as program
expenses. If fair value cannot be determined, neither the contribution nor distribution would be recorded.
Inventory nonperishable food
Inventory household items
Unrestricted support donated assets
To record receipt of donated food and household items.

60,000
40,000

Expenses community service


Inventory nonperishable food
Inventory household items
To record distribution of food and household items to qualified recipients.

65,000

Cash contributions
Cash
Unrestricted support contributions
To record receipt of cash contributions.

100,000

45,000
20,000

10,000

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10,000

22-8
Unconditional promises to give (solution assumes all pledges were due in 2011)
Pledges receivable
Unrestricted support contributions
Allowance for uncollectible pledges
To record pledges received and 10% estimated uncollectible pledges.

20,000
18,000
2,000

Cash
15,000
Unrestricted support contributions
3,000
Allowance for uncollectible pledges
1,000
Contributions receivable
Temporarily restricted support contributions
To record receipt of cash, adjust the allowance account for the overstatement of uncollected
pledges, and reclassify uncollected support.
Grant
Grant receivable

15,000
4,000

25,000

Temporarily restricted support grant


To accrue grant from Town of North Ptarmigan due in 2012.

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25,000

22-9
P22-3
Hometown Memorial Hospital
Statement of Operations
For the year ended December 31, 2011
Unrestricted revenues, gains, and other support:
Net patient service revenues
($2,500,000 - $400,000 - $100,000)
Other operating revenues ($300,000 + $50,000)
Income from investment in affiliate
Investment income
Unrestricted contributions
Net assets released from restrictions for operating purposes
Total operating revenues, gains, and net assets
released from restrictions for operations
Expenses and Losses:
Nursing services
Other professional services
General services
Administrative services
Uncollectible accounts
Loss on sale of fixed assets
Depreciation
Total expenses and losses
Excess of revenues, gains, and other support over
expenses and losses
Net assets released from restrictions for acquisitions of
fixed assets
Increase in unrestricted net assets

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$2,000,000
350,000
80,000
270,000
200,000
80,000
2,980,000

1,000,000
500,000
290,000
310,000
150,000
50,000
200,000
2,500,000

480,000

97,000
$ 577,000

22-10
P22-4
Accounts receivable
Unrestricted revenues tuition and fees
To record tuition and fees.
Tuition reduction: unrestrictedstudent aid
Accounts receivable
To record tuition reductions.
Cash

2,000,000
2,000,000

120,000
120,000

1,100,000
Unrestricted revenues state appropriation
Unrestricted revenues local appropriation
To record governmental appropriations.

Cash

800,000
300,000

500,000
Revenue auxiliary operations
To record auxiliary revenues.

Expenses auxiliary operations


Cash
To record auxiliary expenses.
Cash

500,000

480,000
480,000

90,000

Unrestricted revenuescontributions
Temporarily restricted revenues contributions
To record contributions received.
Cash

20,000
70,000

380,000

Unrestricted revenuesgifts and grants


Temporarily restricted revenuesGifts and grants
To record gifts and grants received.
Expenses educational and general - instruction
Expenses educational and general - research
Expenses educational and general student services
Expenses educational and general operation of plant
Expenses educational and general student aid
Cash (or payables)
To record educational and general expenses.
Temporarily restricted net assets reclassifications out
Unrestricted net assets reclassifications in
To reclassify temporarily restricted assets (assumes all scholarships and research
were from temporarily restricted funds).

80,000
300,000

2,100,000
100,000
120,000
180,000
200,000
2,700,000

300,000

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300,000

22-11
Nongovernmental NFP College
Statement of Activities
for the year 200X
Revenues
Tuition and fees (net)

$1,880,000

State appropriations

1,100,000

Federal grants and contracts


Private grants and gifts

80,000

Endowment income

20,000

Sales and services of educational departments


Sales and services of auxiliary enterprises
Total current revenues

500,000
$3,580,000

Total net assets released from


restrictions for operations
Total revenues and reclassifications

300,000
$ 3,880,000

Expenses
Educational and general
Instruction

2,100,000

Research

100,000

Student services

120,000

Operation and maintenance


of plant

180,000

Student aid

200,000

Auxiliary operations
Total operating expenses
Net increase in unrestricted net assets

480,000
3,180,000
700,000

Changes in temporarily restricted net assets:


Federal grants and contracts
Private grants and gifts
Endowment income
Net assets released from restrictions*
Increase in temporarily restricted net assets
Change in net assets
Net assets, beginning
Net assets, ending

300,000
70,000
-300,000
70,000
770,000
0
$ 770,000

*assumes all scholarships and research were from temporarily restricted funds

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22-12
P22-5
Community Society
Statement of Activities
For the Year Ended December 31, 2011
Changes in Unrestricted Net Assets
Revenues and gains
Contributions
Membership dues
Investment income
Total revenue and gains
Net assets released from restrictions:
For research
For fixed assets
Increase in unrestricted net assets
Expenses:
Program Services:
Research
Education
Total Program Services
Supporting Services:
Management and general
Fund raising
Total Supporting Services
Total expenses
Net increase in unrestricted net assets
Changes in Temporarily Restricted Net Assets
Contributions ($438,000 + $425,000 - $16,000)
Investment income
Gain on sale of investments
Net assets released from restrictions
Decrease in temporarily restricted net assets
Changes in Permanently Restricted Net Assets
Contributions
Increase in permanently restricted net assets

$3,000,000
400,000
83,000
3,483,000
$ 500,000
3,789,000

4,289,000
7,772,000

2,300,000
300,000
2,600,000
117,000
223,000
340,000
2,940,000
4,832,000

847,000
22,500
5,000
(4,289,000)
(3,414,500)

37,000
37,000

Increase in net assets


Net assets, beginning
Net assets, ending

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1,454,500
5,475,000
$6,929,500

22-13
P22-6
1

Tuition and fees receivable


Revenues educational and general
To record tuition revenues.
Expenditures scholarships
Expenditures bad debts
Tuition and fees receivable
Allowance for uncollectible accounts
To record scholarships and estimated bad debts.
Cash

6,000,000
6,000,000

200,000
100,000
200,000
100,000

4,800,000
Tuition and fees receivable
To record collections of receivables.

Cash

4,800,000

800,000
Revenues sales and services of auxiliary enterprises
To record sales of bookstore.

800,000

Expenditures educational and general


Expenditures auxiliary enterprises
Cash
To record payroll.

2,430,000
170,000

Mortgage payable
Cash
To record mortgage payment.

1,000,000

2,600,000

1,000,000

Mortgage payable
Interest expense
Cash
To record debt service payment.

360,000
600,000

Cash
Temporarily restricted revenues contributions
To record restricted gift.

440,000

Expenditures instruction
Cash
To record expenditures for program.

237,000

Temporarily restricted net assets reclassifications out


Unrestricted net assetsreclassifications in
To reclassify revenues equal to qualifying expenditures.

237,000

Temporarily restricted net assets reclassifications out


Unrestricted net assetsreclassifications in
To reclassify revenues equal to qualifying expenditures.

44,000

Equipment

44,000

960,000

440,000

237,000

237,000

44,000

Cash
To record equipment purchased.

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44,000

22-14
P22-7
1

Temporarily restricted net assets reclassifications out


Unrestricted net assets reclassifications in
To record satisfaction of time restriction.

20,000

Pledges receivable
Cash
Allowance for uncollectible pledges
Unrestricted support contributions*
To record contributions.

65,000
35,000

3,250
96,750

To the extent that pledges are not collected by year end a time restriction will be implied. An adjusting
entry reducing unrestricted support and recording temporarily restricted support for the net realizable
value of the uncollected pledges will be required.

Inventory of materials
Unrestricted support donated materials
To record donations of food.

150,000

Expenses Program services


Inventory of materials
To record expenses for food used.

151,200

Inventory of supplies
Cash
To record purchases of supplies.

Expenses management and general


Expenses Program services*
Inventory of supplies
Cash
To record expenses incurred.
* ($8,000 + 70,000 + [27,000 5,000 account increase])
5

20,000

Pledges receivable
Allowance for uncollectible pledges
Temporarily restricted support contributions
To record restricted pledges.

150,000

151,200

27,000
27,000

10,000
100,000
22,000
88,000

300,000
15,000
285,000

Solution P22-8
Patient accounts receivable
Patient service revenuesunrestricted
To record patient service charges at established rates.

Contractual adjustments
Patient accounts receivable
To record contractual adjustments.
Bad debt expense
Allowance for uncollectible Patient accounts receivable
To establish an allowance for uncollectible receivables.

102,300
102,300

30,000
30,000

2,046

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2,046

22-15
2

Cash

54,000

Premium Revenue unrestricted


To record premium revenue from capitation agreements
3

Cash

54,000

16,000
Other operating revenue - unrestricted
To record pharmacy revenue.

16,000

Nursing services expense


Other professional services
General services
Fiscal services
Administrative services
Cash
To record salaries and wages.

35,000
11,000
10,000
2,000
20,000

Cash

12,000

78,000

Grant revenue - restricted


To record receipt of restricted grant funds.
6

Supplies inventory
Cash (or accounts payable)
To record the purchase of nursing supplies.
Supplies expense
Supplies inventory
To record the use of nursing supplies.

12,000

13,000
13,000

6,700

2011 Pearson Education, Inc. publishing as Prentice Hall

6,700