Chapter 19 - Not-for-Profit Entities CHAPTER 19 NOT-FOR-PROFIT ENTITIES ANSWERS TO QUESTIONS Q19-1 Initially, tuition scholarships are included in revenue for the period in order to measure fully the revenue obtainable If the university requires an employment-type work for the tuition scholarship, then they are also shown as an expense However, if no employment-type work is required of the recipient, then the university also records the tuition scholarship as a revenue-reduction item Q19-2 In the statement of financial position for private colleges, the net assets are designated as (1) unrestricted, (2) temporarily restricted, or (3) permanently restricted Permanently restricted assets result from contributions that the donors have specified must be retained into perpetuity Earnings from the principal are then used in accordance with the wishes of the donor Temporarily restricted assets are those which the donor has contributed for specific use or which have been contributed for use in a future period All other assets are classified as unrestricted Q19-3 The accounting and reporting for public universities is specified by the GASB, and GASB 35 provides specific guidance that public universities should be accounted for as special-purpose governments in accordance with GASB 34 Private universities have their accounting and financial reporting specified by the FASB FASB 117 provides the format and requirements for financial reporting for private universities Q19-4 The accrual basis of accounting is used in a hospital's general and restricted funds Donor restricted contributions are held in the restricted fund until the conditions are met and then are transferred to the general fund Q19-5 Donated services are included as a revenue and a corresponding expense at their fair value if the services are significant and would otherwise be performed by salaried personnel The criteria for recognition require that the services either (a) create or enhance the nonfinancial assets of the hospital or (b) the services provided require specialized skills, are provided by individuals possessing those skills, and would need to be purchased if not provided by donation Donated equipment is accounted for as a contribution in a temporarily restricted fund until placed into service, at which time it is transferred to the general fund Donated medical supplies are recorded as revenue and charged to expenses as used Q19-6 The $15,000 is accounted for as a contribution to a specific purpose restricted fund When the $15,000 is expended by the general fund, the specific purpose restricted fund transfers the resources to the general fund to reimburse the general fund or pay for the intensive care operating expenses The expense is reported as an expense of the general fund and the reimbursement from the restricted fund is reported as net assets released from the restricted fund Q19-7 Net patient service revenue of a hospital is computed by deducting contractual adjustments from total billings for inpatient and outpatient services provided Charity care is excluded 19-1 Chapter 19 - Not-for-Profit Entities Q19-8 The general fund records a gain on the sale of hospital properties The gain is reported in the hospital's statement of activities Q19-9 Depreciation is recorded on an accrual basis by hospitals It must be accounted for because depreciable assets constitute a significant part of the total cost of providing medical services Q19-10 The accrual basis of accounting is used for the unrestricted current fund of a VHWO The accrual basis of accounting is also used for all other funds, including the restricted current fund, the land, building, and equipment fund (plant fund), and the endowment fund Q19-11 If separate funds are maintained, fixed assets are recorded in the land, building, and equipment fund (plant fund) in a VHWO If separate funds are not maintained, fixed assets would be recorded in the unrestricted fund along with all other assets Q19-12 The $10,000 contribution is accounted for as contribution revenue in a temporarily restricted (specific purpose) fund when it is received The expense of the $10,000 for public health education service is accounted for as a program services expense of the unrestricted fund and as a net asset released from the temporarily restricted fund Q19-13 Pledges from donors that are unconditional promises to give are recognized as contribution revenue in the period in which the pledge is received Although the total amount of the pledge is recorded as a contribution receivable, an adequate allowance for uncollectibles must be recognized The estimated amount that actually will be collected is recognized as contribution revenue Pledges applicable to future periods or restricted in use by the donor should be recorded in the temporarily restricted or permanently restricted fund, as appropriate Q19-14 It would not be appropriate to report funds whose use is restricted as revenue in the unrestricted fund prior to the time the restriction was met Contributions that must be permanently retained are included as contribution revenue in the permanently restricted fund Those received with restriction as to use or that must be used in a future time period are recorded as contribution revenue in the temporarily restricted fund(s) Q19-15 Many VHWOs are heavily dependent upon donated services However, such services typically are not recorded and included for financial reporting purposes For example, neighborhood solicitations are an integral part of the activities of many charitable organizations but no accounting recognition is given for these efforts To be recognized, donated services must (a) create or enhance nonfinancial assets or (b) require specialized skills, be provided by individuals possessing those skills, and typically be purchased if not provided by donation If these conditions are satisfied, the value of the donated services received should be reported as part of revenue and public support and the cost of the services recognized as an expense item of the period 19-2 Chapter 19 - Not-for-Profit Entities Q19-16 The statement of functional expenses details the items reported in the expense section of the statement of activities The individual expense categories generally are assigned to each major programmatic activity and to general management and efforts As a result, much greater insight can be gained into the way in which funds are spent Voluntary health and welfare organizations are required to prepare a statement of functional expenses Q19-17 The contribution of $12,000 is accounted for as a contribution of a temporarily restricted net asset at the time of receipt When the expense of $12,000 is made for a community service activity, the amount used is recognized as funds released from program use restrictions in the statement of activities Q19-18 All organizations subject to FASB jurisdiction must meet the qualifications for recognition of contributed services set forth in FASB 116 Thus, most hospitals and ONPO will be expected to account for donated services in the same manner Both hospitals and ONPOs must demonstrate that the services received either (a) created or enhanced nonfinancial assets or (b) required specialized skills, were provided by individuals possessing those skills, and would have been purchased if the services had not been contributed ONPOs also have been required to demonstrate that the services of the ONPO were not principally intended for the benefit of the organization's members in the past As a result, ONPOs seldom have recorded donated services If donated services are recognized, an ONPO records them as public support; hospitals recognize donated services as revenue Q19-19 The market value unit method of accounting for investments may be used for pooled investments Under this method, a fund is assigned a number of units based on the fund's contribution to the pool and the total market value of all investments in the pool at the time of the contribution Q19-20 As an ONPO, a Rotary Club should record depreciation expense because the omission of depreciation would result in an understatement of the costs of providing the organization's services Q19-21 The statement of activities for both an ONPO and VHWO reports the support, revenue, expenses, net assets released from restriction, and changes in net assets during the fiscal period The particular items reported and the size of the various revenue and expense categories may vary rather substantially between such entities, however, due to differences in the overall missions and types of activities the organizations are involved in on a routine basis Q19-22 Temporarily restricted contributions of ONPOs would include funds for specific programs such as sponsoring a child to summer camp, purchasing reading materials for vacation church school, or acquiring manuscripts for a research library Permanently restricted funds require the creation of an endowment with the principal to be held intact Examples would be the creation of an endowment with the earnings to be used to help underwrite the cost of bringing in one or more large symphonies each year to perform at a local concert hall, to provide for landscaping and lawn service at a local cemetery, or to assist in recruiting and training new Girl Scout leaders 19-3 Chapter 19 - Not-for-Profit Entities SOLUTIONS TO CASES C19-1 Accounting for Donations a Donated services are a vital element of many not-for-profit entities, including hospitals, voluntary health and welfare organizations and other not-for-profit organizations The criteria established in FASB 116 for recognition of donated services require: The services performed create or enhance nonfinancial assets or, The services (a) require specialized skills, (b) are provided by individuals possessing those skills, and (c) the services would be purchased if not donated In general, donated services are not recognized unless they represent an important contribution to the operations of the organization For example, in the hospital setting, a volunteer who staffs a nursing station on a regular shift but accepts no compensation clearly provides services which meet the criteria for recognition The hospital would need to hire another nurse if these services were not volunteered Moreover, the hospital has the ability to supervise and directly control the activities of the volunteer in the same manner as a paid employee On the other hand, a group of high school youth who visit patients and attempt to make their stay in the hospital more pleasant would not qualify for recognition If the services were not provided it is unlikely the hospital would use its resources to hire staff to perform this function Voluntary health and welfare organizations often receive donated services for concentrated fund raising efforts and for supplementary programs Because of the difficulty in determining the value of these services and the absence of controls over the persons providing the services, VHWOs normally not account for donated services unless the first three criteria are met Even when these are met, it may be appropriate to recognize the donated services only if the amount of time donated is significant and represents an integral part of the activities provided by the organization Other not-for-profit organizations often rely heavily on donated services as well However, many of these are for the benefit of other members rather than for some general public purpose and there has been reluctance to recognize donated services in the financial statements In many cases the services are not under the direct control of the organization and are very difficult to value b Donations of capital assets are recorded as a contribution in a restricted fund and carried in the fund until the asset is placed into service, at which time it is transferred to the general fund The donation is recorded at its fair value Once the asset is placed in service, depreciation is recorded for the use of the asset in order to measure fully the cost of providing the hospital's services 19-4 Chapter 19 - Not-for-Profit Entities C19-1 (continued) c As in all not-for-profit organizations, the accounting for cash contributions to a hospital depends on whether or not the donor places a restriction on the use of the cash If the gift is unrestricted, it is accounted for as contribution revenue in the general fund If the gift is restricted, it is recorded as a contribution of temporarily restricted or permanently restricted net assets In the period in which the restriction is met, the appropriate amount is reported in the general fund as released from use or passage of time restriction Cash contributions to a voluntary health and welfare organization or an other not-forprofit organization are accounted for as public support in the period the contribution is received as an addition to unrestricted or restricted net assets If the contribution is restricted by its donor, the gift is treated as a contribution of a temporarily restricted or permanently restricted net asset at the time of receipt and then reported as released from restriction in the period in which the restriction is met C19-2 Public Support to an Other Not-for-Profit Organization a The $25,000 of unrestricted contributions should be accounted for as public support revenue in the statement of activities for the current period b The $15,000 of restricted contributions should be accounted for as a temporarily restricted asset in the restricted fund, if a restricted fund is used or in the general fund if a separate restricted fund is not maintained The $15,000 should be recorded as a contribution in the period of receipt The expense of $6,000 for public health advertisements triggers recognition of $6,000 as funds released from a use restriction with both the expense and release of funds included in the statement of activities for the period If a separate temporarily restricted fund is maintained and the $6,000 expense is made from the unrestricted operating fund, the restricted fund would then reimburse the unrestricted fund for its expenses It does not matter that unrestricted assets were used for the actual expense The remaining $9,000 of restricted resources should be reported as a part of its temporarily restricted net assets on the ONPO's balance sheet 19-5 Chapter 19 - Not-for-Profit Entities C19-3 A Brief Analysis of the Financial Disclosures of United Way of America The United Way of America’s (UWA) web site is www.unitedway.org The navigation to the consolidated financial statements and Form 990 (the form that the IRS requires tax exempt charitable organizations to file) is as follows: (Click on each of the following, in turn) 1.) About United Way; 2.) United Way of America; 3.) Financial Info (990); and then you will be at the links for the Form 990 and the Consolidated Financial Statements and Supplemental Schedule The most recent year of availability will provide the specific data for the questions, but the following are general answers to the questions in the case a From footnote of the Consolidated Financial Statements: The reporting entity includes the following: United Way of America (UWA) and its subsidiaries, United Way Store and United eWay The statements also include UWA’s regional office of United Way of Tri-State, Inc Operationally, the United Way Store is a for-profit subsidiary to provide sales fulfilment services to UWA and other organizations United eWay provides on-line giving along with pledge processing and fund distribution services for corporations working with UWA In June 2005, United Way of Tri-State, Inc (UWTS) became a Tri-State Regional office of the UWA and is responsible for raising charitable funds and working with companies whose employees live and/or work in the New York Tri-State region And there are a large number of local United Way chapters that manage local fund raising campaigns b The Consolidated Statements of Financial Position includes eliminations for intraorganizational payables and receivables (Due from affiliates and Due to affiliates) and the capital accounts of the for-profit United Way Store (against the investment in subsidiary account of the parent, UWA These eliminating entries are the same type as in the consolidating workpaper used for a parent and its subsidiary companies as presented in the first ten chapters of this textbook The major components of the consolidated assets and equity will depend on the specific year analyzed Because UWA is an organization that focuses on raising and distributing charitable funds, the consolidated statement of financial position will reflect unrestricted and restricted amounts, custodial funds (both as an asset and a liability), campaign receivables, and fixed assets such as building, land, and equipment The custodial funds are described in footnote UWA is the fiscal agent for a Federal Emergency Management Agency (FEMA) program to distribute federal funds through the Emergency Food and Shelter (EF&S) program which is not consolidated into UWA’s financial statements UWA is the custodian of the federal funds and distributes these funds in accordance with the directions of the national board established to determine needs that can be met with these funds Thus, UWA reports both an asset and a liability in the same amount for any undistributed funds for which it is the custodian c The consolidated statement of activities shows the typical types of revenues and expenses of a large fund raising not-for-profit entity Revenues will include public support through membership, campaigns, and contributions Also, United Way Stores generates revenue from sales of promotional materials Expenses include program services, particularly Public Policy, which footnote describes as federal advocacy efforts and coordination of national activities at the regional level, and crisis response 19-6 Chapter 19 - Not-for-Profit Entities C19-3 (continued) The total consolidated fund raising expenses are included in supporting services In 2006, these costs were $577,000, which is a relatively small percentage of total expenses as compared with other fund raising not-for-profit entities UWA has successfully worked with a large number of businesses and other entities to coordinate UWA fund raising activities in those entities Thus, the businesses and other entities provide a relatively large part of UWA’s fund raising efforts d The supplementary schedule of functional expenses presents expense information on each of the program services described in footnote of the consolidated financial statements Public policy is generally the largest, followed by brand leadership, investor relations, Center for Community Leadership and community impact leadership Note that supporting services are presented separately from program services The three largest expense categories are scholarships, grants, and awards (primarily given through the public policy program); salaries, and professional fees and contract services (across all program services and supporting services, but especially under brand leadership) e Form 990 contains much of the same information as provided in the consolidated financial statements, but in a format that permits the IRS to easily compare information for tax-exempt organizations Most students will not have seen a Form 990 before this case and can quickly see that Form 990 can be prepared from information from the consolidated financial statements 19-7 Chapter 19 - Not-for-Profit Entities C19-4 Case on Conditional Gift to a Not-for-Profit Organization MEMO To: Betty Gardner, Treasurer, Central Illinois Chapter From: Re: , CPA Victor Wyatt pledge Mr Wyatt has pledged $20,000 per year for five years to the Central Illinois Chapter, with the condition that the chapter sponsor annual educational programs over the next five years Mr Wyatt’s pledge should be considered as a conditional promise to give, under the requirements stated in paragraph 22 of FASB Statement No 116 The first $20,000 gift, which has already been received by the chapter, should be recognized either as a contribution or as a refundable advance, depending on whether the conditions associated with the contribution have been substantially met [FASB 116, Par 22] Because the first educational workshop has been organized and scheduled and has been approved by Mr Wyatt, I believe that this amount can be recognized as a contribution during the current fiscal year Although the chapter does intend to fulfil Mr Wyatt’s conditions in order to receive the additional contributions, at this point in time these conditions are not substantially met Therefore, the additional $80,000 that Mr Wyatt has pledged should not be recognized in the current fiscal year Mr Wyatt has clearly stated that the additional contributions will not be made if the chapter does not continue with the educational programs Thus there is no ambiguity about whether Mr Wyatt’s promise to give is conditional or unconditional Determining whether a promise is conditional or unconditional can be difficult if it contains donor stipulations that not clearly state whether the right to receive payment or delivery of the promised assets depends on meeting those stipulations It may be difficult to determine whether those stipulations are conditions or restrictions In cases of ambiguous donor stipulations, a promise containing stipulations that are not clearly unconditional shall be presumed to be a conditional promise [FASB 116, Par 23] Although the chapter cannot recognize the $80,000, the pledge should be disclosed The chapter should disclose the following with respect to Mr Wyatt’s conditional promise: a The total of the amounts promised, and b A description and amount for each group of promises having similar characteristics, such as amounts of promises conditioned on establishing new programs, completing a new building, and raising matching gifts by a specified date [FASB 116, Par 25] Primary references FASB 116, Par 22 FASB 116, Par 23 Query Used condition* gift* condition* giv* Other references 19-8 Chapter 19 - Not-for-Profit Entities FASB 116, Par 25 FASB 116, Par 79 19-9 Chapter 19 - Not-for-Profit Entities C19-5 Accounting for Contributions to and Activities of a Not-for-Profit Organization MEMO To: Gerry Finley, Manager From: Re: , CPA Auction Extravaganza There are two different problems with the way that the Community Chest is reporting the proceeds of the Auction Extravaganza event First, paragraph 24 of FASB Statement No 117 (FASB 117) requires that the revenues and expenses from the event be reported as gross amounts and should not be netted together Although FASB 117 does permit net reporting for investment income or gains from certain peripheral activities [FASB 117, Par 24-25], these exceptions not apply to a major event like the Auction Extravaganza Therefore, the statement of activities should include the gross revenue from the event in the revenues section and should identify the event expenses in the expense section of the statement The second accounting issue is the donations that the Community Chest receives for the Auction Extravaganza event Community Chest is recording as revenue the event ticket sales and the auction proceeds but is not reporting donated auction items and services as contributions In paragraph of FASB Statement No 116 (FASB 116), contributions received by a not-for-profit organization are defined as an unconditional transfer of cash, other assets, or services The items that businesses donated to be auctioned meet the definition of contributions FASB 116 provides that contributions received are to be recorded at fair value [FASB 116, Par 8] Because the donated items are immediately used by the Community Chest in the auction, the fair value of the items should be estimated and recognized as both a revenue and an expense in the current reporting period Contributions received shall be recognized as revenues or gains in the period received and as assets, decreases of liabilities, or expenses depending on the form of the benefits received [FASB 116, par 8] The Community Chest should also estimate a fair value for the services provided by the auctioneer and the musicians These meet the requirement for recognition that the services are specialized skills that the Community Chest would have to purchase if the donation was not made [FASB 116, Par 9] Again, since the services are both donated to and consumed in the Auction Extravaganza, the fair values should be recognized as both revenue and expense Although these changes will have no net effect on the change in net assets reported in the statement of activities, they will provide more complete information about the Auction Extravaganza event, which complies with the FASB’s intent in issuing FASB 116 Primary references FASB 117, Par 24 profit Other references FASB 116, Par 19-10 Query Used revenue* expense* net* not-for- Chapter 19 - Not-for-Profit Entities P19-14 Statements for Current Funds of a Voluntary Health and Welfare Organization [AICPA Adapted] Community Association for Handicapped Children Statement of Activities Year Ended June 30, 20X4 Public support and revenue: Public support: Contributions (net of estimated uncollectible pledges of $2,000) Revenue: Membership dues Program service fees Investment income Net assets released from: Time restriction (from Endowment Fund) Use restriction Total support and revenue Expenses: Program services: Deaf children Blind children Total program services Supporting services: Management and general Fund raising Total supporting services Total expenses Unrestricted Temporarily Restricted $298,000 $ 15,000 25,000 30,000 10,000 20,000 5,000 $388,000 (20,000) (5,000) $(10,000) $120,000 150,000 $270,000 $ 49,000 9,000 $ 58,000 $328,000 Change in net assets Fund balances, July 1, 20X3 Fund balances, June 30, 20X4 $ 60,000 38,000 $ 98,000 _ $ _-0$(10,000) 23,000 $ 13,000 Note: The use restriction transfer of $5,000 from the temporarily restricted fund to the unrestricted fund is for the $4,000 and $1,000 of expenses initially recorded in the temporarily restricted fund FASB 117 requires that all not-for-profit organizations report all entity expenses in the unrestricted fund Therefore, the temporarily restricted fund will not report any expenses The management and general, and the fund raising amounts in the unrestricted fund include the $4,000 and $1,000 expenses transferred from the temporarily restricted fund 19-36 Chapter 19 - Not-for-Profit Entities P19-14 (continued) Community Association for Handicapped Children Statement of Financial Position June 30, 20X4 Cash Investments (at cost, which approximates market value) Pledges receivable (less $3,000 allowance for uncollectibles) Interest receivable Assets whose use is restricted Total assets Accounts payable Deferred revenue Total liabilities Net assets: Unrestricted Temporarily restricted Total net assets Total liabilities and net assets $ 40,000 100,000 9,000 1,000 13,000 $163,000 $ 50,000 2,000 $ 52,000 $98,000 13,000 111,000 $163,000 Note: The $13,000 for Assets whose use is restricted is the $14,000 of temporarily restricted assets minus the $1,000 of temporarily restricted liabilities 19-37 Chapter 19 - Not-for-Profit Entities P19-15 Comparative Journal Entries for a Government Entity and a Voluntary Health and Welfare Organization [AICPA Adapted] a Local Government Unit General Fund Expenditures – Purchase of Equipment Cash General Fund (or any other fund) Cash Revenue – Donations 25,000 100,000 Permanent Trust Fund Cash Investments Fund Balance – Restricted – Gain on Sale of Investments Capital Projects Fund Cash Other Financing Sources – Bond Issue Capital Projects Fund Construction Expenditures Cash 55,000 100,000 50,000 5,000 1,000,000 1,000,000 1,000,000 19-38 25,000 1,000,000 Chapter 19 - Not-for-Profit Entities P19-15 (continued) b Voluntary Health and Welfare Organization Unrestricted Fund Equipment Cash 25,000 Cash Net Assets Released from Fixed Asset Acquisition Restriction Temporarily Restricted Fund – Plant and Equipment Net Assets Released from Fixed Asset Acquisition Restriction Cash Unrestricted Fund Cash Contributions – Unrestricted Permanently Restricted Fund – Endowments Cash Investments – Common Stocks Gain on Sale of Investments Unrestricted Fund Cash Bonds Payable 25,000 25,000 25,000 100,000 55,000 1,000,000 Buildings Cash 1,000,000 19-39 25,000 25,000 100,000 50,000 5,000 1,000,000 1,000,000 Chapter 19 - Not-for-Profit Entities P19-16 Matching Effects of Transactions on a Hospital’s Financial Statements [AICPA Adapted] E The designation of intent is not a transaction When the actual purchase is made, the transaction will be recorded A After the investment is actually made, the income from resources under the control of the governing board is recorded as unrestricted revenue C Resources contributed for capital expansion serve a specific purpose for which the resources should be used This contribution is accounted for in a temporarily restricted fund, and reported as an increase in temporarily restricted net assets A The use of temporarily restricted resources in accordance with the donor’s specification results in a reclassification (transfer) of the resources from temporarily restricted to unrestricted The following entries would be made in the case of the hospital maintaining a separate Plant Fund: Plant Fund: Net Assets Released – Plant Acquisition Cash Unrestricted Fund: Cash Net Assets Released from Capital Acquisition Restriction Property, Plant, and Equipment Cash XXXX XXXX XXXX XXXX XXXX XXXX A Donated services to a hospital are accounted for in accordance with FASB 116 under which donated services are recognized if the services (a) create or enhance nonfinancial assets, or (b) require specialized skills, are provided by individuals possessing those skills, and would typically need to be purchased if not provided by donations In the case of specialized accounting services, the hospital would recognize the estimated value of the donated services as an expense and a corresponding amount is reported as an increase in unrestricted revenues, gains, and other support Given the five choices of A through E, A is the answer D The contribution of permanently restricted investments would normally be accounted for in an endowment fund which would be an increase in permanently restricted net assets The income from the investments would be available for the unrestricted fund, but the investments themselves would be restricted in accordance with the donor’s specification 19-40 Chapter 19 - Not-for-Profit Entities P19-17 Balance Sheet for a Hospital Havencrest Hospital Balance Sheet June 30, 20X8 Assets Current: Cash Accounts Receivable (net of the allowance of $5,000) Inventories Prepaid Expenses Total Current Assets Assets Limited as to Use: By Donors for Specific Purpose – Research By Donors for Plant Replacement and Expansion By Donors for Permanent Investment Investments Property, Plant, and Equipment (net of accumulated depreciation of $140,000) Total Assets Liabilities and Net Assets Current: Accounts Payable Accrued Expenses Deferred Revenues Current Portion of Long-term Debt Total Current Liabilities Long-term Debt: Mortgage Payable Total Liabilities Net Assets: Unrestricted Temporarily Restricted Permanently Restricted Total Net Assets Total Liabilities and Net Assets 19-41 $ 30,000 20,000 50,000 10,000 $ 110,000 $ 32,000 200,000 520,000 100,000 160,000 $1,122,000 $ $ 45,000 17,000 11,000 24,000 97,000 125,000 $ 222,000 $ 148,000 232,000 520,000 $ 900,000 $1,122,000 Chapter 19 - Not-for-Profit Entities P19-18 Matching of Transactions to Effects on Statement of Changes in Net Assets for a Hospital A E B G C C A and D A D (A and B offset) 10 E 11 G 12 A P19-19 Matching of Transactions to Effects on Statement of Activities for a Voluntary Health and Welfare Organization C B B G E C A and C A A 10 C 11 A 12 D A board-designation is not an external, donor-imposed restriction There is no change in the unrestricted net assets 19-42 Chapter 19 - Not-for-Profit Entities P19-20 Net Asset Identification for Transactions Involving a Private University Unrestricted net assets increased $2,000,000 Temporarily restricted net assets increased $1,000,000 Unrestricted net assets decreased $200,000 Temporarily restricted net assets increased $1,500,000 Temporarily restricted net assets increased $150,000 Temporarily restricted net assets increased $75,000 Temporarily restricted net assets decreased $60,000, the result of a reclassification of $60,000 to unrestricted net assets There is no effect on unrestricted net assets because the increase of $60,000 due to the reclassification is offset by a $60,000 increase in expenses Expenses are decreases in unrestricted net assets There is no effect on unrestricted net assets as a result of this board designation Net assets under the control of the governing board are unrestricted The board of BU took cash that was unrestricted and designated that it be used for a specific purpose This designation does not change the net asset classification of the cash Permanently restricted net assets increased $3,750,000 10 There is no effect on unrestricted net assets as a result of the acquisition of debt securities by the board The board took cash that was unrestricted and used it to acquire debt securities 11 Unrestricted net assets increased $6,000 The interest revenue of $18,000 from the investments is an increase in unrestricted net assets, while the $12,000 used to fund summer research grants represents a $12,000 decrease in unrestricted net assets 19-43 Chapter 19 - Not-for-Profit Entities P19-21 Questions on Voluntary Health and Welfare Organization [AICPA Adapted] Transaction List A Effect B List B Effect N B H A H G K D N G L P19-22 Contributions to a Hospital [AICPA Adapted] E The board’s designation is not a required reportable event A The investments are under the board’s discretion; therefore, the income is recorded as unrestricted revenue C Funds provided specifically for a building expansion are temporarily restricted until the construction takes place A At the time the temporarily restricted resources are expended for the program specified by the donor, the funds are reclassified as unrestricted A Professional services contributed to the not-for-profit organization are valued at their fair value and recorded as unrestricted revenues, gains, and other support D The principal is permanently restricted by the donor The income from the investments, when the income is earned, would be classified as temporarily restricted, to be used for the specific purpose specified by the donor 19-44 Chapter 19 - Not-for-Profit Entities P19-23 Evaluating Items for a Hospital’s Statement of Operations A Estimated uncollectibles from providing services is an operating expense A,A Both as a contribution revenue and an operating expense If the supplies had not been used during the period they would be reported as contribution revenue and an increase in inventory The operating expense would be recognized as they are consumed A Unrestricted investment income is included in unrestricted revenue A Assumes normal case that gain is not restricted B Net assets released for acquisition of equipment are nonoperating items A Net assets released for operations are part of operating items C The statement of operations reports only income/loss on unrestricted net assets C This investment income would be retained by the temporarily restricted fund C Pledges for planned new construction would be accounted for as contributions in the temporarily restricted building fund until released for acquisition of the equipment They would then be accounted for as a net assets released to the unrestricted fund 10 A Auxiliary services revenues are included in unrestricted revenues 11 A,A Both as contribution revenue and an operating expense 12 A Depreciation is an operating expense of the hospital 13 C Board designations not change the nature of the unrestricted resources 14 A Contribution revenue would be recorded at the time of the gift and assets would be increased Operating expense would be recorded for the periodic depreciation 15 C Charity care not reported on the statement Charity care is usually footnoted 16 C Net patient care revenue is net of contractual adjustments Therefore, contractual adjustments not directly shown on the statement of operations 17 C A bond issue is shown as a liability in the hospital’s balance sheet 18 C Only the periodic depreciation on these operating tables will be reported on the statement of operations 19 B Investment income in excess of amounts designated for current operations are shown below the operating performance indicator 19-45 Chapter 19 - Not-for-Profit Entities P19-24 True-False Questions About Not-for-Profit Accounting and Reporting F Per FASB 117, a statement of functional expenses is required only for voluntary health and welfare organizations T According to FASB 116, pledge revenue is recorded net of estimated uncollectibles F Time restricted contributions should be recorded in the temporarily restricted net assets until the time restriction has expired At that point, the resources may be transferred to the unrestricted net asset class F Contractual adjustments should be a direct reduction of patient revenue, not an expense F Designated resources are part of the unrestricted net asset class Only external donor-restricted resources are reported in the restricted asset classes T The net asset transfer from the temporarily restricted net asset class is appropriate at the point the unrestricted net asset class expends the resources in accordance with the donor’s restrictions F According to FASB 116, donated supplies should be recognized as contribution revenue in the period received and as an operating expense in the period used T FASB 124 specifies that income on permanently restricted endowment assets should be recognized in the appropriate net asset class for which the income is directed In this example, the income is restricted for a specific use Therefore, the investment income should be recognized directly in the temporarily restricted net asset class F FASB 124 requires that investments held by not-for-profit organizations should be revalued to their fair values at each balance sheet date The total investment return for the period would be determined and that portion designated for current operations would be reported above the operating performance measure in the statement of operations 10 T FASB 116 states that contributions of art or historical works not need to be recorded as contribution revenue and capitalized as assets of the not-forprofit organization if the works are for public display, the organization agrees to care and preserve the collection, and any proceeds from sales of any collection item will be used only for acquiring other items for the collection 19-46 Chapter 19 - Not-for-Profit Entities P19-24 (continued) 11 F The building and equipment is recorded and reported in the hospital’s unrestricted net asset class (the general fund) The restricted building fund is used to account for resources, some of which might be contributions of equipment, to be used for obtaining buildings and equipment Some contributions to the building fund might be equipment that is not put into service At the time the resources are used for acquiring or using plant assets for providing services to patients, the resources are accounted for as net assets released from temporary restriction out of the building fund and also as net assets released from temporary restriction into the unrestricted, general fund The unrestricted fund reports this transfer received below the operating performance measure on the hospital’s statement of operations 12 T FASB 116 states that significant donated services that would otherwise need to be obtained should be recognized as contribution revenue and an expense in the period of the donation 13 F Estimated uncollectibles from patient service receivables should be shown as a bad debt expense and a contra account to the receivables asset 14 F FASB 116 states that conditional pledges should not be recognized until the conditions have been substantially met Potentially possible is not equal to substantially met 15 F The temporarily restricted net asset class should not report any expenses Only the unrestricted net asset class may report expenses The cost of the program should be reported in the unrestricted net asset class and then a net assets released from temporary restriction transfer should be made from the temporarily restricted net asset class to the unrestricted net asset class 16 F FASB 116 states that time restricted contributions should be reported as contribution revenue in a temporarily restricted net asset class At the end of the time restriction, the resources will be transferred to the unrestricted net asset class 17 F Fund accounting is not required for hospitals, although many hospitals use fund accounting for its account discipline Hospitals and other not-forprofit organizations are required by FASB 117 to report net assets by unrestricted, temporarily restricted, and permanently restricted classes Net assets are restricted only by external donors or laws that govern the organization 19-47 Chapter 19 - Not-for-Profit Entities P19-24 (continued) 18 T The performance measure may have any descriptive title such as “Excess of revenues over expenses” but must separate the operating income (loss) from the nonoperating items 19 F The building fund should record this transfer as a net assets released from the temporarily restricted fund The unrestricted, general fund should record this transfer as net assets released from the temporarily restricted fund to the general fund Note that it is not a revenue of the general fund because the revenue was already recognized in the temporarily restricted fund at the time of the donation Contribution revenue should be recognized only once by the not-for-profit hospital 20 F FASB 117 specified that the cost of a fund raising effort of a VHWO is an important piece of information for users of the financial statements of the VHWO Thus, fund raising costs must be separately reported as an expense of the entity and cannot be reported as a direct reduction of the contribution revenue obtained in the fund raising effort 19-48 Chapter 19 - Not-for-Profit Entities P19-25 Statement of Activities for a Voluntary Health and Welfare Organization United Ways Statement of Activities For the Year Ended December 31, 20X3 Unrestricted Revenues, gains, and other support: Contributions Investment income Donated services Net assets released from restriction: Program use restrictions Equipment acquisitions Total revenues, gains, and Other support $ $ 950,000 200,000 Permanently Restricted $ 150,000 100,000 (150,000) (100,000) 765,000 $ 900,000 Total $ 600,000 $ 1,450,000 800,000 15,000 $ 600,000 $ 2,265,000 15,000 Program and supporting services expenses: Research $ Public health education Community services Management and general Fund raising Total expenses Change in net assets Net assets, beginning of the year Net assets, end of the year 500,000 Temporarily Restricted 250,000 100,000 150,000 140,000 115,000 $ 250,000 100,000 150,000 140,000 115,000 $ 755,000 $ 10,000 $ -0$ 900,000 $ -0$ 600,000 $ 755,000 $ 1,510,000 3,000,000 $3,010,000 5,000,000 $5,900,000 6,000,000 $6,600,000 14,000,000 $15,510,000 Notes: The donated services of $15,000 are reported as an increase in unrestricted net assets and included as part of the $140,000 of expenses for management and general The uncollectible pledges of $50,000 are reported as a deduction from temporarily restricted contributions received in 20X3 The $950,000 of pledges received in 20X3 is reported as temporarily restricted because of a time restriction—the pledges will not be received until 20X4 The governing board’s designation of $225,000 for computer acquisitions is not reported on the Statement of Activities The resources that were designated were reported as unrestricted, and the governing board’s designation of the resources does not change their classification FASB 117 permits temporarily restricted net assets that are spent in the same year in which the assets are received to be reported as unrestricted In the problem, this means that the $150,000 of investment income that was earned in 20X3 and used for research in 20X3 could have been reported directly in unrestricted net assets, avoiding the need to report $150,000 of net assets released from restriction 19-49 Chapter 19 - Not-for-Profit Entities P19-26 Reporting Transactions on the Statement of Cash Flows for Private, Not-for-Profit Entities Report the $100,000 increase in accounts receivable as a deduction from the change in net assets in the operating activities section Report a deduction for the $200,000 contribution from the change in net assets in the operating activities section and disclose an increase of $200,000 in the financing activities section Report a deduction for the $25,000 contribution from the change in net assets in the operating activities section and disclose an increase of $25,000 in the investing activities section Report an addition to the change in net assets in the operating activities section for the increase of $20,000 in accounts payable Report the $70,000 borrowed as an increase in the financing activities section Report a deduction of $50,000 to acquire investments in the investing activities section Report a deduction for the investment income of $45,000 from the change in net assets in the operating activities section and report an increase of $45,000 in the financing activities section Report the $850,000 as a decrease in the investing activities section Report the loans made to students and faculty of $100,000 as a decrease in the investing activities section 10 Report the $30,000 loan repayment as a deduction in the financing activities section 11 Report the increase in accrued interest receivable as a deduction from the change in net assets in the operating activities section 12 Report the increase of $12,000 in deferred revenue as an increase to the change in net assets in the operating activities section 13 Report the $100,000 received as an increase in the investing activities section 14 Report the increase of $2,500 in prepaid assets as a deduction to the change in net assets in the operating activities section 15 Report the $35,000 unrealized gain on investment as a deduction from the change in net assets in the operating activities section 19-50 ... (a) create or enhance nonfinancial assets or (b) require specialized skills, be provided by individuals possessing those skills, and typically be purchased if not provided by donation If these conditions... Chapter 19 - Not-for-Profit Entities SOLUTIONS TO PROBLEMS P19-10 Financial Statements for a Private, Not-for-Profit College a Friendly College Statement of Financial Position June 30, 20X3 and... services require: The services performed create or enhance nonfinancial assets or, The services (a) require specialized skills, (b) are provided by individuals possessing those skills, and (c) the services