BADVAC3X – GOVERNMENT AND NON-FOR-PROFIT ACCOUNTING

MODULE 6: NOT-FOR-PROFIT ORGANIZATIONS

Nature of Not-for-profit Organizations (NFP)

1. receives contributions of significant amounts of resources from resource providers who do not expect
commensurate or proportionate pecuniary return
2. operates for purposes other than to provide goods or services at a profit
3. does not possess ownership interests like those of business enterprises

Categories of NFP Organization

1. voluntary health and welfare organizations (VHWOs, such as the Salvation Army)
2. other NFP organizations (such as churches and museums)
3. healthcare entities (hospitals)
4. colleges and universities

ACCOUNTING PRINCIPLES FOR NFP ORGANIZATION

Financial Statements

1. statement of financial position

2. statement of activities
3. statement of cash flows
4. notes to the financial statements
5. statement of functional expenses (for VHWOs)

Classification of Net Assets of NFP

1. Permanently restricted net assets are the portion of net assets whose use is limited by donor-imposed
stipulations that do not expire by time and cannot be removed by action of the NFP entity.
2. Temporarily restricted net assets are the portion of net assets whose use is limited by donor-imposed
stipulations that either expire (time restrictions) or can be removed by the organization fulfilling the stipulations
(purpose restrictions)
3. Unrestricted net assets are the portion of net assets that carry no donor-imposed stipulations

Note: Organizations can report revenues, gains, and losses in each net asset class, but expenses are reported only in the
unrestricted net assets class

Statement of Financial Position

The statement of financial position or balance sheet reports assets, liabilities, and net assets. It reports net assets in total
and by the three classes of net assets—unrestricted, temporarily restricted, and permanently restricted. Permanently and
temporarily restricted amounts appear on the face of the balance sheet or in notes. Assets received with donor-imposed
restrictions that limit their use to long-term purposes should be separated from assets available for current use.
Comparative statements from the prior period are not required

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Exhibit 1. Statement of Financial Position - Ayala Foundation

Statement of Activities

The statement of activities provides information about the change in amount and nature of net assets and reports how
resources are used to provide various programs or services. NFP organizations account for revenues and expenses using
the accrual basis of accounting. NFP organizations that issue GAAP-basis financial statements must recognize
depreciation expense on long-lived assets. NFP organizations should record depreciation even if the assets are gifts;

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however, certain works of art and certain historical treasures that meet the definition of “collections” need not be
capitalized or depreciated.

The statement of activities focuses on the organization as a whole. It reports the amount of change in net assets, ending
with a net asset figure that is the same as net assets on the balance sheet. The statement presents revenues, expenses,
gains, and losses by net asset class; thus, there are columns or sections reporting the amount of change in permanently
restricted net assets, temporarily restricted net assets, and unrestricted net assets.

Expenses always decrease unrestricted net assets; thus, they cannot appear in the temporarily restricted or permanently
restricted net asset classes.

Exhibit 2. Statement of Activities

NFP organizations report expenses by functional classification—major classes of program services and supporting
services—in the statement or notes. Program services are the activities that distribute goods and services that fulfill the
purpose or mission of the organization to beneficiaries, customers, or members. Supporting services are all activities
other than program services. Supporting services include the following:

• Management and general. Oversight, business management, general record-keeping, budgeting, financing, and
related administrative activities
• Fund-raising. Publicizing and conducting fund-raising campaigns; maintaining donor mailing lists; conducting
special fund-raising events; preparing and distributing fund-raising manuals, instructions, and other materials;
and other activities to solicit contributions
• Membership-development activities. Soliciting for prospective members and membership dues, membership
relations, and so on

Statement of Functional Expenses

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VHWOs must report expenses classified by function and by natural classification (salaries, rent, etc.) in a matrix format as
a separate statement. Other NFP organizations are encouraged, but not required, to provide this additional expense
information

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Exhibit 3. Statement of Functional Expenses

Statement of Cash Flows

NFP organizations use the same cash flow classifications and definitions as business enterprises, except that the
description of financing activities is expanded to include resources that are donor restricted for long-term purposes. The
NFP statement of cash flows reports investing activities of permanent endowments as cash flows of investing activities

Exhibit 4. Statement of Cash Flows

Contributions

An unconditional transfer of cash or other assets to an entity or a settlement or cancellation of its liabilities in a voluntary,
nonreciprocal transfer by another entity acting other than as an owner.

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.

Donor-Imposed Restrictions or Conditions. A donor-imposed condition provides that the donor’s money is
returned or the donor is released from the promise to give if the condition is not met.

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Donor-imposed restrictions simply limit the use of contributed assets. If it is unclear whether donor stipulations are
conditions or restrictions, the organization should presume that the promise is conditional. A donor-imposed restriction
expires in the period in which the restriction is satisfied (i.e., when a time restriction is met or a purpose restriction
satisfied). If a given contribution is subject to more than one restriction, the restrictions expire in the period in which the
last restriction is satisfied.

When a temporary restriction is met (either by the passage of time or by the incurrence of expenses for the restricted
purpose), organizations reclassify resources from the temporarily restricted net assets category to the unrestricted net
assets category. On the statement of activities, they report the reclassified amount as net assets released from
restrictions. These assets increase unrestricted net assets and decrease temporarily restricted net assets.

Gifts of Long-Lived Assets. Gifts of long-lived assets may be restricted or unrestricted, depending on the
organization’s accounting policy or the donor’s restriction. If the donor restricts contributed long-lived assets for use over
a certain period of time, recipients report the assets as restricted support in temporarily restricted net assets. Later, the
recipient organization recognizes depreciation by reclassifying the amount of the depreciation from temporarily restricted
to unrestricted net assets and recording an expense in unrestricted net assets.

If the donor contributes the long-lived assets with no restrictions or if the assets are purchased with contributions
restricted to the acquisition of long-lived assets, the organization can choose either of two accounting methods, which
should be used consistently. The accounting policy must be disclosed in notes to the financial statements. The two
acceptable methods are as follows:

1. The organization may adopt an accounting policy that implies a time restriction that expires over the useful life of
the donated asset. As in the case of contributed long-lived assets with an explicit donor-imposed time restriction,
the gift is reported as restricted support in temporarily restricted net assets. Depreciation is recorded as an
expense in unrestricted net assets, and a reclassification for the amount of the depreciation from temporarily
restricted to unrestricted net assets. (This also applies to assets purchased with cash that was restricted to the
purchase of long-lived assets.)
2. If no policy implying a time restriction exists and there are no donor-imposed restrictions, the gifts are
unrestricted support.

Investments and Investment Income. NFP organizations initially record purchased investments at their cost and
contributed investments at fair value in the appropriate net asset classification. They recognize investment income as
earned and report the income as an increase in unrestricted, temporarily restricted, or permanently restricted net assets,
depending on donor-imposed restrictions on the use of the investment income

Transfers That Are Not Contributions

Exchange Transactions. Exchange transactions are reciprocal transfers in which both parties give and receive
approximately equal value. Sales of products and services are exchange transactions. Exchange transactions are
sometimes difficult to distinguish from contributions.

Resources received in exchange transactions are classified as unrestricted revenues and unrestricted net assets even if
the resource provider limits use of the resources.

Agency Transactions. An agency transaction is one in which assets are transferred to the NFP organization, but the
NFP organization has little or no discretion over the use of those assets, and the assets are passed on to a third party.
The resource provider is using the NFP entity as an agent or intermediary to transfer assets to a third-party donee. Under
GAAP, the receipt of assets in an agency transaction increases the assets and liabilities of the NFP agent, and
disbursement of those assets decreases assets and liabilities. No contribution revenue or program expense is recorded by

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the agent. The NFP agent reports the cash received and paid as cash flows from operating activities in the statement of
cash flows.

Gifts in Kind. Gifts in kind are noncash contributions, such as clothing, furniture, and services. They are contributions if
the NFP entity has discretion over the disposition of the resources. Otherwise, the entity will account for the gifts as
agency transactions. Organizations measure gifts in kind that are contributions at fair value, if practicable. When fair
value cannot be reasonably determined, NFP entities should not record the gifts as contributions. Instead, they record
the items as sales revenue when they are sold. Cost of sales is the cost of getting the inventory ready for sale.

GAAP limits the recognition of contributed services to those that (1) create or enhance nonfinancial assets of the
organization or (2) require specialized skills, are provided by individuals possessing those skills, and would typically need
to be purchased if not provided by donation. If contributed services do not meet these criteria, they should not be
recognized; however, information about services contributed to the organization’s programs and activities should be
described in the financial statement notes.

Measurement Principles

NFP organizations measure contributions at fair value. Quoted market prices are the best estimate of fair values for both
monetary and nonmonetary assets. Other valuation methods that might be used include quoted market prices for similar
assets or independent appraisals (see PFRS 13 for fair value hierarchy). If a reasonable estimate for fair value cannot be
made, the contribution should not be recognized.

Recall that NFP organizations record unconditional promises to give when pledges are made. If the fair value of the
contributed asset changes significantly between the pledge date and the date the asset is received, the NFP entity
accounts for the contribution as follows:

• No additional revenue is recognized if the fair value increases

• If the fair value decreases, the difference is recognized in the period the decrease occurred and is reported as a
change in the net asset class in which the revenue was originally reported or in the class where the net assets
are represented

An NFP entity may record unconditional promises to give that it expects to collect within one year of the financial
statement date at their net realizable value (gross amount less an allowance for uncollectible accounts). However, the
entity should measure unconditional promises to give that are not expected to be collected within the year at the present
value of the amounts expected to be collected (estimated future cash flows)

Collections

Collections of works of art, historical treasures, and similar items may be capitalized but are not required to be so long as
the following conditions are satisfied:

• They are held for public exhibition, education, or research in furtherance of public service rather than financial
gain
• They are protected, kept encumbered, cared for, and preserved
• They are subject to an organizational policy that requires proceeds from sales of collection items to be used to
acquire other items for collections

Organizations that choose not to capitalize collections should describe the collections in the notes to the financial
statements. Contributed collection items are recognized as revenues or gains if the collection is capitalized.

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When collection items are not recognized, the costs of collection items, proceeds from sales, and proceeds from
insurance recoveries appear as increases or decreases of the appropriate net asset class on the activities statement,
separately from revenues, expenses, gains, and losses.

Accounting for NFP Hospitals (Health Organizations)

Hospitals and other health care providers constitute a significant area of accounting, both in terms of the entities
represented and the cost of services provided. Health care providers include clinics, ambulatory care organizations,
continuing-care retirement communities, health maintenance organizations, home health agencies, hospitals,
government-owned health care entities, and nursing homes that provide health care. Health care entities may be
organized as NFP entities, governmental entities, or private business enterprises owned by investors (stockholders,
partners, or sole proprietors).

Patient Service Revenues. Patient service revenues include room and board, nursing services, and other
professional services. Patient revenues are recorded at full established rates when service has been provided. However,
because a hospital’s objective is to report the amount of revenues that it will ultimately collect, adjustments are made for
deductions from revenues, such as the following:

• Courtesy allowances. Discounts for doctors and employees

• Contractual adjustments. Discounts arranged with third-party payors (Medicare and Blue Cross, e.g.) that
frequently have agreements to reimburse at less-than established rates

Courtesy allowances and contractual adjustments are not expenses. They are revenue deductions that are subtracted
from gross patient service revenues to arrive at the net patient service revenue reported in the statement of operations.
In addition, bad debt expense is recorded and allowance accounts are used to reduce net receivables for estimated bad
debts. Charity care services—those provided free of charge to patients who qualify under a hospital’s charity care
policy—are excluded from both gross and net patient service revenues, because they are not expected to generate cash
flow.

Premium fees. Premium fees, also known as subscriber fees or capitation fees, are revenues from agreements under
which a hospital provides any necessary patient services (perhaps from a contractually established list of services) for a
specific fee. The fee is usually a specific fee per member per month. Hospitals earn the agreed-upon fee whether the
standard charges for services actually rendered are more or less than the amount of the fee—that is, without regard to
services actually provided in the period. Therefore, hospitals report premium fees, which constitute a growing portion of
revenues in many hospitals, separately from patient service revenues.

Other Operating Revenues. The “other operating revenue” classification includes revenue from services to patients
other than for health care and revenues from sales and services provided to nonpatients. This classification might include
tuition from schools operated by the hospital, rentals of hospital space, charges for preparing and reproducing medical
records, and proceeds from cafeterias, gift shops, and snack bars.

Private NFP Colleges and Universities

The primary objective of a college or university is to provide educational services to its constituents. Like governmental
entities, colleges and universities often provide their services on the basis of social desirability and finance them, at least
in part, without reference to those receiving the benefits. For example, very bright students may receive a full academic
scholarship, or needy students might receive federal subsidies and financial aid to cover the costs of their education. The
objectives of college and university accounting are to show the sources from which resources have been received and to
demonstrate how those resources have been utilized in meeting educational objectives.

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Colleges and universities maintain accounts and reports on an accrual basis; thus, revenues are recognized when earned,
and expenses are recognized when the related materials or services are received. They report expenses by function,
either on the face of the financial statements or in the notes. As with other NFP organizations, private institutions classify
net assets, revenues, expenses, gains, and losses based on the existence or absence of donor-imposed restrictions
(unrestricted, temporarily restricted, or permanently restricted).

Tuition and Fees. Private colleges and universities recognize the full amount of tuition and fees (net of refunds)
assessed against students for educational purposes as revenue. Tuition waivers for scholarships appear in a contra
revenue account, while estimated bad debts are recorded as institutional support expenses.

Student Financial Aid. Universities often receive financial aid funds from third parties that are intended to be used by
students to cover educational costs.

Contributions. Universities record contributions that carry no specifications regarding the time period or purpose of use
as unrestricted revenue, whereas they must record contributions that may only be expended after a point in time or for a
specific purpose as temporarily restricted.

Endowments. Universities record contributions of principal that must be held indefinitely but whose income is available
for restricted or unrestricted purposes as special contributions termed endowments.

Sales and Services of Auxiliary Enterprises. The revenue of auxiliary enterprises includes amounts earned in
providing facilities and services to faculty, staff, and students. It includes amounts charged for residence halls, food
services, intercollegiate athletics, and college student unions, as well as sales and receipts from college stores, barber
shops, movie houses, and so on. Colleges and universities classify all revenue and expenses directly related to the
operations of auxiliary enterprises as “auxiliary” and report them as unrestricted.