© The McGraw-Hill Companies, Inc., 2004 Slide 18-1 McGraw-Hill/Irwin Chapter Eighteen Accounting and Reporting for Private Not-For- Profit Organizations

© The McGraw-Hill Companies, Inc., 2004 Slide 18-2 McGraw-Hill/Irwin Authoritative Jurisdiction

© The McGraw-Hill Companies, Inc., 2004 Slide 18-3 McGraw-Hill/Irwin Two basic ideas form the FASB’s framework for not-for-profit standards: Financial Reporting  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.

© The McGraw-Hill Companies, Inc., 2004 Slide 18-4 McGraw-Hill/Irwin FASB No. 117 requires three financial statements. Financial Reporting Statement of Financial Position  Uses “Net Assets” instead of owners’ equity or fund balance. Statement of Activities and Changes in Net Assets Statement of Cash Flows Statement of Functional Expense (required only for voluntary health and welfare organizations). Statement of Financial Position  Uses “Net Assets” instead of owners’ equity or fund balance. Statement of Activities and Changes in Net Assets Statement of Cash Flows Statement of Functional Expense (required only for voluntary health and welfare organizations). {

© The McGraw-Hill Companies, Inc., 2004 Slide 18-5 McGraw-Hill/Irwin ? ? ? ? Report assets, liabilities, and net assets. Net assets are presented in 3 categories: l l Unrestricted l l Temporarily Restricted l l Permanently Restricted Net assets are presented in 3 categories: l l Unrestricted l l Temporarily Restricted l l Permanently Restricted Use the term “Net assets” rather than owners’ equity or fund balance. Statement of Financial Position

© The McGraw-Hill Companies, Inc., 2004 Slide 18-6 McGraw-Hill/Irwin Per FASB No. 116, unconditional promises by donors to give are recognized as revenue in the period of promise. Change in net assets is reported instead of net income. Revenues & expenses are measured on the accrual basis. Statement of Activities and Changes in Net Assets Change in net assets = difference between revenues and expenses

© The McGraw-Hill Companies, Inc., 2004 Slide 18-7 McGraw-Hill/Irwin Per FASB No. 116, unconditional promises by donors to give are recognized as revenue in the period of promise. Change in net assets = difference between revenues and expenses Statement of Activities and Changes in Net Assets Expenses are presented in 2 categories: Program Services Supporting Services Expenses are presented in 2 categories: Program Services Supporting Services

© The McGraw-Hill Companies, Inc., 2004 Slide 18-8 McGraw-Hill/Irwin Supporting Services Administrative costs and fund-raising. Supporting Services Administrative costs and fund-raising. Let’s take a quick look at the last two statements! Statement of Activities and Changes in Net Assets Program Services Activities relating to social services, research, and other objectives of the organization. Program Services Activities relating to social services, research, and other objectives of the organization. Expenses are presented in 2 categories: Program Services Supporting Services Expenses are presented in 2 categories: Program Services Supporting Services

© The McGraw-Hill Companies, Inc., 2004 Slide 18-9 McGraw-Hill/Irwin Statement of Cash Flows

© The McGraw-Hill Companies, Inc., 2004 Slide McGraw-Hill/Irwin Statement of Functional Expense

© The McGraw-Hill Companies, Inc., 2004 Slide McGraw-Hill/Irwin GAAP Hierarchy Level A FASB Statements & Interpretations, APB Opinions, AICPA ARB’s Level A FASB Statements & Interpretations, APB Opinions, AICPA ARB’s Level B FASB Technical Bulletins, AICPA Industry Audit & Accounting Guides Level B FASB Technical Bulletins, AICPA Industry Audit & Accounting Guides Level C FASB EITF Consensus Positions, and AICPA AcSEC Practice Bulletins Level C FASB EITF Consensus Positions, and AICPA AcSEC Practice Bulletins Level D AICPA Accounting Interpretations, FASB staff “Q&A”’s, Industry Practice Level D AICPA Accounting Interpretations, FASB staff “Q&A”’s, Industry Practice

© The McGraw-Hill Companies, Inc., 2004 Slide McGraw-Hill/Irwin Accounting for Contributions

© The McGraw-Hill Companies, Inc., 2004 Slide McGraw-Hill/Irwin Accounting for Contributions

© The McGraw-Hill Companies, Inc., 2004 Slide McGraw-Hill/Irwin Holding Contributions for Others

© The McGraw-Hill Companies, Inc., 2004 Slide McGraw-Hill/Irwin Let’s look at accounting for health care organizations.

© The McGraw-Hill Companies, Inc., 2004 Slide McGraw-Hill/Irwin Three classifications of health care organization: Investor-owned. Not-for-profit. Government-owned. Three classifications of health care organization: Investor-owned. Not-for-profit. Government-owned. Financial Reporting for Health Care Organizations

© The McGraw-Hill Companies, Inc., 2004 Slide McGraw-Hill/Irwin Identifying the classification is important. For example, the classification will determine how cash flows are accounted for. FASB No. 116 & 117 GASB Three classifications of health care organization: Investor-owned. Not-for-profit. Government-owned. Three classifications of health care organization: Investor-owned. Not-for-profit. Government-owned. Financial Reporting for Health Care Organizations

© The McGraw-Hill Companies, Inc., 2004 Slide McGraw-Hill/Irwin Bad debts for health care organizations can be significantly higher than other kinds of businesses. Amounts that the entity does not intend to collect should not 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. 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

© The McGraw-Hill Companies, Inc., 2004 Slide McGraw-Hill/Irwin Record the entry for Medi-Health’s revenues. Medi-Health General Hospital is a private, not-for-profit hospital. In March, Medi-Health had patient charges totaling $980,000. Twelve percent of the patient charges are due from the patients. The remaining amount is due from insurance providers. Patient Service Revenues Example

© The McGraw-Hill Companies, Inc., 2004 Slide McGraw-Hill/Irwin Record the journal entry for Medi- Health’s uncollectible services. Of the amount due from patients, $36,000 is related to services rendered to poor patients that the hospital did not intend to collect. Patient Service Revenues Example

© The McGraw-Hill Companies, Inc., 2004 Slide McGraw-Hill/Irwin Record the journal entry for Medi-Health’s expected bad debts from patients. For the remaining receivables from patients, Medi-Health expects to receive 92%. Patient Service Revenues Example

© The McGraw-Hill Companies, Inc., 2004 Slide McGraw-Hill/Irwin The amount billed to the third-party payor may not agree with the contracted amount that the third- party payor pays. The amount billed to the third-party payor may not agree with the contracted amount that the third- party payor pays. The difference is charged to an account called: The difference is charged to an account called: Contractual Adjustment Contractual Adjustment The amount billed to the third-party payor may not agree with the contracted amount that the third- party payor pays. The amount billed to the third-party payor may not agree with the contracted amount that the third- party payor pays. The difference is charged to an account called: The difference is charged to an account called: Contractual Adjustment Contractual Adjustment Contractural Agreements with Third-Party Payors

© The McGraw-Hill Companies, Inc., 2004 Slide McGraw-Hill/Irwin Record the journal entry for Medi-Health’s billings to the insurance companies. Of the $862,400 that Medi-Health has billed the insurance companies, Medi-Health projects that it will collect 96% based on contractural agreements. Third-Party Payors Example

© The McGraw-Hill Companies, Inc., 2004 Slide McGraw-Hill/Irwin I get such satisfaction working for not- for-profit companies! End of Chapter 18