Chapter Eighteen Accounting and Reporting for Private Not-for- Profit Organizations Copyright © 2013 by The McGraw-Hill Companies, Inc. All rights reserved. McGraw-Hill/Irwin

Not-for-Profit Organizations General Characteristics  They receive contributions from donors who do not expect a return of equal financial value  Their operating purpose is not providing goods and services for profit  They do not have ownership interests as do for- profits They may be governmental or private  Charitable  Educational  Civic organizations  Political parties  Trade organizations 18-2

FASB has jurisdiction over private Not-For- Profits, and two basic ideas form the FASB’s framework for not-for-profit standards: The financial statements should focus on the entity as a whole. Reporting requirements for not-for-profits should be similar to business entities, unless there are critical differences in the needs of users. Financial Reporting LO

A Little History…. Prior to 1993, there was a confusing variety of private not-for-profit accounting practices.  In that year, FASB issued guidance to  standardize the reporting,  emphasize reporting the operations and financial position of the entire entity, and  allow the use of many of the same accrual-based techniques utilized by for-profit entities. 18-4

FASB requires three financial statements for not-for-profits. Financial Reporting 1) Statement of Financial Position 2) Statement of Activities and Changes in Net Assets 3) Statement of Cash Flows 4) Statement of Functional Expenses (required only for voluntary health and welfare organizations). LO2 18-5

Report assets, liabilities, and net assets. Net assets are presented in three categories:  Unrestricted  Temporarily Restricted  Permanently Restricted Use the term “Net assets” rather than owners’ equity or fund balance. Statement of Financial Position 18-6

Statement of Financial Position Restrictions by an outside donor results in an asset that is classified as:  Temporarily restricted  For a particular purpose OR  For use in a future time period  Permanently restricted  Expected to remain restricted for as long as the organization exists  Unrestricted  Board-designated or internally restricted assets 18-7

Statement of Activities and Changes in Net Assets  Change in net assets = difference between revenues and expenses.  The change in net assets is reported instead of net income. Donors’ unconditional promises to give are recognized as both revenue and a receivable in the period of promise.  Revenues and expenses are measured on the accrual basis. 18-8

Statement of Activities and Changes in Net Assets Expenses are presented in two categories:  Program Services  Supporting Services Program Services Activities relating to social services, research, or other objectives of the organization. Supporting Services Administrative costs and fund-raising expenses. 18-9

Statement of Functional Expense Statement of Functional Expenses A detailed analysis of expenses by both function and object. Allocation of joint fund-raising & program service costs is permitted only when certain criteria are met. LO

Accounting for Contributions Cash is recorded as revenue in the period received. Conditional promises to give are recognized as revenue when the conditions are met. Unconditional promises to give are recognized as revenue when the promise is made. Restricted gifts are not the same as conditional gifts. Pledges that allow donors to change their minds are not unconditional. LO

Tax-Exempt Status Section 501(c)(3) Applies to charitable, educational or scientific. Tax-Exempt Status – Not-for-profits may not have to pay federal income taxes under the following sections of the Internal Revenue Code: Section 501(c)(4) Applies to advocacy groups Section 501(c)(6) Applies to business leagues, boards of trade LO

Mergers & Acquisitions  Why have mergers and acquisitions become prevalent among Not-for-Profits?  Efficient use of resources  Common goals  Efficiencies of size  Rescue suffering charities  Expand one organization’s scope of outreach LO

Mergers & Acquisitions  The respective Boards of Directors make the decision to acquire another entity, there are no shareholders to buy out or consider.  In an Acquisition, the acquired accounts are added at FMV.  In a Merger, the newly formed not-for- profit records all accounts at their previous book values

Accounting for Health Care Organizations LO 6 Health Care expenditures account for 16% of our Gross Domestic Product, much of which is paid by third-party payors. From a financial reporting perspective, these organizations have no need to compute and report net income. However, readers of the financial statements need a way to measure the efficiency of the entity’s operations. FASB requires the reporting of a “performance indicator” to show operational success or failure

Bad debts and fee reductions for health care organizations can be significantly higher than for other kinds of businesses. Amounts that the entity does not intend to collect should not ultimately be reported as revenues. In many cases, the patient is not responsible for the entire bill. Third-party payors, such as insurance providers, are an important part of the process. Accounting for Patient Service Revenues 18-16