ACCOUNTING FOR NON-PROFIT ORGANIZATION

ACCOUNTING FOR NON-PROFIT ORGANIZATIONS

Although the PFRSs are designed to apply to business entities, they can also be applied to non-profit
organizations. Non-profit organizations carry out socially desirable needs of the community or its
members without the intention of making profit. NPOs can be classified into the following:
1. Health Care Organizations
2. Private, non-profit, colleges and universities
3. Voluntary Health and Welfare Organizations
4. Other non-profit organizations
The financial statements of most NPOs ae based on the fund theory. Under fund accounting, the main
accounting unit is the fund. Accordingly, transactions are accounted for in the books and presented in the
financial statements strictly based on their fund classifications as either:
1. Unrestricted – available for immediate use and for any purpose.
2. Temporarily restricted – restricted by the donor in such a way that the availability of the
contribution for the NPO’s use is dependent upon:
a. the performance of a specific task
b. the happening of a future event
c. the passage time
At the time the task is performed, the event occurred, or the time restraint passes, the support is
reclassified from temporarily restricted to unrestricted.
3. Permanently restricted – restricted by the donor in such a way that the organization will never be
able to use the contribution itself; however, the organization may be able to use the income therefrom.

CONTRIBUTIONS
-Refer to resources received in non-reciprocal transactions. Contributions exclude those that result from
exchange transactions.
1. Cash and other Non-cash assets
a. recognized as revenues in the period received.
b. measured at fair value at the date of contribution.
2. Unconditional promises – promise to give cash or other non-cash assets in a future period.
a. recognized when the unconditional promise to give is received from the donor.
b. generally classified as a temporarily restricted contribution.
c. an allowance for uncollectability is recognized when the promised contribution becomes
doubtful of collection.
3. Conditional promises – promises which depend on the occurrence of a specified future and
uncertain event to bind the promisor.
a. recognized only when the attached conditions are substantially met (reasonably certain).
b. a transfer of assets with a condition promise to contribute them shall be accounted for as a
refundable advance (liability) until the conditions have been substantially met.
4. Services - recognized if the services received:
a. create or enhance nonfinancial assets
b. require specialized skills, are provided by individuals possessing those skills, and would
typically need to be purchased if not provided by donation.
5. Work of art and similar items – not recognized if donated items are added to collections that is:
a. held for public exhibition, education, or research in furtherance of public service rather
than financial gain.
b. protected, kept unencumbered, cared for, and preserved.
c. proceeds from sales of collection items are to be used to acquire other items for collections.

Illustration:
Entity A receives the following donations:
a. Unrestricted donation of P1M cash.
b. Cash of P2M restricted for the acquisition of a building.
c. Investment in stocks of P3M. Entity A can only use the investment income.

Entity A acquires a building for P2M and receives dividends of P100,000 from the investment at the end
of the period.

Unrestricted fund Temporarily restricted fund Permanently restricted fund

Cash 1M Cash 2M Investment in
Contribution 1M Contribution 2M stocks 3M
Revenue Revenue Contribution 3M
Revenue
Cash 2M Net released from
Net released from Restrictions 2M
Restrictions 2M Cash 2M
To record funds To record funds
released from released from
temporary temporary
restriction. restriction.
Building 2M
Cash 2M
Cash 100K
Dividend Income 100K

The balances of net assets are determined as follows:

Unrestricted net assets Temporarily restricted Permanently restricted
net assets net assets
Assets
Cash
Cash donations 1,000,000 2,000,000
Transfer
between fund
classifications 2,000,000 (2,000,000)
Payment for
building (2,000,000)
Cash dividends 100,000
Cash, end. 1,100,000 -
Investment in stocks 3,000,000
Building 2,000,000
Net Assets 3,100,000 - 3,000,000

OTHER FUNDS HELD BY NPOs

 Endowment fund
o Term endowment fund – under the donor’s restrictions, the NPO can use a portion of the
principal each period. This is classified as temporarily restricted.
o Regular endowment fund – under the donor’s restrictions, the NPO cannot spend any of the
principal. This is classified as permanently restricted.
 Agency fund – funds held by the NPO acting as custodian. Agency funds are recognized as
liabilities.
 Plant fund – consists of the following:
o Unexpended funds for the acquisition of plant assets
o Funds for the renewal and replacement of plant assets
o Funds for the retirement of indebtedness
o Investment in plant assets
 Board-designated fund (quasi-endowment) – funds which are restricted at the sole discretion of
NPO’s governing board. Funds that are initially restricted are classified as unrestricted. Only
contributions with donor-imposed restrictions are classified as restricted.

DEFERRAL METHOD OF RECOGNIZING CONTRIBUTIONS

The Chartered Accountants of Canada suggest a Deferral Method in accounting for restricted
contribution received by NPOs. The deferred method is similar to the provisions of PAS 20, in such a way
that income from donations is recognized based on the matching concept.
Under the deferral method, restricted contributions are initially recognized as liability and
recognized as revenue in the same period where the related expenditures, for which the contributions
were intended to reimburse, are incurred.

EXPENSES
 SFAS No. 117 requires expenses to be presented in the statement of activities or in the notes
according to their function. The function qualifications are as follows:
a. Program Services – are the activities that result in goods and services being distributed to
beneficiaries, customers, or members that fulfill the purposes or mission for which the
organization exists.
b. Supporting Activities – are all activities other than program services. Generally, these include
management and general, fund-raising, and membership-development activities.

FINANCIAL STATEMENTS
A complete set of general-purpose financial statements of an NPO consists of the following:
 Statement of financial position
 Statement of activities
 Statement of cash flows
 Notes

Statement of Financial Position

The statement of financial position shows information on assets, liabilities, and net assets. SFAS
No. 117 requires reporting of net assets in the statement of financial position according to the following
classifications:
1. Unrestricted net assets
2. Temporarily restricted net assets
3. Permanently restricted net assets

PFRS-based financial statements may present net assets using the classifications above either on
the statement of financial position or in the notes.

Statement of Activities
The statement of activities shows information on revenues, expenses, and changes in net assets for
a period. NPOs however may opt to present a separate statement of changes in net assets. SFAS No. 117
requires that the statement of activities report the changes in net assets for each of the three categories of
support separately. PFRS-based financial statements may present changes in net assets using the
classifications above either on the statement of activities or in the notes. In a statement of activities, the
term profit or net income is replaced by the term change in net assets.

Statement of Cash Flows

The statement of cash flows of an NPO is similar to that of a business entity and can also be
prepared using the direct or indirect method. Restricted assets during the period that are used for long-
term, purposes because of donor restrictions are classified as financing activities.
ACCOUNTING PROCEDURES PECULIAR TO SPECIFIC TYPES OF NPOs

HEALTH CARE ORGANIZATIONS

Health care organizations include hospitals, clinics, medical group practices, individual practice
associations, individual practitioners, emergency care facilities, laboratories, surgery centers, other
ambulatory care organizations, continuing care retirement communities, health maintenance
organizations, home health agencies, nursing homes, and rehabilitation centers.

Presentation of Revenues in the Statement of Operations

1. Net patient revenue – gross patient service revenue less contractual adjustments, employee
discounts and billed charity care.
a. Contractual Adjustments - a portion of hospital’s revenues is collectible from third-party
payors, such as the Philippine Health Insurance Corporation and other health insurance
providers. In this regard, a contractual adjustment may arise from the reimbursement
agreement. A contractual adjustment is the difference between what the hospital considers
a fair price for a service rendered versus an agreed upon amount for the service with the
insurance company.
b. Employee Discounts - These are special discounts available only to the NPOs employees
and their immediate family members in the form of reduction in the price of patient
services. Employee discounts are accounted for a direct reduction to patient service
revenue.
c. Charity Care - charity care pertains to free services rendered to patients. Charity care is not
recognized but rather disclosed only in the notes.
2. Premium revenue – results from capitation agreements.
a. Capitation agreements – agreements with third parties based on the number of employees
instead of services rendered.
3. Other revenues – all other revenues not classifiable as net patient revenue or premium revenue.

Presentation of Contributions in the Statement of Operations

Unlike other NPOs, health care organizations do not present restricted contributions on the
statement of operations as part of revenues. Revenues pertain only to unrestricted revenues and may
include revenues from unrestricted contributions. Revenues from unrestricted contributions may be
separately indicated as such or included in the other revenues classification. Revenues from restricted
contributions are presented separately at the bottom part of the statement of operations, after
unrestricted revenues and expenses.

Disclosure of Performance Indicator

According to the AICPA Guide, the statement of operations shall provide a performance indicator,
such as operating income, and revenue over expenses. The policy used in determining the performance
indicator shall be disclosed in the notes.
Unrealized gains and losses on investments in securities are not part of the performance indicator,
but shall be reported on the statement of operations after the performance indicator.