Not-for-Profit Entities Chapter 19
Learning Objectives • Describe the source of accounting standards for nongovernment nonbusiness organizations (NNOs). • 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 • Understand how donated services are recorded. • Describe the funds used to account for property, plant and equipment. • Explain the basic accounting used by endowment funds. • Indicate how equity investments are reported in the financial statements. • Explain the change in accounting for loan funds brought about by new standards. • Understand the use of an annuity or life income fund. • Discuss the special reporting issues of hospitals.
Nongovernment Nonbusiness Organizations (NNOs) • Four Major Classifications of NNOs: • Nonprofit institutions of higher education. • Hospitals and other health care providers. • Voluntary health and welfare organizations (VHWOs). • Other nongovernment nonbusiness organizations (ONNOs).
Financial Reporting for Not-for-Profit Three Basic Financial Statements required: • Statement of financial position • Net Asset categories: • Unrestricted net assets • Temporarily restricted net assets • Permanently restricted net assets • Statement of activities • Statement of cash flows
Fund Accounting Most NNOs use fund accounting for recordkeeping and reporting purposes. funds commonly used: • Current Fund (restricted and unrestricted). • Endowment Fund. • Loan Fund. • Agency or Custodial Fund. • Annuity and Life Income Fund.
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.
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.
Contributions Exercise 19-6A 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.
Contributions Exercise 19-6Prepare 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
Contributions Exercise 19-6Prepare 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
Contributions 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.
Contributions Exercise 19-2During 2008 volunteer donated their services to General Hospital at no cost. The staff at General Hospital was in control of the 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 volunteers 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
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. Donor-imposed Restricted Contributions
Contributions Exercise 19-3The 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.
Contributions Exercise 19-3Prepare the journal entries necessary to record these events during 2008. Restricted Current Fund Cash 300,000 Contribution Revenue – Poetry Collection 300,000 Net Assets Released from Restrictions 100,000 Cash 100,000 Unrestricted Current Fund Cash 100,000 Net Assets Released from Restrictions 100,000 Expenses – Poetry Collection 100,000 Cash 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.