1

CPA FAR – STUDY UNIT 20

Not-for-Profit Accounting and Reporting
Core Concepts

1. Financial Statements
a. The net assets model is used. Net assets equal the excess or deficiency of assets over
liabilities.
1) The minimum required presentation reports amounts for (a) net assets without donor
restrictions, (b) net assets with donor restrictions, and (c) total assets.
2) A donor restriction may be temporary, such as using resources (a) in a later period,
(b) for a specific purpose, or (c) both. Donor restrictions also may be perpetual.
b. An NFP’s general-purpose financial statements are the statement of financial position,
statement of activities, and statement of cash flows.
1) A statement of financial position is equivalent to a for-profit entity’s balance sheet.
It presents information about assets, liabilities, net assets, and their relationships at a
moment in time.
2) A statement of activities is an operating statement equivalent to a for-profit entity’s
income statement. It presents changes in net assets and the classes of net assets,
including reclassifications.
3) An NFP’s statement of cash flows is similar to the statement reported by for-profit
entities.
c. Revenues result from contributions and exchange transactions. They are reported as
increases in net assets without donor restrictions unless the use of the assets received is
donor-restricted.
d. Most expenses are reported as decreases in net assets without donor restrictions.
1) A statement of activities or the notes must provide information about expenses
reported by functional classification, i.e., by major classes of program services
and supporting services. An analysis also must disaggregate functional expense
classifications by natural expense classifications.
2. Contributions
a. Contributions are one entity’s unconditional, voluntary, and nonreciprocal transfer of assets
to another entity. Assets include unconditional promises to give and donated services.
b. Contributions received ordinarily are accounted for at fair value as credits to revenues or
gains. Debits are to assets, liabilities, or expenses. The difference between the amount
ultimately received and the fair value is recognized as an adjustment of the original
contributions. Present value may be used to measure the fair value of an unconditional
promise to give cash.
c. Contributions made are recognized at fair value when made as expenses and as
decreases of assets or increases in liabilities.
d. An NFP distinguishes between (1) contributions with donor-imposed restrictions
and (2) contributions without restrictions. Donor-restricted support consists of
contribution revenues or gains that increase net assets with donor restrictions. A
contribution whose restrictions expire in the same period may be reported in net assets
without donor restrictions if the NFP (1) applies the policy consistently, (2) discloses the
policy, and (3) has a similar policy for investment gain and income.
e. Unconditional promises to give, with amounts due in future periods, are reported as
donor-restricted support unless the donor clearly intended support for the current period.

Copyright © 2017 Gleim Publications, Inc. All rights reserved. Duplication prohibited. Reward for information exposing violators. Contact copyright@gleim.com.
2 CPA FAR – Study Unit 20

3. Investments
a. Debt and equity securities received as contributions initially are measured at fair value.
Gains and losses, dividends, and interest are reported as changes in net assets without
donor restrictions unless they are donor-restricted or a law extends donor restrictions.
b. A donor-restricted endowment fund is created by a donor stipulation requiring a gift to be
invested for a specified period or in perpetuity. Classifying a donor-restricted endowment
fund depends on (1) the donor’s specific stipulation or (2) the applicable laws.
c. An underwater endowment fund has a reporting-date fair value less than the amount of
(1) the gift or (2) required by the donor or a law that extends donor restrictions.
4. Healthcare Entities (HCEs)
a. This study unit applies to healthcare entities (HCEs) organized as private for-profit
businesses or private not-for-profit entities.
b. The typical basic financial statements reported by a nongovernmental HCE are the
(1) statement of financial position, (2) statement of operations, (3) statement of changes in
net assets (or equity if for-profit), and (4) statement of cash flows.
c. Patient service revenues are recorded on an accrual basis at the provider’s established
rates, that is, at their gross amount.
1) Healthcare often is paid for by third-parties, e.g., insurers and the federal government.
Because their collection practices differ, the receivables are recorded separately.
2) An HCE establishes an allowance for uncollectibles in the same way as a for-profit
entity.
3) HCEs acknowledge that certain patients cannot be expected to pay. Charity care
amounts are not treated as receivables. At the time the service is rendered, they
are not expected to be paid. Thus, these amounts are reductions of revenue and
receivables.
4) HCEs do not expect to collect the full amount billed to third-party payors. However, the
accounting treatment is not the same. These reductions are the result of contracts
between the HCE and payors and reasonable estimates are possible.
d. Premium revenues are generated by agreements to provide healthcare rather than by
actually providing services.
e. Other revenues may include (1) donated medicine or supplies, (2) donated labor,
(3) providing educational programs, (4) proceeds from the sale of cafeteria meals and
guest trays, and (5) gifts and grants.
f. Revenues are reported on the statement of operations at their net amounts. The
components of net patient service revenue are disclosed in the notes.
1) Expense recognition by for-profit HCEs generally is the same as for other business
entities.
2) Not-for-profit HCEs must report three categories of net assets and the changes in
them during the reporting period.

Copyright © 2017 Gleim Publications, Inc. All rights reserved. Duplication prohibited. Reward for information exposing violators. Contact copyright@gleim.com.