Chapter 19-1

19
Accounting For Nongovernment Nonbusiness Organizations: Colleges And Universities, Hospitals And Other Health Care Organizations

Advanced Accounting, Third Edition

Chapter 19-2

Learning Objectives
1. Describe the source of accounting standards for nongovernment nonbusiness organizations (NNOs).

2.
3. 4. 5. 6. 7.
Chapter 19-3

Identify the three basic statements for NNOs.

Describe the basic funds used by nongovernment nonbusiness organizations. Distinguish between a current restricted fund and an unrestricted fund. Explain the term assets whose use is limited. Distinguish between a mandatory and a nonmandatory transfer. Explain how contributions are recorded by NNOs.

Learning Objectives
8. 9. Understand how donated services are recorded. Describe the funds used to account for property, plant and equipment.

10. Explain the basic accounting used by endowment funds. 11. Indicate how equity investments are reported in the financial statements. 12. Explain the change in accounting for loan funds brought about by new standards. 13. Understand the use of an annuity or life income fund. 14. Discuss the special reporting issues of hospitals.
Chapter 19-4

Nongovernment Nonbusiness Organizations (NNOs)

Four Major Classifications of NNOs:
1. Nonprofit institutions of higher education.

2. Hospitals and other health care providers.

3. Voluntary health and welfare organizations (VHWOs). 4. Other nongovernment nonbusiness organizations (ONNOs).

Chapter 19-5

Hierarchy of Reporting Standards (NNOs)

First level of priority
FASB Statements and Interpretations APB Opinions AICPA Accounting Research Bulletins

Second level of priority

FASB Technical Bulletins AICPA Industry Audit and Accounting Guides

Third level of priority

Consensus positions of FASB emerging issues task force AICPA AcSec Practice Bulletins

Chapter 19-6

Hierarchy of Reporting Standards (NNOs)

Fourth level of priority
AICPA Accounting Interpretations Implementation guides Industry practices

Fifth level of priority

FASB Concept Standards Pronouncements of other professional associations or regulatory agencies. Other accounting literature.

Chapter 19-7

Hierarchy of Reporting Standards (NNOs)

Most guidance for NNOs is found in Audit and Accounting Guides of the AICPA and in publications of industry:
Colleges and Universities Audits of Colleges and Universities, 2nd ed. (AICPA, 1975) Financial Accounting and Reporting Manual for Higher Education Hospitals and Other Health Care Providers Audits of Providers of Health Care Services (AICPA, 1989) Voluntary Health and Welfare Organizations (VHWOs) Audits of Voluntary Health and Welfare Organizations (AICPA, 1988) Other Nongovernment Nonbusiness Organizations Audits of Certain Nonprofit Organizations, second edition (AICPA, 1987).

Chapter 19-8

Financial Reporting for Not-for-Profit

Three Basic Financial Statements required:
1. Statement of financial position
Net Asset categories:
Unrestricted net assets Temporarily restricted net assets Permanently restricted net assets

2. Statement of activities
3. Statement of cash flows
Chapter 19-9

Fund Accounting
Most NNOs use fund accounting for recordkeeping and reporting purposes. Six funds commonly used: 1. Current Fund (restricted and unrestricted).

2. Plant Fund.
3. Endowment Fund. 4. Loan Fund. 5. Agency or Custodial Fund. 6. Annuity and Life Income Fund.
Chapter 19-10

Accrual Basis of Accounting

Financial statements for NNOs (accrual basis)

Revenues are reported when earned and realized or realizable, and

Expenditures are reported when materials or services are received. For external reporting purposes, Revenues are classified by source, and

Expenses and expenditures are classified by function or activity.

Chapter 19-11

Accounting for Current Funds

Current Unrestricted Funds
Financial resources that may be expended at the discretion of the governing board

Current Restricted Funds

Resources restricted because of legal, contractual, or external restrictions on their use.
Current unrestricted resources may be expended at the discretion of the governing board, whereas current restricted resources may be expended only in accordance with externally imposed restrictions.
Chapter 19-12

Accounting for Current Funds

Accounting for Board Designated Funds
Part of current unrestricted fund. Resources designated by governing board for specific purposes, projects, or investments. To limit discretion of management. Governing board can modify designations.

Hospitals = classified as assets whose use is limited.

Chapter 19-13

Accounting for Current Funds

Colleges and Universities
Board designated funds for specific current operating purposes are accounted for by footnote or by reclassification of the Unrestricted Current Fund Balance. Some board-restricted current resources can be transferred to other funds.

Chapter 19-14

Accounting for Current Funds

Mandatory and Nonmandatory Transfers
Unique to colleges and universities
Mandatory transfers Transfers from current funds group to other fund groups arising from binding legal agreements grant agreements

Nonmandatory transfers
Transfers from current funds group to other fund groups at discretion of governing board.
Chapter 19-15

Contributions
SFAS No. 116, requires contributions to be recognized as revenue in the period received. Contributions include gifts of cash, pledges, donated services, and gifts of noncash assets.

Conditional promises to give are recognized when they become unconditional.

Pledges are recorded as revenues when a promise to give is nonrevocable and unconditional, at present value of expected receipts.
Chapter 19-16

Contributions
Exercise 19-6 A well-known celebrity sponsored a telethon for the Help for the Blind Foundation on November 1, 2008. Pledges in the amount of $1,000,000 were called in. Using similar telethon campaigns as a basis, it is estimated that 25% of the pledges will be uncollectible. During 2009, $700,000 of contributions from these pledges were collected. The remainder were uncollectible. Required: Identify the appropriate fund(s) and prepare the journal entries necessary in 2008 and 2009 to record these transactions.
Chapter 19-17

Contributions
Exercise 19-6 2008.
Pledges Receivable Revenue - Contributions Provision for Uncollectible Pledges Allowance for Uncollectible Pledges 250,000 250,000

Prepare the journal entries necessary in

1,000,000 1,000,000

Chapter 19-18

Contributions
Exercise 19-6 2009.
Cash

Prepare the journal entries necessary in

700,000 700,000 50,000 250,000

Pledges Receivable
Provision for Uncollectible Pledges Allowance for Uncollectible Pledges

Pledges Receivable

300,000

Chapter 19-19

Contributions
Donated Services
Recognized only if the services received:
1. Create or enhance nonfinancial assets, or 2. a. Require specialized skills,

b. Are provided by individuals possessing those skills, and

c. Would need to be purchased if not provided by donation.
Recorded as revenue or support with an amount equal to the revenue recognized as an expense in the appropriate expense account.
Chapter 19-20

Contributions
Exercise 19-2 During 2008 volunteer pinstripers donated their services to General Hospital at no cost. The staff at General Hospital was in control of the pinstripers duties. If regular employees had provided the services rendered by the volunteers, their salaries would have totaled $6,000. While working for the hospital, the pinstripers received complimentary meals from the cafeteria, which normally would have cost $500. Required: Prepare the journal entry necessary in the General Fund to record the donated services on the books of General Hospital. General Services Expense 5,500 5,500

Donated Services (Nonoperating Revenue)

Chapter 19-21

Contributions
Donor-imposed Restricted Contributions
Recorded as contribution revenues in period received, thus increasing either temporarily or permanently restricted net assets. When expenditures are made, or restriction expires, net assets are reported as unrestricted net assets on the Statement of Activities.

Chapter 19-22

Contributions
Exercise 19-3 The Franklin Public Library received a restricted contribution of $300,000 in 2008. The donor specified that the money must be used to acquire books of poetry written in the sixteenth century. As of December 31, 2008, only $100,000 of the restricted resources had been expended. Required: Prepare the journal entries necessary to record these events during 2008. Indicate the fund in which each journal entry is recorded.
Chapter 19-23

Contributions
Exercise 19-3 Prepare the journal entries necessary to record these events during 2008.
Restricted Current Fund Cash 300,000 Contribution Revenue Poetry Collection Net Assets Released from Restrictions Cash 100,000

300,000 100,000

Unrestricted Current Fund Cash 100,000 Net Assets Released from Restrictions Expenses Poetry Collection Cash
Chapter 19-24

100,000 100,000

100,000

Accounting for Plant Funds

The plant fund is used to account for

(1) property, plant and equipment (PP&E) owned by the organization and the net investment,
(2) accumulation of financial resources for acquisition or replacement of PP&E, (3) acquisition and disposal of PP&E, (4) liabilities relating to acquisition of PP&E, and

(5) depreciation expense and accumulated depreciation.

Chapter 19-25

Accounting for Plant Funds

College and Universities
Divided into four separate self-balancing subgroups:
1. Unexpended Plant Fund 2. Funds for Renewals and Replacements 3. Funds for Retirement of Indebtedness 4. Investment in Plant
Both board-designated funds and externally restricted funds are accounted for in the plant fund; therefore, a distinction is made between restricted and unrestricted fund balances.
Chapter 19-26

Accounting for Plant Funds

Exercise 19-8 The After the election of a prominent political figure, the principal from a term endowment fund was expendable by Crandall University. The official was elected this year. The fund was restricted to the construction of a Political Science building annex. The following transactions occurred because of this event. Required: For each of the following transactions, record the journal entries and identify the fund or fund subgroup in which each entry is recorded.

Chapter 19-27

Accounting for Plant Funds

Exercise 19-8
1. A transfer of $3,000,000 is made from the Endowment Fund (Term) to the Unexpended Plant Fund.
Endowment Fund Endowment fund balance Cash Unexpended Plant Fund Cash Fund Balance - Restricted
Chapter 19-28

3,000,000

3,000,000

3,000,000

3,000,000

Accounting for Plant Funds

Exercise 19-8
2. Construction is begun on the Political Science annex. Costs of construction during the year amounted to $1,000,000, of which $30,000 remained unpaid at the end of the year. (The financial controller does not record transfers to the Investment in Plant subgroup until a project has been completed.)
Unexpended Plant Fund Construction in process Cash Accounts payable
Chapter 19-29

1,000,000

970,000 30,000

Accounting for Plant Funds

Exercise 19-8
3. By the end of the following year, the annex is completed at an additional cost of $2,100,000. All costs have been paid.
Unexpended Plant Fund

Construction in process Accounts payable Cash

Building Work in process
Chapter 19-30

2,100,000 30,000
3,100,000

2,130,000

3,100,000

Accounting for Plant Funds

Exercise 19-8
4. The completed building is recorded in the Investment in Plant subgroup. Net Investment in Plant Fund
Building Net investment in plant 3,100,000 3,100,000

Chapter 19-31

Accounting for Plant Funds

Hospitals
Property, plant and equipment (PP&E) transactions are accounted for in the General Fund. Contributed resources restricted to acquire PP&E are accounted for in a plant replacement and

expansion (restricted) fund.

Upon expenditure, the assets acquired and the related fund balance are transferred to the General Fund.
Chapter 19-32

Accounting for Plant Funds

Voluntary Health and Welfare and ONNOs
Single Plant Fund and report the fund balance in two classifications:
Expended Fund Balance is equal to the organizations net investment in PP&E. Unexpended Fund Balance represents the amount of resources available to replace or acquire additional PP&E.

Chapter 19-33

Accounting for Endowment Funds

Pure Endowment Fund - donated funds have been given in perpetuity. Term Endowment Fund - donor has specified a particular date or event after which the principal of the endowment fund may be expended. Income from endowment funds generally may be expended as earned either for specified purposes or at the discretion of the governing board.

Chapter 19-34

Accounting for Endowment Funds

Exercise 19-7 (partial) Jefferson Hospital received money from a donor to set up an endowment fund. The following information pertains to this contribution. Prepare the journal entries necessary to record the events in the endowment fund.

Chapter 19-35

Accounting for Endowment Funds

Exercise 19-7 (partial) During 2008
1. $2,000,000 was received to establish the fund. The requirements were (a) $100,000 of the endowment funds income must be used for research grants each year. (b) The remainder of income is under the discretion of the governing board. (c) The principal is expendable after the donors death. It shall be used to purchase equipment. Cash Revenue Contribution - Restricted 2,000,000

2,000,000

Chapter 19-36

Accounting for Endowment Funds

Exercise 19-7 (partial) During 2008 2. The cash received was invested in a number of securities.

Investment
Cash

2,000,000
2,000,000

Chapter 19-37

Accounting for Endowment Funds

Exercise 19-7 (partial) During 2009 3. Dividends of $100,000 and interest of $300,000 were received.

Cash
Due to General Fund Due to Specific Purpose Fund

400,000
300,000 100,000

Chapter 19-38

Accounting for Endowment Funds

Exercise 19-7 (partial) During 2009 4. The income was transferred to the appropriate funds.

Due to General Fund

Due to Specific Purpose Fund Cash

300,000
100,000 400,000

Chapter 19-39

Accounting for Endowment Funds

Exercise 19-7 (partial) During 2010 8. The was notified of the donor death. Transfer to Plant Replacement and Expansion Fund Cash

2,000,000 2,000,000

Chapter 19-40

Accounting for Investments

SFAS No. 124, Accounting for Certain Investments Held by Not-for-Profit Organizations,
Requires NPOs to report investments in equity securities with readily determinable fair values and all debt securities at fair value in unrestricted, temporarily restricted, or permanently restricted net assets. Unrealized and realized gains and losses are to be recognized in the Statement of Activities.

To improve effectiveness and flexibility, NNOs often pool investments of different funds into a single portfolio.
Chapter 19-41

Accounting for Loan Funds

Loans to:
Students and staff of colleges and universities,

Employees of hospitals, and

Beneficiaries of the interests of certain ONNOs. (for example, loans to music students by symphony orchestra societies).

Chapter 19-42

Accounting for Loan Funds

Exercise 19-4 The following events relate to Grearson University Loan Fund:

1. $100,000 is received from an estate to establish a faculty and student loan fund. Annual interest rates range from 8% for students to 10% for faculty.
2. Loans to students totaled $60,000, and $40,000 was disbursed to faculty members (of the total loans made, 10% are estimated to be uncollectible). 3. Grearson wrote off a $1,000 student loan as uncollectible. 4. The following loans were repaid. Faculty Student
Chapter 19-43

Principal
$ 5,000 10,000

Interest
$500 800

Accounting for Loan Funds

Exercise 19-4 Prepare the journal entries necessary to record these transactions. 1. $100,000 is received from an estate to establish a faculty and student loan fund. Annual interest rates range from 8% for students to 10% for faculty. Cash 100,000 100,000

Revenue Contributions Restricted

Chapter 19-44

Accounting for Loan Funds

Exercise 19-4 Prepare the journal entries necessary to record these transactions.

2. Loans to students totaled $60,000, and $40,000 was disbursed to faculty members (of the total loans made, 10% are estimated to be uncollectible).
Loans Receivable Students Loans Receivable Faculty Cash Bad Debt Expense Allowance for UncollectibleStudents Allowance for UncollectibleFaculty
Chapter 19-45

60,000 40,000 10,000

100,000

6,000 4,000

Accounting for Loan Funds

Exercise 19-4 Prepare the journal entries necessary to record these transactions. 3. Grearson wrote off a $1,000 student loan as uncollectible. Allowance for UncollectibleStudents 100,000

Loans Receivable Students

100,000

Chapter 19-46

Accounting for Loan Funds

Exercise 19-4 Prepare the journal entries necessary to record these transactions. 4. The following loans were repaid. Faculty Student Cash

Principal
$ 5,000 10,000

Interest
$500 800

16,300

Loans Receivable Students

Loans Receivable Faculty Interest Income
Chapter 19-47

10,000
5,000 1,300

Accounting for Agency (Custodial) Funds

Account for assets held by NNO as custodian for others. Unless significant amounts are involved, resources held by an NNO as an agent for others are often accounted for as assets and liabilities in the unrestricted or general fund rather than in a separate agency fund.

Chapter 19-48

Accounting for Annuity and Life Income Funds

Contribution to the organization on the condition that the organization make annuity payments to a specified recipient for a specified period of time (annuity fund) or that the organization pay the income earned on the contributed assets to a specified recipient during his or her lifetime (life income fund). At the end of the annuity or on the death of the life income beneficiary, the unexpended assets of the fund are transferred to the unrestricted fund or to an endowment fund, loan fund, plant fund, or other fund specified by the donor.
Chapter 19-49

Accounting for Annuity and Life Income Funds

Annuity Fund - Annuity payments made to a specified recipient for a specified period of time. Life Income Fund - Income earned on contributed assets is paid to a specified recipient during his or her lifetime. At the end of the annuity or on the death of the life income beneficiary, the unexpended assets of the fund are transferred to the unrestricted fund or to an endowment fund, loan fund, plant fund, or other fund specified by the donor.

Chapter 19-50

Issues Relating to Colleges and Universities

Recognition of Service Fee Revenue

Operating versus Nonoperating Income

Issues Relating to Hospitals

Charity care Contractual allowances Capitation revenues Malpractice
Chapter 19-51

Copyright
Copyright 2008 John Wiley & Sons, Inc. All rights reserved. Reproduction or translation of this work beyond that permitted in Section 117 of the 1976 United States Copyright Act without the express written permission of the copyright owner is unlawful. Request for further information should be addressed to the Permissions Department, John Wiley & Sons, Inc. The purchaser may make back-up copies for his/her own use only and not for distribution or resale. The Publisher assumes no responsibility for errors, omissions, or damages, caused by the use of these programs or from the use of the information contained herein.

Chapter 19-52