Chapter Eighteen Accounting and Reporting for Private Not-for-Profit Entities Copyright © 2015 McGraw-Hill Education All rights reserved No reproduction or distribution without the prior written consent of McGraw-Hill Education Not-for-Profit Organizations General Characteristics They receive contributions from donors who not expect a return of equal financial value Their operating purpose is not providing goods and services for profit They not have ownership interests as for- profits May be governmental or private Charitable Educational Civic organizations Political parties Trade organizations 18-2 Charitable Contributions Recipients of these contributions represent an eclectic assortment of missions: 18-3 Charitable Contributions Total estimated charitable giving in the United States increased 4.0 percent in 2011 from 2010 to $298.42 billion in contributions from a wide sector: 18-4 Charitable Contributions The 10 largest charities reported receiving $13.6 billion in private support in 2012 with total revenues of $29.8 billion The entities receive significant revenue from a variety of sources as a list of the five largest charities demonstrates: 18-5 Learning Objective 18-1 Understand the basic composition of financial statements produced for a private not-for-profit entity 18-6 Not-for-Profit Organizations Several basic goals form the framework for the generally accepted accounting principles for private not-for-profit entities, including: Financial statements should focus on the entity as a whole Reporting requirements for private not-for-profit entities should be similar to those applied by for-profit businesses unless critical differences exist in the nature of the transactions or the informational needs of financial statement users 18-7 Financial Statement Goals The first goal asserts that the financial statements should not highlight individual funds the organizations use for internal record-keeping For external reporting purposes, FASB emphasized the operations and financial position of the entire organization The second goal allows the use of many of the same accounting techniques utilized by for-profit entities Existing authoritative literature for capital leases, pensions, contingent liabilities, and similar issues have not been rewritten for private not-for-profit entities 18-8 Not-for-Profit Organizations FASB Statement (SFAS) 116, “Accounting for Contributions Received and Contributions Made,” established guidelines for determining when and how donations should be recognized and reported FASB Statement 117, “Financial Statements of Not-for-Profit Organizations,” specified the required content and format for financial statements distributed by these organizations 18-9 Learning Objective 18-2 Describe the differences in assets that are unrestricted, temporarily restricted, or permanently restricted and explain the method of reporting these categories 18-10 Statement of Functional Expense Statement provides a detailed analysis of expenses by function and object Columns represent functions followed by supporting services Categories are the same as those reported on the statement of activities and column totals agree with the operating expenses on that statement Rows list expenses according to their nature Allocation of joint fund-raising & program service costs is permitted only when certain criteria are met 18-19 Learning Objective 18-4 Report the various types of contributions that a private not-for-profit entity can receive 18-20 Accounting for Contributions Contributions, unconditional transfers of cash or other resources, are recorded as support at fair value in the period received Restricted gifts are not the same as conditional gifts Donors of restricted contributions specify how they are to be used These gifts are recognized as temporarily or permanently restricted assets when a promise is received Conditional promises that require a future action before asset will be transferred from the donor are not recognized until conditions are met 18-21 Accounting for Contributions Donations of works of art and historical treasures are generally not recognized, but disclosure is required Exchanges, such as member dues, are treated as accrual revenue Contributed services are recognized as revenue if one of two conditions is met: The service creates or enhances a nonfinancial asset, OR The services are specialized and would have had to be purchased otherwise 18-22 Learning Objective 18-5 Understand the impact of a tax-exempt status 18-23 Tax-Exempt Status 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)(3) applies to charitable, educational or scientific entities Section 501(c)(4) applies to social welfare entities, referred to as advocacy groups Section 501(c)(6) applies to business leagues, boards of trade, chambers of commerce, etc 18-24 Tax-Exempt Status Tax-Exempt Status Exempt from federal taxes Often exempt from state taxes Donors receive reduction in their taxable income Non-profit postal permit reduces the cost of postage Cannot engage in political campaign activity A not-for-profit must file a Form 990, Return of Organization Exempt from Income Tax 18-25 Learning Objective 18-6 Account for both mergers and acquisitions of not-for-profit entities 18-26 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 18-27 Acquisitions In an Acquisition, one organization obtains control over another Acquired accounts are reported at fair value If total acquisition value is greater than the total value of identifiable assets and liabilities, excess is reported as goodwill If future operations are expected to by primarily supported by contributions, the excess value is reported as a reduction in net assets 18-28 Mergers A merger occurs when two or more not-for-profit entities form a new not-for-profit and turn control over to a newly created governing board The carryover method is applied in reporting for mergers In a merger, the newly formed not-for-profit records all accounts at their previous book values as of the date of the merger 18-29 Learning Objective 18-7 Describe the unique aspects of accounting for health care entities 18-30 Accounting for Health Care Organizations Health Care expenditures account for 17.6% 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 18-31 Accounting for Patient Service Revenues Third-party payors, insurance companies, Medicare, and Medicaid, not the patient, pay some or all of the cost of medical services received Bad debts and fee reductions for health care providers can be significantly higher than for other kinds of businesses Entities initially record revenue at standard rates Amounts that the entity does not expect to collect is reported in a manner that best reflects the activities (contra-revenue or bad debt expense) 18-32 Contractual Agreements with Third-Party Payors Insurance companies and Medicare establish contractual arrangements with health care providers stipulating rates to be paid for specific services The entity must write off the difference in the amount a patient is charged and the amount the payor will pay in a contractual adjustment account For matching purposes, these reductions must be recognized in the same period that the patient service revenue is earned 18-33 ... of the merger 18-29 Learning Objective 18-7 Describe the unique aspects of accounting for health care entities 18-30 Accounting for Health Care Organizations Health Care expenditures account for... financial position of the entire organization The second goal allows the use of many of the same accounting techniques utilized by for-profit entities Existing authoritative literature for capital... for private not-for-profit entities 18-8 Not-for-Profit Organizations FASB Statement (SFAS) 116, Accounting for Contributions Received and Contributions Made,” established guidelines for determining