1. Chapter 19-1

2. Chapter 19-2 Accounting For Nongovernment Nonbusiness Organizations: Colleges And Universities, Hospitals And Other Health Care Organizations Advanced Accounting, Fifth Edition 1919

3. Chapter 19-3 1. 1.Describe the source of accounting standards for nongovernment nonbusiness organizations (NNOs). 2. 2.Identify the three basic statements for NNOs. 3. 3.Describe the basic funds used by nongovernment nonbusiness organizations. 4. 4.Distinguish between a current restricted fund and an unrestricted fund. 5. 5.Explain the term “assets whose use is limited.” 6. 6.Distinguish between a mandatory and a nonmandatory transfer. 7. 7.Explain how contributions are recorded by NNOs. Learning Objectives

4. Chapter 19-4 8. 8.Understand how donated services are recorded. 9. 9.Describe the funds used to account for property, plant and equipment. 10. 10.Explain the basic accounting used by endowment funds. 11. 11.Indicate how equity investments are reported in the financial statements. 12. 12.Explain the change in accounting for loan funds brought about by new standards. 13. 13.Understand the use of an annuity or life income fund. 14. 14.Discuss the special reporting issues of hospitals. Learning Objectives

5. Chapter 19-5 Four Major Classifications of NNOs: 1.Nonprofit institutions of higher education. 2.Hospitals and other health care providers. 3.Voluntary health and welfare organizations (VHWOs). 4.Other nongovernment nonbusiness organizations (ONNOs). Nongovernment Nonbusiness Organizations ( NNOs)

6. Chapter 19-6 Hierarchy of Reporting Standards (NNOs)  The hierarchy used to establish generally accepted reporting standards for NNOs other than government- owned special entities  is the same as that for profit oriented business organizations  and included in the FASB Codification. LO 1 Source of accounting standards for NNOs.  FASB standards for nonprofits are found in FASB ASC Topic 958, Not-for-Profit Entities.

7. Chapter 19-7 Three Basic Financial Statements required: 1. 1.Statement of financial position (balance sheet) Net Asset categories:   Unrestricted net assets   Temporarily restricted net assets   Permanently restricted net assets 2. 2.Statement of activities 3. 3.Statement of cash flows Financial Reporting for Not-for-Profit LO 2 Basic statements for NNOs.

8. Chapter 19-8 Most NNOs use fund accounting for recordkeeping and reporting purposes. Six funds commonly used: 1. 1.Current Fund (restricted and unrestricted). 2. 2.Plant Fund. 3. 3.Endowment Fund. 4. 4.Loan Fund. 5. 5.Agency or Custodial Fund. 6. 6.Annuity and Life Income Fund. Fund Accounting LO 3 Basic funds used by NNOs.

9. Chapter 19-9 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. For external reporting purposes, Revenues are classified by source, and Expenses and expenditures are classified by function or activity. Accrual Basis of Accounting

10. Chapter 19-10 Current Unrestricted Funds Accounting for Current 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. LO 4 Current restricted vs. unrestricted funds.

11. Chapter 19-11 Part of current unrestricted fund. Resources designated by governing board for specific purposes, projects, or investments. Aid in planning and control of expenditures and limit discretion of management. Governing board can modify designations. Accounting for Current Funds Accounting for Board Designated Funds LO 5 Assets whose use is limited.

12. Chapter 19-12 Hospitals = classified as assets whose use is limited. Assets set aside by the governing board of a hospital for board-designated purposes. Assets whose use is limited under terms of debt indentures, trust agreements, third-party reimbursement arrangements, or similar arrangements are also presented as assets whose use is limited. Accounting for Current Funds Assets Whose Use is Limited LO 5 Assets whose use is limited.

13. Chapter 19-13 Board designated funds for specific current operating purposes are accounted for by footnote or by reclassification of the Unrestricted Current Fund Balance. Some board-restricted current resources can be transferred to other funds. Accounting for Current Funds Colleges and Universities LO 4 Current restricted vs. unrestricted funds.

14. Chapter 19-14 Unique to colleges and universities Mandatory transfers   Transfers from current funds group to other fund groups arising from binding legal agreements grant agreements Nonmandatory transfers   Transfers from current funds group to other fund groups at discretion of governing board. Mandatory and Nonmandatory Transfers Accounting for Current Funds LO 6 Mandatory vs. nonmandatory transfers.

15. Chapter 19-15 All NNOs under FASB jurisdiction are required to recognize contributions as revenue in the period received. This includes unconditional promises to give. The standard does not apply to tax exemptions, abatements or incentives, or to transfers of assets from a government to a business enterprise. Contributions include gifts of cash, pledges, donated services, and gifts of noncash assets. Conditional promises to give are recognized when they become unconditional. ContributionsContributions LO 7 Explain how contributions are recorded by NNOs.

16. Chapter 19-16 Pledges are recorded as revenues when a promise to give is nonrevocable and unconditional, at present value of expected receipts. Pledges are signed commitments to contribute specific amounts of money to an organization on a future date or in installments. Although resembling promissory notes, pledges generally are not enforceable contracts. All NNOs should establish an allowance for uncollectible pledges. ContributionsContributions LO 7 Explain how contributions are recorded by NNOs.

17. Chapter 19-17 Exercise 19-6: A well-known celebrity sponsored a telethon for the Help for the Blind Foundation on November 1, 2012. 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 2013, $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 2012 and 2013 to record these transactions. ContributionsContributions

18. Chapter 19-18 Exercise 19-6: Prepare the journal entries necessary in 2012. ContributionsContributions Pledges Receivable 1,000,000 Revenue - Contributions 1,000,000 Provision for Uncollectible Pledges 250,000 Allowance for Uncollectible Pledges 250,000

19. Chapter 19-19 Exercise 19-6: Prepare the journal entries necessary in 2013. ContributionsContributions Cash 700,000 Pledges Receivable 700,000 Provision for Uncollectible Pledges 50,000 Allowance for Uncollectible Pledges 250,000 Pledges Receivable 300,000

20. Chapter 19-20 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 ContributionsContributions Recorded as revenue or support with an amount equal to the revenue recognized as an expense in the appropriate expense account. LO 8 Recording donated services.

21. Chapter 19-21 Exercise 19-2: During 2012 volunteer pinstripers donated their services to General Hospital at no cost. The staff at General Hospital was in control of the pinstripers’ 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 pinstripers 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. ContributionsContributions General Services Expense5,500 Donated Services (Nonoperating Revenue)5,500

22. Chapter 19-22 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 released from temporarily (or permanently) restricted net assets and are reported as unrestricted net assets on the Statement of Activities. Donor-imposed Restricted Contributions ContributionsContributions LO 7 Explain how contributions are recorded by NNOs.

23. Chapter 19-23 Exercise 19-3: The Franklin Public Library received a restricted contribution of $300,000 in 2012. 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 2012. Indicate the fund in which each journal entry is recorded. ContributionsContributions

24. Chapter 19-24 Exercise 19-3: Prepare the journal entries necessary to record these events during 2012. ContributionsContributions Restricted Current Fund Cash300,000 Contribution Revenue – Poetry Collection 300,000 Net Assets Released from Restrictions100,000 Cash 100,000 Unrestricted Current Fund Cash 100,000 Net Assets Released from Restrictions 100,000 Expenses – Poetry Collection 100,000 Cash 100,000

25. Chapter 19-25 The plant fund is used to account for 1. 1.property, plant and equipment (PP&E) owned by the organization and the net investment, 2. 2.accumulation of financial resources for acquisition or replacement of PP&E, 3. 3.acquisition and disposal of PP&E, 4. 4.liabilities relating to acquisition of PP&E, and 5. 5.depreciation expense and accumulated depreciation. Accounting for Plant Funds LO 9 Funds used to account for PP&E.

26. Chapter 19-26 Divided into four separate self-balancing subgroups: 1. 1.Unexpended Plant Fund 2. 2.Funds for Renewals and Replacements 3. 3.Funds for Retirement of Indebtedness 4. 4.Investment in Plant College and Universities Accounting for Plant Funds Both board-designated funds and externally restricted funds are accounted for in the plant fund; therefore, a distinction is made between restricted and unrestricted fund balances. LO 9 Funds used to account for PP&E.

27. Chapter 19-27 Exercise 19-8: After the election of a prominent political figure, the principal from a term endowment fund was expendable by Crandall University. The official was elected this year. The fund was restricted to the construction of a Political Science building annex. The following transactions occurred because of this event. Required: For each of the following transactions, record the journal entries and identify the fund or fund subgroup in which each entry is recorded. Accounting for Plant Funds

28. Chapter 19-28 Exercise 19-8: Endowment Fund Endowment fund balance3,000,000 Cash3,000,000 Unexpended Plant Fund Cash 3,000,000 Fund Balance - Restricted 3,000,000 1. A transfer of $3,000,000 is made from the Endowment Fund (Term) to the Unexpended Plant Fund. Accounting for Plant Funds

29. Chapter 19-29 Exercise 19-8: 2. Construction is begun on the Political Science annex. Costs of construction during the year amounted to $1,000,000, of which $30,000 remained unpaid at the end of the year. (The financial controller does not record transfers to the Investment in Plant subgroup until a project has been completed.) Unexpended Plant Fund Construction in process1,000,000 Cash 970,000 Accounts payable 30,000 Accounting for Plant Funds

30. Chapter 19-30 Exercise 19-8: 3. By the end of the following year, the annex is completed at an additional cost of $2,100,000. All costs have been paid. Unexpended Plant Fund Construction in process2,100,000 Accounts payable30,000 Cash 2,130,000 Building3,100,000 Work in process3,100,000 Accounting for Plant Funds

31. Chapter 19-31 Exercise 19-8: 4. The completed building is recorded in the Investment in Plant subgroup. Net Investment in Plant Fund Building3,100,000 Net investment in plant3,100,000 Accounting for Plant Funds

32. Chapter 19-32 Property, plant and equipment (PP&E) transactions are accounted for in the General Fund. Contributed resources restricted to acquire PP&E are accounted for in a plant replacement and expansion (restricted) fund. Upon expenditure, the assets acquired and the related fund balance are transferred to the General Fund. Hospitals Accounting for Plant Funds LO 9 Funds used to account for PP&E.

33. Chapter 19-33 Single Plant Fund and report the fund balance in two classifications: Expended Fund Balance is equal to the organization’s net investment in PP&E. Net Investment = Gross assets less related liabilities and accumulated depreciation. Unexpended Fund Balance represents the amount of resources available to replace or acquire additional PP&E. Voluntary Health and Welfare and ONNOs Accounting for Plant Funds LO 9 Funds used to account for PP&E.

34. Chapter 19-34 Accounting for Endowment Funds Pure Endowment Fund - donated funds have been given in perpetuity. Term Endowment Fund - donor has specified a particular date or event after which the principal of the endowment fund may be expended. Income from endowment funds generally may be expended as earned either for specified purposes or at the discretion of the governing board. LO 10 Endowment Funds.

35. Chapter 19-35 Exercise 19-7 (partial): Jefferson Hospital received money from a donor to set up an endowment fund. The following information pertains to this contribution. Prepare the journal entries necessary to record the events in the endowment fund. Accounting for Endowment Funds

36. Chapter 19-36 Exercise 19-7 (partial): During 2012 1. $2,000,000 was received to establish the fund. The requirements were (a) $100,000 of the endowment fund’s income must be used for research grants each year. (b) The remainder of income is under the discretion of the governing board. (c) The principal is expendable after the donor’s death. It shall be used to purchase equipment. Accounting for Endowment Funds Cash 2,000,000 Revenue Contribution - Restricted 2,000,000

37. Chapter 19-37 Exercise 19-7 (partial): During 2012 2. The cash received was invested in a number of securities. Accounting for Endowment Funds Investment 2,000,000 Cash 2,000,000

38. Chapter 19-38 Exercise 19-7 (partial): During 2013 3. Dividends of $100,000 and interest of $300,000 were received. Accounting for Endowment Funds Cash400,000 Due to General Fund300,000 Due to Specific Purpose Fund100,000

39. Chapter 19-39 Exercise 19-7 (partial): During 2013 4. The income was transferred to the appropriate funds. Accounting for Endowment Funds Cash400,000 Due to General Fund300,000 Due to Specific Purpose Fund100,000

40. Chapter 19-40 Exercise 19-7 (partial): During 2014 8. The hospital was notified of the donor death. Accounting for Endowment Funds Cash2,000,000 Transfer to Plant Replacement and Expansion Fund 2,000,000

41. Chapter 19-41 Accounting for Investments FASB ASC paragraph 958-320-35-1 r equires NPOs to report investments in equity securities with readily determinable fair values and all debt securities at fair value in unrestricted, temporarily restricted, or permanently restricted net assets. Unrealized and realized gains and losses are to be recognized in the Statement of Activities. To improve effectiveness and flexibility, NNOs often pool investments of different funds into a single portfolio. LO 11 Accounting for Equity Investments.

42. Chapter 19-42 Accounting for Loan Funds Loans to: Students and staff of colleges and universities, Employees of hospitals, and Beneficiaries of the interests of certain ONNOs. (for example, loans to music students by symphony orchestra societies). LO 12 Accounting for loan funds.

43. Chapter 19-43 Exercise 19-4: The following events relate to Grearson University Loan Fund: 1. $100,000 is received from an estate to establish a faculty and student loan fund. Annual interest rates range from 8% for students to 10% for faculty. 2. Loans to students totaled $60,000, and $40,000 was disbursed to faculty members (of the total loans made, 10% are estimated to be uncollectible). 3. Grearson wrote off a $1,000 student loan as uncollectible. 4. The following loans were repaid. Principal Interest Faculty $ 5,000 $500 Student 10,000 800 Accounting for Loan Funds

44. Chapter 19-44 Exercise 19-4: Prepare the journal entries necessary to record these transactions. 1. $100,000 is received from an estate to establish a faculty and student loan fund. Annual interest rates range from 8% for students to 10% for faculty. Accounting for Loan Funds Cash100,000 Revenue – Contributions Restricted100,000

45. Chapter 19-45 Exercise 19-4: Prepare the journal entries necessary to record these transactions. 2. Loans to students totaled $60,000, and $40,000 was disbursed to faculty members (of the total loans made, 10% are estimated to be uncollectible). Accounting for Loan Funds Loans Receivable – Students60,000 Loans Receivable – Faculty40,000 Cash100,000 Bad Debt Expense 10,000 Allowance for Uncollectible–Students6,000 Allowance for Uncollectible–Faculty4,000

46. Chapter 19-46 Exercise 19-4: Prepare the journal entries necessary to record these transactions. 3. Grearson wrote off a $1,000 student loan as uncollectible. Accounting for Loan Funds Allowance for Uncollectible–Students1,000 Loans Receivable – Students1,000

47. Chapter 19-47 Exercise 19-4: Prepare the journal entries necessary to record these transactions. 4. The following loans were repaid. Principal Interest Faculty $ 5,000 $500 Student 10,000 800 Accounting for Loan Funds Cash16,300 Loans Receivable – Students10,000 Loans Receivable – Faculty5,000 Interest Income 1,300

48. Chapter 19-48 Accounting for Agency (Custodial) Funds Account for assets held by NNO as custodian for others. Unless significant amounts are involved, resources held by an NNO as an agent for others are often accounted for as assets and liabilities in the unrestricted or general fund rather than in a separate agency fund.

49. Chapter 19-49 Accounting for Annuity and Life Income Funds Contribution to the organization on the condition that the organization make annuity payments to a specified recipient for a specified period of time (annuity fund) or that the organization pay the income earned on the contributed assets to a specified recipient during his or her lifetime (life income fund). At the end of the annuity or on the death of the life income beneficiary, the unexpended assets of the fund are transferred to the unrestricted fund or to an endowment fund, loan fund, plant fund, or other fund specified by the donor. LO 13 Annuity or life income fund.

50. Chapter 19-50 Recognition of Service Fee Revenue Operating versus Nonoperating Income Issues Relating to Colleges and Universities Charity care Contractual allowances Capitation revenues Malpractice Issues Relating to Hospitals LO 14 Special reporting issues.

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