Advanced accounting 10th by a beams athony ch21

Chapter 21:Accounting for Notfor-Profit Organizations
by Jeanne M. David, Ph.D., Univ. of Detroit Mercy
to accompany
Advanced Accounting, 10th edition
by Floyd A. Beams, Robin P. Clement,
Joseph H. Anthony, and Suzanne Lowensohn

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Not-for-Profits : Objectives
1. Learn about the four main categories of not-forprofit organizations
2. Differentiate between governmental and
nongovernmental not-for-profit organizations.
3. Introduce FASB not-for-profit accounting
principles.
4. Apply not-for-profit accounting principles to
voluntary health and welfare organizations.

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Objectives (cont.)
5. Apply not-for-profit accounting principles to
hospitals and other health care organizations.
6. Apply not-for-profit accounting principles to private
not-for-profit colleges and universities.

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Accounting for Not-for-Profit Organizations

1: Categories of NFPs

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Characteristics
Not-for-profit characteristics

– Contributions without expected commensurate
returns
– Purpose is other than providing goods or
services
– Lacks ownership interests
Accounting for not-for-profits

– Governmental: follow GASB
– Nongovernmental: follow FASB
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Categories of NFPs
1.
2.
3.
4.

Voluntary health and welfare
Hospitals and health care
Colleges and universities
Other not-for-profits
•
•

Churches, museums
Other NFPs are similar to voluntary health and
welfare, without requiring a statement of
functional expenses

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Accounting for Not-for-Profit Organizations

2: Governmental and
Nongovernmental NFPs
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Governmental NFPs
Governmental not-for-profits are NFPs with

– Officers elected or appointed by government
– Government can unilaterally dissolve and assets
revert to government
– Has power to enact/enforce taxes
Follow GASB

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Nongovernmental NFPs
NFPs that lack the governmental element
Follow FASB
• FASB Statement No. 116

– Contributions
• FASB Statement No. 117

– Financial statements
• 2007 AICPA Audit and Accounting Guide: Not-forProfit Organizations
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Accounting for Not-for-Profit Organizations

3: Accounting Principles

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Financial Statements
Statement of financial position
Statement of activities
• Replace with "Statement of operations" and
"Statement of changes in net assets" for hospitals
and health care

Statement of cash flows
Statement of functional expenses
• Required only for voluntary health and welfare
organizations

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Net Assets

Three categories

1. Permanently restricted net assets
•
•

Asset use is limited
Donor imposed stipulations that do not expire/
cannot be removed by entity

2. Temporarily restricted net assets
•
•

Donor imposed restrictions that expire (time
restrictions)
Can be removed by entity fulfilling stipulations
(purpose restrictions)

3. Unrestricted net assets
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Statement of Activities
• Changes in net assets shown separately for

– Unrestricted net assets
– Temporarily restricted net assets

– Permanently restricted net assets
• Revenues and contributions in all three areas
• Expenses only in unrestricted net assets
• Reclassifications
– Move amounts from temporarily restricted to
unrestricted net assets
• Expiration of time restrictions
• Fulfillment of purpose restrictions
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Expenses
Expenses are classified into one of two major
categories
Program services
These are the activities the NFP provides
Examples: Research expense, Educational expense,
Food bank expense, Recreational expense

Supporting services
Management and general expenses
Fund-raising expenses

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Contributions
• Contributions of cash
• Contribution revenue

• Conditional promise to give
• Will be contribution revenue and receivable when
conditions are substantially met

• Unconditional promise to give
• Contribution revenue and receivable when pledged,
but is temporarily restricted (time)

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Contributions (cont.)
• Contributions (cash, pledge, other assets) with
donor imposed restrictions

• Contribution revenue as temporarily restricted (time
or purpose) or permanently restricted
• When temporary restriction is met, reclassify
temporarily restricted net assets as unrestricted net
assets

• Contributions of fixed assets

• Temporarily restricted net assets if donor imposed or

board designated as such

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Transfers (Non-contribution)
• Exchange transactions: Revenues
– Sales of products or services
– "Donations" with gift of same approximate value
• Exchange is unrestricted

• Agency transactions
– No revenue or contribution
– Increase (decrease) both assets and liabilities

• Gifts in kind
– Contribution revenue (restricted or unrestricted)
• Create or enhance nonfinancial assets
• Specialized skills that would otherwise have been
purchased
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Other Accounting Issues
• Measurement
– Contributions at fair value

– Fair value at time of pledge
• Don't recognize increases
• Decreases change net assets
• Collections (art work, historical treasures)
– Capitalization encouraged
• Contributions are revenues
• Fund accounting
– Not required
– Fund financial statements may be presented as supplemental
information

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Accounting for Not-for-Profit Organizations

4: Voluntary Health and Welfare

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Fund Raising
Expenses - supporting services - fund raising
Cash
Cash
Unrestricted gains – special event

Unrestricted gains – special event
Cash

• Pay general fund raising expenses
• Special event fund raisers (two entries)

145

 

 
1,950

145
1,950

250
250

– Receive $1,950 in contributions: gains
– Pay fund raising costs of special event $250
• Special events are disclosed net of costs
• Therefore, the term "gain," not revenue

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Cash Donations and Pledges

Cash
Contributions receivable
Allowance for uncollectibles
Unrestricted support – contributions
Temporarily restricted support contributions

4,000  
6,000  
 
600
 
7,600
 

1,800

• Receive cash and pledge (no purpose restrictions)

– Cash is unrestricted
– $1,800 of $6,000 pledges are to be collected next year: creates a time
restriction

Support – contributions (restricted or not) is revenue

– Revenue accounts are closed to net assets (temporarily, permanently
or unrestricted)

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Collect a Time-Restricted Pledge
Cash

1,800  

Contributions receivable

 

1,800

Temporarily restricted net asset - reclassification
out
1,800  
Unrestricted net assets - reclassification in

• Two entries

 

1,800

• Cash collection
• Reclassification for expiration of time restriction

Reclassification accounts are temporary accounts closed
to their respective net asset accounts
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Receive Equipment and Use It
Equipment
Temporarily restricted net assets –
contributions
Depreciation expense - program services community service
Accumulated depreciation – equipment
Temporarily restricted net asset reclassification out
Unrestricted net assets - reclassification in

1,500  
 

1,500
500  

 

500
500  

 

500

• Contribution of equipment is temporarily restricted
(in the sense that it gets used up)

• As depreciation is recorded, net assets are
reclassified from temporarily restricted to
unrestricted
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Receive Cash with Purpose
Restriction
Cash
Temporarily restricted support –
contributions
Expenses - program services – research
Cash
Temporarily restricted net asset reclassification out
Unrestricted net assets - reclassification in

1,000  
 

1,000
900  
 
900
900  
 

• Receive cash for research
• Pay research costs – fulfills purpose restriction

900

– Two entries: record expenses, reclassify net
assets

If cash was for buying equipment, reclassify as it is
depreciated
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Receive Donated Services
Expenses - support services - management
500  
and general
Unrestricted support - donated services  
500
Construction in process
1,200  
Unrestricted support - donated services  
1,200
• Accounting, specialized services that would have to
be purchased: record as both expense and revenue
• Services of general labor (non-specialized) that result
in nonfinancial assets: record asset and revenue
Services of other general labor (door-to-door collections):
not recorded
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