chapter 19-1. chapter 19-2 accounting for nongovernment nonbusiness organizations: colleges and...

Chapter 19-1

Chapter 19-2

AccountingFor NongovernmentNonbusinessOrganizations: CollegesAnd Universities, HospitalsAnd Other Health CareOrganizations

Advanced Accounting, Fourth Edition

19191919

Chapter 19-3

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).

Nongovernment Nonbusiness Nongovernment Nonbusiness Organizations (Organizations (NNOs)NNOs)

Nongovernment Nonbusiness Nongovernment Nonbusiness Organizations (Organizations (NNOs)NNOs)

Chapter 19-4

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).

Hierarchy of Reporting Standards Hierarchy of Reporting Standards (NNOs)(NNOs)Hierarchy of Reporting Standards Hierarchy of Reporting Standards (NNOs)(NNOs)

Chapter 19-5

Most guidance for NNOs is found in Audit and Accounting Guides of the AICPA and in publications of industry:

Hierarchy of Reporting Standards Hierarchy of Reporting Standards (NNOs)(NNOs)Hierarchy of Reporting Standards Hierarchy of Reporting Standards (NNOs)(NNOs)

LINK to Audit and Accounting Guides

Chapter 19-6

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

Financial Reporting for Not-for-ProfitFinancial Reporting for Not-for-ProfitFinancial Reporting for Not-for-ProfitFinancial Reporting for Not-for-Profit

Chapter 19-7

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.

Fund AccountingFund AccountingFund AccountingFund Accounting

Chapter 19-8

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.

Accrual Basis of AccountingAccrual Basis of AccountingAccrual Basis of AccountingAccrual Basis of Accounting

Chapter 19-9

Current Unrestricted Funds

Accounting for Current FundsAccounting for Current FundsAccounting for Current FundsAccounting for Current 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.

Chapter 19-10

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.


Accounting for Board Designated Funds

Chapter 19-11

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.


Colleges and Universities

Chapter 19-12

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.

Mandatory and Nonmandatory Transfers


Chapter 19-13

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.

ContributionsContributionsContributionsContributions

Chapter 19-14

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 19-15

Exercise 19-6: Prepare the journal entries necessary in 2008.


Pledges Receivable 1,000,000

Revenue - Contributions 1,000,000

Provision for Uncollectible Pledges 250,000

Allowance for Uncollectible Pledges 250,000

Chapter 19-16

Exercise 19-6: Prepare the journal entries necessary in 2009.


Cash 700,000

Pledges Receivable 700,000

Provision for Uncollectible Pledges 50,000

Allowance for Uncollectible Pledges 250,000

Pledges Receivable 300,000

Chapter 19-17

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.

Donated Services


Recorded as revenue or support with an amount equal to the revenue recognized as an expense in the appropriate expense account.

Chapter 19-18

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

Donated Services (Nonoperating Revenue) 5,500

Chapter 19-19

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.

Donor-imposed Restricted Contributions


Chapter 19-20

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 19-21

Exercise 19-3: Prepare the journal entries necessary to record

these events during 2008.


Restricted Current FundCash 300,000 Contribution Revenue – Poetry Collection 300,000

Net Assets Released from Restrictions 100,000 Cash 100,000

Unrestricted Current FundCash 100,000 Net Assets Released from Restrictions 100,000

Expenses – Poetry Collection 100,000 Cash 100,000

Chapter 19-22

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.

Accounting for Plant FundsAccounting for Plant FundsAccounting for Plant FundsAccounting for Plant Funds

Chapter 19-23

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

College and Universities


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 19-24

Exercise 19-8: 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 19-25

Exercise 19-8:

Endowment Fund

Endowment fund balance 3,000,000Cash 3,000,000

Unexpended Plant Fund

Cash 3,000,000Fund Balance - Restricted 3,000,000

1. A transfer of $3,000,000 is made from the Endowment Fund (Term) to the Unexpended Plant Fund.


Chapter 19-26

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.)


Construction in process 1,000,000Cash 970,000Accounts payable 30,000


Chapter 19-27

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.


Construction in process 2,100,000Accounts payable 30,000

Cash 2,130,000

Building 3,100,000Work in process 3,100,000


Chapter 19-28

Exercise 19-8:

4. The completed building is recorded in the Investment in Plant subgroup.

Net Investment in Plant Fund

Building 3,100,000Net investment in plant 3,100,000


Chapter 19-29

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.

Hospitals


Chapter 19-30

Single Plant Fund and report the fund balance in two

classifications:

Expended Fund Balance is equal to the organization’s

net investment in PP&E.

Unexpended Fund Balance represents the amount of

resources available to replace or acquire additional

PP&E.

Voluntary Health and Welfare and ONNOs


Chapter 19-31

Accounting for Endowment FundsAccounting for Endowment FundsAccounting for Endowment FundsAccounting 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 19-32

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 19-33

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 fund’s 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 donor’s death. It shall be used to purchase equipment.


Cash 2,000,000

Revenue Contribution - Restricted 2,000,000

Chapter 19-34


2. The cash received was invested in a number of securities.


Investment 2,000,000

Cash 2,000,000

Chapter 19-35


3. Dividends of $100,000 and interest of $300,000 were received.


Cash 400,000

Due to General Fund 300,000

Due to Specific Purpose Fund 100,000

Chapter 19-36


4. The income was transferred to the appropriate funds.


Cash 400,000

Due to General Fund 300,000

Due to Specific Purpose Fund 100,000

Chapter 19-37


8. The was notified of the donor death.


Cash 2,000,000

Transfer to Plant Replacement and Expansion Fund 2,000,000

Chapter 19-38

Accounting for InvestmentsAccounting for InvestmentsAccounting for InvestmentsAccounting 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 19-39

Accounting for Loan FundsAccounting for Loan FundsAccounting for Loan FundsAccounting 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 19-40

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.

Principal InterestFaculty $ 5,000 $500

Student 10,000 800


Chapter 19-41

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

Revenue – Contributions Restricted 100,000

Chapter 19-42


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 60,000Loans Receivable – Faculty 40,000

Cash 100,000

Bad Debt Expense 10,000Allowance for Uncollectible–Students 6,000Allowance for Uncollectible–Faculty 4,000

Chapter 19-43


3. Grearson wrote off a $1,000 student loan as uncollectible.


Allowance for Uncollectible–Students 100,000

Loans Receivable – Students 100,000

Chapter 19-44


4. The following loans were repaid.Principal Interest

Faculty $ 5,000 $500Student 10,000 800


Cash 16,300

Loans Receivable – Students 10,000

Loans Receivable – Faculty 5,000

Interest Income 1,300

Chapter 19-45

Accounting for Agency (Custodial) FundsAccounting for Agency (Custodial) FundsAccounting for Agency (Custodial) FundsAccounting 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 19-46

Accounting for Annuity and Life Income FundsAccounting for Annuity and Life Income FundsAccounting for Annuity and Life Income FundsAccounting 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 19-47

Recognition of Service Fee Revenue

Operating versus Nonoperating Income

Issues Relating to Colleges and UniversitiesIssues Relating to Colleges and UniversitiesIssues Relating to Colleges and UniversitiesIssues Relating to Colleges and Universities

Charity care

Contractual allowances

Capitation revenues

Malpractice

Issues Relating to HospitalsIssues Relating to HospitalsIssues Relating to HospitalsIssues Relating to Hospitals

Chapter 19-48

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