Chapter Eighteen

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Accounting and Reporting for

Private Not-for-Profit Entities

Not-for-Profit Organizations

General Characteristics They receive contributions from donors who do not

expect a return of equal financial value Their operating purpose is not providing goods and

services for profit They do not have ownership interests as do for- profits

May be governmental or private Charitable Educational Civic organizations Political parties Trade organizations

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Charitable Contributions

Recipients of these contributions represent an eclectic assortment of missions:

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Charitable Contributions

Total estimated charitable giving in the United States increased 4.0 percent in 2011 from 2010 to $298.42 billion in contributions from a wide sector:

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Charitable Contributions

The 10 largest charities reported receiving $13.6 billion in private support in 2012 with total revenues of $29.8 billion. The entities receive significant revenue from a variety of sources as a list of the five largest charities demonstrates:

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Learning Objective 18-1

Understand the basic compositionof financial statements produced for a private not-for-profit entity.

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Not-for-Profit Organizations

Several basic goals form the framework for the generally accepted accounting principles for private not-for-profit entities, including:

1. Financial statements should focus on the entity as a whole.

2. Reporting requirements for private not-for-profit entities should be similar to those applied by for-profit businesses unless critical differences exist in the nature of the transactions or the informational needs of financial statement users.

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Financial Statement Goals

The first goal asserts that the financial statements should not highlight individual funds the organizations use for internal record-keeping. For external reporting purposes, FASB emphasized the

operations and financial position of the entire organization.

The second goal allows the use of many of the same accounting techniques utilized by for-profit entities. Existing authoritative literature for capital leases,

pensions, contingent liabilities, and similar issues have not been rewritten for private not-for-profit entities.

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Not-for-Profit Organizations

FASB Statement (SFAS) 116, “Accounting for Contributions Received and Contributions Made,” established guidelines for determining when and how donations should be recognized and reported.

FASB Statement 117, “Financial Statements of Not-for-Profit Organizations,” specified the required content and format for financial statements distributed by these organizations.

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Learning Objective 18-2

Describe the differences in assets that are unrestricted, temporarily restricted, or permanently restricted and explainthe method of reporting these categories.

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Three critical differences exist between private not-for-profit and for-profit businesses.

1) Donations received by private entities are transactions that have no counterpart in commercial businesses.

2) The private entities’ donations often have donor-imposed restrictions.

3) No single figure describes performance as effectively as net income does for commercial entities.

Financial Reporting

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The differences create the need for a unique set of financial statements for not-for-profit entities.

FASB requires three financial statements for not-for-profits.

Financial Reporting

1) Statement of Financial Position

2) Statement of Activities

3) Statement of Cash Flows

In addition, the Statement of Functional Expenses is required only for voluntary health and welfare organizations.

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Statement of Financial Position

Reports assets, liabilities, and net assets.

Uses term Net assets rather than Owners’ Equity.

Restrictions by outside donors results in assets classified as: Unrestricted

Includes board-designated or internally restricted assets.

Temporarily restricted (for a particular purpose or for use in a future time period).

Permanently restricted (expected to remain restricted for as long as the organization exists).

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Statement of Activities

Reports revenues, expenses, and other changes in net assets.

A separate column presents increases and decreases in each of the three categories of net assets.

Final totals agree with the net asset balances on the statement of financial position.

Statement is sometimes labeled as a statement of changes in net assets.

Primary purpose is to provide a clear picture of donations received and any attached restrictions.

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Statement of Activities

When a temporary restriction (either time or usage) is fulfilled, that amount of net assets is immediately reclassified as unrestricted.

If an expense is incurred to meet a donor stipulation, both the expense and the contribution appear in the statement of activities in the Unrestricted column in the same time period.

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Statement of Activities

All expenses are presented in the Unrestricted Net Assets column in two categories:Program ServicesSupporting Services

Program ServicesActivities relating to social services, research, or other objectives of the organization. Supporting ServicesAdministrative costs and fund-raising expenses.

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Statement of Cash Flows

Statement of Cash Flows

Use the standard FASB classifications1. Operating Activities2. Investing Activities3. Financing Activities

May use either the direct or the indirect methods.

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Learning Objective 18-3

Explain the purpose andconstruction of a statementof functional expenses.

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Statement of Functional Expense

Statement provides a detailed analysis of expenses by function and object.

Columns represent functions followed by supporting services.

Categories are the same as those reported on the statement of activities and column totals agree with the operating expenses on that statement.

Rows list expenses according to their nature.

Allocation of joint fund-raising & program service costs is permitted only when certain criteria are met.

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Learning Objective 18-4

Report the various types ofcontributions that a privatenot-for-profit entity canreceive.

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Accounting for Contributions

Contributions, unconditional transfers of cash or other resources, are recorded as support at fair value in the period received.

Restricted gifts are not the same as conditional gifts.

Donors of restricted contributions specify how they are to be used. These gifts are recognized as temporarily or permanently restricted assets when a promise is received.

Conditional promises that require a future action before asset will be transferred from the donor are not recognized until conditions are met.

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Accounting for Contributions

Donations of works of art and historical treasures are generally not recognized, but disclosure is required.

Exchanges, such as member dues, are treated as accrual revenue.

Contributed services are recognized as revenue if one of two conditions is met:

1. The service creates or enhances a nonfinancial asset, OR

2. The services are specialized and would have had to be purchased otherwise.

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Learning Objective 18-5

Understand the impact of atax-exempt status.

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Tax-Exempt Status

Tax-Exempt Status – Not-for-profits may not have to pay federal income taxes under the following sections of the Internal Revenue Code:

Section 501(c)(3) applies to charitable, educational or scientific entities.

Section 501(c)(4) applies to social welfare entities, referred to as advocacy groups.

Section 501(c)(6) applies to business leagues, boards of trade, chambers of commerce, etc.

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Tax-Exempt Status

Tax-Exempt Status

Exempt from federal taxes.

Often exempt from state taxes.

Donors receive reduction in their taxable income.

Non-profit postal permit reduces the cost of postage.

Cannot engage in political campaign activity.

A not-for-profit must file a Form 990, Return of Organization Exempt from Income Tax.

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Learning Objective 18-6

Account for both mergers andacquisitions of not-for-profitentities.

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Mergers & Acquisitions

Why have mergers and acquisitions become prevalent among Not-for-Profits?

Efficient use of resourcesCommon goalsEfficiencies of sizeRescue suffering charitiesExpand one organization’s scope of outreach

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Acquisitions

In an Acquisition, one organization obtains control over another.

Acquired accounts are reported at fair value.

If total acquisition value is greater than the total value of identifiable assets and liabilities, excess is reported as goodwill.

If future operations are expected to by primarily supported by contributions, the excess value is reported as a reduction in net assets.

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Mergers

A merger occurs when two or more not-for-profit entities form a new not-for-profit and turn control over to a newly created governing board.

The carryover method is applied in reporting for mergers.

In a merger, the newly formed not-for-profit records all accounts at their previous book values as of the date of the merger.

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Learning Objective 18-7

Describe the unique aspectsof accounting for health careentities.

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Health Care expenditures account for 17.6% of our Gross Domestic Product, much of which is paid by third-party payors.

From a financial reporting perspective, these organizations have no need to compute and report net income.

However, readers of the financial statements need a way to measure the efficiency of the entity’s operations.

FASB requires the reporting of a “performance indicator” to show operational success or failure.

Accounting for Health Care Organizations

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Accounting for Patient Service Revenues

Third-party payors, insurance companies, Medicare, and Medicaid, not the patient, pay some or all of the cost of medical services received.

Bad debts and fee reductions for health care providers can be significantly higher than for other kinds of businesses.

Entities initially record revenue at standard rates.

Amounts that the entity does not expect to collect is reported in a manner that best reflects the activities (contra-revenue or bad debt expense).

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Insurance companies and Medicare establish contractual arrangements with health care providers stipulating rates to be paid for specific services.

The entity must write off the difference in the amount a patient is charged and the amount the payor will pay in a contractual adjustment account.

For matching purposes, these reductions must be recognized in the same period that the patient service revenue is earned.

Contractual Agreements with Third-Party Payors

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