Advanced Accounting Jeter ● Chaney Accounting For Nongovernment Nonbusiness Organizations: Colleges And Universities, Hospitals And Other Health Care Organizations Prepared by Sheila Ammons, Austin Community College Learning Objectives • • • • • • • Describe the source of accounting standards for nongovernment nonbusiness organizations (NNOs) Identify the three basic statements for NNOs Describe the basic funds used by nongovernment nonbusiness organizations Distinguish between a current restricted fund and an unrestricted fund Explain the term “assets whose use is limited.” Distinguish between a mandatory and a nonmandatory transfer Explain how contributions are recorded by NNOs Copyright © 2015 John Wiley & Sons, Inc All rights reserved Learning Objectives • • • • • • • Understand how donated services are recorded Describe the funds used to account for property, plant and equipment Explain the basic accounting used by endowment funds Indicate how equity investments are reported in the financial statements Explain the change in accounting for loan funds brought about by new standards Understand the use of an annuity or life income fund Discuss the special reporting issues of hospitals Copyright © 2015 John Wiley & Sons, Inc All rights reserved Nongovernment Nonbusiness Organizations (NNOs) • Four Major Classifications of NNOs: – Nonprofit institutions of higher education – Hospitals and other health care providers – Voluntary health and welfare organizations (VHWOs) – Other nongovernment nonbusiness organizations (ONNOs) Copyright © 2015 John Wiley & Sons, Inc All rights reserved 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 FASB standards for nonprofits are found in FASB ASC Topic 958, Not-for-Profit Entities LO The source of accounting standards Copyright © 2015 John Wiley & Sons, Inc All rights reserved Financial Reporting for Not-for-Profit • Three basic financial statements required: 1) 2) 3) Statement of financial position (balance sheet) • Net Asset categories: – – Unrestricted net assets – Permanently restricted net assets – endowments: interest might be spend but not the principal Temporarily restricted net assets – resources that must be used for a specific purpose or in a specific time period (restriction is donor imposed) Statement of activities Statement of cash flows LO Three basic financial statements Copyright © 2015 John Wiley & Sons, Inc All rights reserved Fund Accounting • • Most NNOs use fund accounting for recordkeeping and reporting purposes Six funds commonly used: – Current Fund (restricted and unrestricted) – Plant Fund – Endowment Fund – Loan Fund – Agency or Custodial Fund – Annuity and Life Income Fund LO Basic funds used by NNOs Copyright © 2015 John Wiley & Sons, Inc All rights reserved Accrual Basis of Accounting • Financial statements for NNOs (accrual basis) • For external reporting purposes, – Revenues are reported when earned and realized or realizable, and – Expenditures are reported when materials or services are received, – Expenses incurred before the reporting date are accrued, – Expenses applicable to future periods are deferred – Revenues are classified by source, and – Expenses and expenditures are classified by function or activity Copyright © 2015 John Wiley & Sons, Inc All rights reserved Accounting for Current Funds • Current Unrestricted 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 Distinguish between restricted and unrestricted funds Copyright © 2015 John Wiley & Sons, Inc All rights reserved Accounting for Current Funds Accounting for Board Designated Funds – 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 reverse or modify designations Do not confuse these designations with donor or external restrictions on the use of resources LO Distinguish between restricted and unrestricted funds Copyright © 2015 John Wiley & Sons, Inc All rights reserved 10 Accounting for Endowment Funds Exercise 19-7 (partial): During 2015 $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 Endowment Fund Cash 2,000,000 Revenue Contribution - Restricted 2,000,000 LO 10 Basic accounting by Endowment Funds 36 Copyright © 2015 John Wiley & Sons, Inc All rights reserved Accounting for Endowment Funds Exercise 19-7 (partial): During 2015 The cash received was invested in a number of securities Endowment Fund Investment 2,000,000 Cash 2,000,000 LO 10 Basic accounting by Endowment Funds 37 Copyright © 2015 John Wiley & Sons, Inc All rights reserved Accounting for Endowment Funds Exercise 19-7 (partial): During 2016 Dividends of $100,000 and interest of $300,000 were received Endowment Fund Cash 400,000 Due to General Fund 300,000 Due to Specific Purpose Fund 100,000 LO 10 Basic accounting by Endowment Funds 38 Copyright © 2015 John Wiley & Sons, Inc All rights reserved Accounting for Endowment Funds Exercise 19-7 (partial): During 2016 The income was transferred to the appropriate funds Endowment Fund Due to General Fund 300,000 Due to Specific Purpose Fund 100,000 Cash 400,000 LO 10 Basic accounting by Endowment Funds 39 Copyright © 2015 John Wiley & Sons, Inc All rights reserved Accounting for Endowment Funds Exercise 19-7 (partial): During 2017 The hospital was notified of the donor death Endowment Fund Transfer to Plant Replacement and Expansion Fund 2,000,000 Cash 2,000,000 LO 10 Basic accounting by Endowment Funds 40 Copyright © 2015 John Wiley & Sons, Inc All rights reserved Accounting for Investments • • • FASB ASC paragraph 958-320-35-1 requires 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 asset categories 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 Equity Investments Copyright © 2015 John Wiley & Sons, Inc All rights reserved 41 Accounting for Loan Funds • Loans to: – Students and staff of colleges and universities, – Employees of hospitals, and – Beneficiaries of the interests of certain ONNOs • Example: Loans to music students by symphony orchestra societies LO 12 Accounting for loan funds 42 Copyright © 2015 John Wiley & Sons, Inc All rights reserved Accounting for Loan Funds Exercise 19-4: The following events relate to Grearson University Loan Fund: $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 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) Grearson wrote off a $1,000 student loan as uncollectible The following loans were repaid Principal $500 Student Interest Faculty 10,000 $ 5,000 800 LO 12 Accounting for loan funds 43 Copyright © 2015 John Wiley & Sons, Inc All rights reserved Accounting for Loan Funds Exercise 19-4: Prepare the journal entries necessary to record these transactions in the Loan Fund $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 Cash 100,000 Revenue – Contributions Restricted 100,000 LO 12 Accounting for loan funds 44 Copyright © 2015 John Wiley & Sons, Inc All rights reserved Accounting for Loan Funds Exercise 19-4: Prepare the journal entries necessary to record these transactions 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) Loans Receivable – Students 60,000 Loans Receivable – Faculty 40,000 Cash 100,000 Bad Debt Expense 10,000 Allowance for Uncollectible–Students 6,000 Allowance for Uncollectible–Faculty 4,000 LO 12 Accounting for loan funds 45 Copyright © 2015 John Wiley & Sons, Inc All rights reserved Accounting for Loan Funds Exercise 19-4: Prepare the journal entries necessary to record these transactions Grearson wrote off a $1,000 student loan as uncollectible Allowance for Uncollectible–Students 1,000 Loans Receivable – Students 1,000 LO 12 Accounting for loan funds 46 Copyright © 2015 John Wiley & Sons, Inc All rights reserved Accounting for Loan Funds Exercise 19-4: Prepare the journal entries necessary to record these transactions The following loans were repaid Principal $500 Student Interest 10,000 Faculty $ 5,000 800 Cash 16,300 Loans Receivable – Students 10,000 Loans Receivable – Faculty 5,000 Interest Income 1,300 LO 12 Accounting for loan funds Copyright © 2015 John Wiley & Sons, Inc All rights reserved Accounting for Agency (Custodial) Funds • • Use to 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 48 Copyright © 2015 John Wiley & Sons, Inc All rights reserved 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 The use of an annuity fund Copyright © 2015 John Wiley & Sons, Inc All rights reserved 49 Issues Relating to Colleges and Universities • • Recognition of Service Fee Revenue Operating versus Nonoperating Income Issues IssuesRelating RelatingtotoHospitals Hospitals Charity care Contractual allowances Capitation revenues Malpractice Presentation of Bad Debts on the Statement of Operations LO 14 Reporting issues of colleges, universities, and hospitals Copyright © 2015 John Wiley & Sons, Inc All rights reserved 50 ... the basic accounting used by endowment funds Indicate how equity investments are reported in the financial statements Explain the change in accounting for loan funds brought about by new standards... Revenues are classified by source, and – Expenses and expenditures are classified by function or activity Copyright © 2015 John Wiley & Sons, Inc All rights reserved Accounting for Current Funds... & Sons, Inc All rights reserved Accounting for Current Funds Accounting for Board Designated Funds – Part of current unrestricted fund – Resources designated by governing board for specific purposes,