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Chapter 18 - Accounting and Reporting for Private Not-for-Profit Organizations

CHAPTER 18 ACCOUNTING AND REPORTING FOR PRIVATE NOT-FOR-PROFIT ORGANIZATIONS


Chapter Outline
I. Historically, the financial reporting for private not-for-profit entities has differed significantly according to the type of organization (such as a health care entity versus a college or university). The reporting of these entities is now standardized considerably by FASB pronouncements that focus on the reporting of contributions, the financial statements to be issued, and the recording of mergers and acquisitions. However, public colleges and universities and similar organizations still must follow the standards issued by GASB. A. This chapter looks at the financial reporting for private not-for-profit organizations. FASB has placed the emphasis on the entity as a whole rather than on the individual funds. B. Reporting for these organizations should be similar to a business entity unless a critical difference exists that impacts the needs of financial statement users. Several critical differences can be identified. 1. Many private not-for-profit organizations receive a significant amount of their financial resources from contributions rather than from revenues or capital investments. 2. Some of the resources given to a not-for-profit organization include donor-imposed restrictions. 3. No single indicator of success is present in the financial reporting. No number such as net income provides a means for evaluation as it does for a for-profit business entity. II. FASB has established the following financial statements for a private not-for-profit organization. Statement of Financial Position reports assets, liabilities, and net assets. Statement of Activities and Changes in Net Assets reports revenues, expenses, gains, and losses. Statement of Cash Flows A voluntary health and welfare organization is also required to present a Statement of Functional Expenses which indicates the allocations of resources to program services (to meet the goals of the organization) and supporting services (to operate the organization and raise funds).

A. B. C. D.

III. For reporting purposes, the economic resources of a private not-for-profit organization must be classified within one of three categories. A. "Unrestricted net assets" indicates the amount of an entity's resources that are not subject to external donor restrictions. Officials of the organization can make whatever use they wish of these assets.

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B.

C.

D.

"Temporarily restricted net assets" are restricted by an outside party (often a donor) for a particular purpose or for use in a future period of time. When the restriction is satisfied, these resources are switched to unrestricted net assets. Thus, on the statement of activities and changes in net assets, temporarily restricted net assets are shown as being reclassified as unrestricted net assets when the appropriate time has passed or the resource is used as stipulated. "Permanently restricted net assets" are expected to remain restricted for as long as the organization exists. Income from these assets is normally unrestricted or temporarily restricted based on the specifications of the donor.

IV. Contributions should be recognized as revenues when received. A. Restricted contributions are recognized as revenue either within temporarily restricted net assets or permanently restricted net assets. B. Donated assets are recorded at fair value. Recognition of art works, historical treasures, and the like is not required (although still allowed) if three conditions are all met. 1. The items are added to a collection for public exhibition, education, or research. 2. The items are protected and preserved. 3. If sold, receipts must be used to acquire other collection items. C. Unconditional promises to give that are received by a private not-for-profit organization should be reported immediately as both a receivable and revenue. 1. If not to be collected within one year, the promise is recorded at the present value of the future cash flows. Subsequent amortization of the discount is recorded as contribution revenue. 2. Estimated uncollectible balances are also deducted. 3. Conversely, conditional promises are not recognized until the conditions are met. D. Services contributed to a not-for-profit organization should be recognized as revenue if the services (1) create or enhance a nonfinancial asset or (2) require a specialized skill possessed by the donor and would be purchased if not donated. E. If a not-for-profit organization accepts a donation that must be conveyed to a separate individual or other beneficiary, the organization normally records the asset along with an accompanying liability. However, if the organization is given variance powers to change the beneficiary, revenue is recognized instead of a liability. V. Education institutions record tuition revenue at the gross amount billed and show revenue net of scholarships and financial aid in the Statement of Activities VI. Mergers and acquisitions have become common in private not-for-profit organizations. A. In an acquisition, one entity gains control over another 1. All identifiable assets and liabilities of the acquired company are combined at the fair value on the date of acquisition.

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2. If the acquisition value of the acquired company is greater than the sum of the fair value of all identified assets and liabilities, normally the difference is reported as goodwill. 3. If the acquisition value of the acquired company is greater than the sum of the fair value of all identified assets and liabilities, the difference is charged off immediately if the acquired company expects to be predominantly supported by contributions and investment in come in the future. VII. Health care organizations exhibit some unique reporting features that must be addressed in not-for-profit accounting. A. Third-party payors such as Medicare and insurance companies have had a significant impact on the reporting process because of their need for usable financial information B. A net patient service revenue figure is actually reported by these organizations but only after reduction for contractual adjustments. These adjustments are decreases allowed for some third-party payors based on the approved cost for a particular service in that geographic region. C. Services to indigents are not included in receivables or revenues.

Answers to Discussion Questions


Are Two Sets of GAAP Really Needed for Colleges and Universities? Over the last few years, a number of differences have appeared between the accounting for public colleges and universities and for those that are private. FASB has authority over private educational institutions whereas GASB holds authority over the reporting of public schools. Consequently, statements produced by FASB do not apply to pubic schools unless specifically made applicable by GASB. FASB pronouncements on depreciation, pledges, contributions, and financial statement format for not-for-private organizations do not affect public schools until and unless so stated by GASB. Because of this split, the financial statements for these two types of schools have developed several significant, unique differences. GASB 35 has states that public schools must follow the guidelines of GASB 34 which created financial statements for state and local governments. However, these new guidelines are not as radically different from private schools as might be first imagined. GASB 35 allows public colleges and universities to label themselves as solely Enterprise Funds if they meet the required criteria. If this decision is made, the school can report only fund-based financial statements as would be produced by a proprietary fund. These statements have some resemblance to the statements prepared by private schools. However, important distinctions do continue to exist. Students can be asked to address the question of whether a public and a private school need to have comparable financial statements. Net income is not an issue, rather the sources and utilization of resources is usually emphasized. Is the adoption of a single set of generally accepted accounting principles necessarily essential? Will a decision-maker care if the University of North Carolina at Chapel Hill (a public school) has one statement format but Duke University (a private school) has another? This controversy leads to the important question of user needs. Why does a company or individual look at the financial statements of a college or university? Donors might have one

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answer to that question while creditors could have an entirely different response. Once that question has been addressed, the need for comparability is easier to assess. No ultimate answer for that query currently exists but students can be asked to develop their own list of user needs and then note whether the existence of two different sets of GAAP has an adverse impact on those needs. Is This Really an Asset? In theory, accounting for a pledge is a relatively straightforward process. If unconditional, a receivable is established (at present value if not to be received within the year) along with an adequate allowance for doubtful collections. However, in practice, the process might be much more complicated. In this case, for example, was a pledge actually made or was this just a superfluous statement spoken at a moment of overwhelming emotions? Is this a promise to give or an intention to give? Can the donor change his mind? Does this potential donor really own land in Idaho and can it be sold for $15 million? How can an adequate allowance be determined for this pledge? If the indivdiual's mother should die, would he lose interest in supporting the hospital? If the $5 million is reported as a receivable and then is not collected, what is the impact on the readers of the financial statements? How much time and energy should the hospital invest in attempting to arrive at a proper method of financial reporting? The accountant must address all of these questions (and more) to determine the appropriate accounting treatment. At a minimum, hospital officials need to contact this donor and have a long discussion. He needs to understand their reasons for attempting to establish a valuation of this promise. In class discussion, students can be asked to identify questions that should be posed to this person. They would probably include the following: Does he really plan to give $5 million to the hospital? When does he project that the land will be sold and the gift made? How did he establish a $15 million price? Could the land be sold for less and, if so, how will that impact on the gift to the hospital? How does he want the $5 million to be used? Is there any chance that he will change his mind? What other charities has he supported? Has he previously made such large gitfs? Would he be willing to furnish financial statements as well as a list of references who could verify his intentions and his ability to carry out those intentions? Does the hospital have legal recourse for the promise since it is in writing and signed? If this individual has supported other charities over the years, is committed to the work of Mercy Hospital, has adequate financial resources, and if the land appears to be worth $15 million, the hospital should report the pledge as a receivable. However, a large allowance should probably be established simply because of the uncertainties involved with collecting this amount of money over an extended period of time. Conversely, if too much uncertainty exists (a value for the land cannot be determined or the gentleman refuses to give information about his ability to meet this commitment), the hospital may decide that this is not a pledge at all but merely the promise of a possible future pledge the donor intends to give. In that case, the information should be adequately spelled out in a footnote.

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Answers to Questions
1. The Financial Accounting Standards Board (FASB) has authority for establishing accounting standards for private not-for-profit organizations. In addition, audit and accounting guides produced by the AICPA provide further guidance for the preparation of financial statements by these organizations. 2. If a user of the financial statements is a potential donor, that company or person is interested in assessing whether a gift to a not-for-profit organization is a wise use of resources. To make that assessment, the individual needs to know whether the organization uses its resources appropriately to achieve its stated goals. In this way, donors can decide which organization deserves to receive support and how much will be donated. If a user of financial statements is a creditor, that company or person is primarily interested in whether the organization can generate sufficient cash flows to pay its debts as they come due.
3. According to FASB Statement 117, three financial statements are required to be

produced by private not-for-profit organizations: a statement of financial position, a statement of activities and changes in net assets, and a statement of cash flows. A voluntary health and welfare organization must also produce a statement of functional expenses. 4. Temporarily restricted assets have been restricted by an external donor or grantor for a specified purpose or for use at a future point in time. For example, cash might be given that had to be spent to buy a bus for the organization or that could not be spent for three years. Such restrictions are eventually lifted when the intended usage is fulfilled or when the time limit has been met. 5. Permanently restricted assets have been restricted by an external donor and grantor. That restriction is expected to last for as long as the organization continues to function. Normally, any income generated by these assets can be used by the organization although its specific usage may be restricted. For example, investments could be given to a private not-forprofit organization that could never be spent. However, the income produced by these investments could be designated by the donor for the purchase of computer equipment or might be available to the organizations officials for whatever purpose they deemed necessary. 6. Private not-for-profit organizations report (a) program service expenses and (b) supporting service expenses. Program service expenses are those that relate to the goals and objectives of the organization. Supporting service expenses encompass the costs of operating the organization and raising funds.

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7. Not-for-profit organizations are frequently evaluated based on the ratio of program service expenses to total expenses. This ratio tells the readers of the statements what portion of each dollar of expense can be attributed to achieving the goals of the organization.

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8. A statement of functional expense is produced by a voluntary health and welfare organization to assist the reader of the statements in measuring its efficiency in using resources. The 9. assumption is that an entity should use a greater portion of its resources to meet stated goals and a smaller part for administrative costs and fund raising. This statement provides a simple way of evaluating one of these organizations in comparison to another. 10. When an organization conveys a gift to a private not-for-profit organization (such as the United Way) that must be conveyed to a separate beneficiary, a question arises as to the recording of the expense and the contribution revenue. Under normal circumstances, the original donor records an expense at the time of the gift while the charity reports both an asset and a liability until the gift can be conveyed to the beneficiary. At the same time, the eventual beneficiary should record a receivable and contribution revenue because action has been taken that will lead to the receipt of this gift. The organization that initially collected and then conveyed the gift recorded neither expense nor revenue. 11. If a donor makes a contribution to a charity for conveyance to a separate beneficiary but can still revoke or redirect the gift, the donor records a receivable (rather than an expense) until the gift is actually conveyed to the beneficiary. At that point, the receivable is reclassified as an expense. The charity initially receiving the gift shows a liability but, in this situation, it is directed to the donor and not to the beneficiary. Because the beneficiary is not completely certain that the gift will be received, no recording is made until that time. The donor has retained a significant degree of control which impacts the method by which the gift is reported. 12. If a donor makes a contribution to a charity for conveyance to a separate beneficiary but grants it variance powers to change the identity of the beneficiary, the donor reports an expense immediately. Since control of the gift now lies with the charity, it should record contribution revenue instead of a liability. The beneficiary makes no entry until the gift is received because of the uncertainty involved. The identity of the ultimate recipient may still change. Here, the charity initially receiving the gift records both a revenue and, eventually, an expense for the contribution even thought it was not the original donor. 13. The value of donated services is recognized by a private not-for-profit organization if the service (a) creates or enhances a nonfinancial asset (such as adding a room to a building) or (b) requires a specialized skill possessed by the donor that would have been purchased by the organization except for the gift. An example of this second criterion is the donation of medical services by a surgeon to a childrens hospital. 14. Normally, the costs of a direct mailing that contains a solicitation for funds will be classified entirely as a fund-raising (supporting services) expense. However, under a specific set of circumstances, these costs can be

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allocated in a logical manner between supporting services and program services. This allocation is allowed where the mailing has a specific call for action that would have been made even without the fund raising solicitation. This call for action must further the mission of the organization and the appeal cannot be made purely to potential donors.

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For example, if a mailing was made by a private not-for-profit blood service asking all previous blood donors to donate blood during the next six weeks and was accompanied by a request for funds, the direct mail costs should probably be allocated between program service costs and supporting service costs. 15. Unconditional promises to give must be recorded immediately by a private not-forprofit organization at present value (if not to be received within the next year) and net of an allowance for uncollectibles. An unconditional promise requires no future service or action by the charity. 16. An unconditional promise to give is recorded immediately by the private not-for-profit organization that anticipates receiving the gift. Conversely, an intention to give is not to be recorded. In practice, the difference between the two can be rather subtle. If donors have the ability or the right to change their minds, the assumption is that they have only expressed their intention to make a gift at some time in the future but have not yet made an unconditional promise. If an action is required of the charity, the promise is not unconditional. 17. A number of private not-for-profit organizations assess dues of their membership and also receive contributions. Dues are only considered revenues rather than contributions if the member receives a benefit in return. That benefit can take the form of a periodic newsletter or journal or can also be the use of the facilities (such as at the YMCA) and services of the organization. However, if nothing of value is really being given to the member, the dues are considered to be merely donations. Here, revenues indicate some type of exchange transaction. 18. If a not-for-profit organization gains control over another organization, combined financial statements should be prepared. This type of transaction is viewed as an acquisition. If two not-for-profit organizations come together to form a new, third not-for-profit with a new governing board, combined statements are also needed. However, this event is viewed as a merger. 19. The acquisition value is in excess of the fair value of all identifiable assets and liabilities by $200,000. In a for-profit consolidation, this excess is reported as goodwill, an intangible asset. The same is true for many combined statements created when a not-for-profit entity gains control over another organization. However, if this acquired entity is expected to be predominantly supported by contributions and investment income, then extra $200,000 is reported as a reduction in unrestricted net assets on the statement of activities. In this case, the amount is not capitalized as goodwill. 20. If Helping Hand NFP acquires Fancy Fingers NFP, then the reported value for the equipment will be $2.3 million. That is the book value reported by Helping Hand plus the fair value of the property held by Fancy Fingers.

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If Fancy Fingers acquires Helping Hand, then the reported value for the equipment will be $2.4 million. That is the book value reported by Fancy Fingers plus the fair value of the property held by Helping Hand.

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If the two not-for-profits are brought together to form a new, third entity under a new governing board, the equipment will be reported at $2.1 million. The carryover method is used so that this is the combination of the book value of these assets on both sets of financial statements. 21. A third-party payor is any outside party who assumes responsibility for a portion or even all of a patient's medical charges. The most commonly encountered third-party payors would include insurance companies, Medicare, and the like. Because third parties bear such a significant portion of the medical costs in this country, they require extensive as well as accurate financial information. Health care organizations have long been required, therefore, to develop and maintain accounting systems that will provide this needed data. 22. A contractual adjustment refers to a portion of a patient's charged fee that a health care organization estimates will not be received because of agreements with third-party payors. These arrangements specify that the provider (the health care entity) is willing to accept an amount that is less than its normal charge if the third-party payor determines that the lesser figure is reasonable for the services rendered. As an example, if a hospital charges $212,000 for a specific service but the third-party payor responsible for payment remits only $185,000 (based on its determination of reasonable costs for this service in this area of the world), the hospital must accept that amount as payment in full. The $27,000 reduction is recorded by the hospital as a contractual adjustment. These reductions may take an extended period of time to finalize. Thus, the expected amount of these reductions is estimated by the health care organization and recorded (for matching purposes) at the time that the original invoice is submitted.

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Answers to Problems 1. C (Amounts charged to patients less contractual adjustments) 2. A 3. B 4. B (Permanently restricted net assets have increased by only $120,000.) 5. B (Since the donor continues to have control, an asset [a receivable] will be reported until conveyed. Because of the uncertainty, Charity Two should report nothing until the money is actually collected.) 6. B (The financial aid is shown as a direct reduction to the tuition revenue so that revenues and support should total only $780,000.) 7. C (The work of the librarian does not enhance a nonfinancial asset nor does it require a specialized skill that would be purchased if not donated.) 8. D (If the other information that is included contains a call for a specific action that will help accomplish the mission of the charity and if the mailing is not directed solely to potential donors, a portion of the costs can be allocated to program service expenses.)

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9. A (FASB wanted to get away from financial reporting based on fund accounting so that the statements provide information about the private not-for-profit organization as a whole.) 10. C (The money to be used for the building is temporarily restricted for that purpose whereas the other $2 million is permanently restricted so that only the income can be used.) 11. D (The charity must convey the donation to the designated beneficiary. Unless the charity was given variance powers that allowed it to change the beneficiary, this amount represents a liability to the Jones family.) 12. B 13. A (Because of the time restriction, the amount spent for playground equipment remains in temporarily restricted net assets until depreciated. The equipment was bought at the end of the year so that no depreciation was recorded and no reclassification was made.) 14. A (The new organization is expected to be predominantly supported by contributions and investment income. Thus, future exchange revenues will likely be minor. The acquisition value ($1 million) in excess of the fair value of all assets and liabilities ($700,000) is $300,000. Because most support comes from contributions and investment income, the $300,000 is charged off against unrestricted assets on the statement of activities.) 15. A (When two not-for-profit organizations come together to form a new not-forprofit organization with a new governing board, a merger has occurred. In a merger, the carryover method is used. Thus, book value is retained. The $300,000 book value plus the $500,000 book value gives a reported land account of $800,000.) 16. B (This is an acquisition and the acquired company is not predominantly supported by contributions or investment income. Thus, the difference in the acquisition value of Northeast ($980,000) and the fair value of the two recognized assets ($950,000 or $150,000 plus $800,000) is recognized as the intangible asset goodwill.) 17. D 18. C 19. C

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20. D (The charity care work should not be recorded in any way because there is no expectation of collection. The contractual adjustment is reported as a contra balance to the revenue. The bad debt is shown as an expense.) 21. B 22. B 23. A 24. A 25. D (These volunteer services do not meet the criteria for the recognition of donated services.) 26. B 27. A 28. B 29. A (The fund-raising costs and administrative salaries are supporting service expenses.) 30. B 31. D 32. (10 minutes) (Reporting of various account balances by a not-for-profit health care organization) Donated medicines = an asset is reported as well as an increase in unrestricted net assets because of the contribution Donated services (replacing salaried workers) = contribution causes an increase in unrestricted net assets along with an accompanying decrease in unrestricted net assets because the expense is also recognized Donated services (not replacing salaried workers) = not recorded Interest income = revenue is an increase in unrestricted net assets Charges to patients = increase in unrestricted net assets shown as net patient service revenues Charity care = not recorded if the organization has no intention of seeking collection; if recorded, it must be removed from the receivable and the revenue.

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Bad debts = amount is anticipated and recorded as an expense that decreases unrestricted net assets 33. (15 Minutes) (Series of questions about the reporting of health care entities) a. A third-party payor is an organization such as Medicare or an insurance company that pays a portion, or all, of a patient's medical expenses. Because of their need for accurate financial information, such third party payors have exerted pressure over the decades on health care entities to develop adequate accounting principles. b. A contractual adjustment is a reduction to patient service revenues created when a lesser amount is paid by a third-party payor and accepted as payment in full by a health care entity. These outside parties often have established contractual arrangements whereby the health care entity agrees to accept a lower amount for a service if the third party determines the figure to be reasonable in that particular area. These contractual adjustments create an accounting problem for the health care organization since it is not always able to determine the amount that eventually will be collected. Consequently, the entity recognizes the full amount of the invoice as patient service revenue at the time the service is performed. The health care entity then estimates and establishes an offsetting Contractual Adjustment account to reduce the amount of net reported revenue to the amount anticipated as being collected. c. At the time that materials are donated to a health care entity (or any private not-for-profit organization), the fair value is recorded as an asset. Because of the donation, Contribution Revenue is also recognized as an increase in unrestricted net assets. If the asset has an extended life, the organization can assume a time restriction on the use of the asset so that the Contribution Revenue is reported initially as an increase in temporarily resticted net assets. An amount is then reclassified to unrestricted net assets each period equal to depreciation expense. Donated services are recorded as Contribution Revenue and as Salary Expense; both are shown as changes in unrestricted net assets. FASB requires private not-for-profit organizations to recognize donated services but only if they (a) enhance nonfinancial assets or (b) require specialized skills, are provided by individuals possessing those skills, and would need to be purchased if not provided by donation. If the donated service enhances a nonfinancial asset, the Contribution Revenue recognized is balanced with an increase in the assets reported balance rather than as Salary Expense.

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34. (5 Minutes) (Reporting of various accounts by a not-for-profit organization) Only $7.6 million is reported as patient service revenues. Charity care of $1.4 million is not recorded because no attempt at collection is anticipated. Then, the contractual adjustment total of $800,000 is netted with the revenue to leave the hospital with a net patient service revenue figure to report of $6.8 million. The supplies are recorded at their $4,000 value with an offsetting entry to Contribution Revenue, which is an increase in unrestricted net assets. All $860,000 of the board-designated assets (assets that have been internally restricted by management or the organizations board) remain as unrestricted net assets because neither the cash nor the investments has been restricted by an external donor. On the statement of financial position, these assets can be classified as "Assets Whose Use Is Limited" for disclosure purposes. 35. a). (8 Minutes) (Recording donations given to a voluntary health and welfare organization) Pledges ............................................................................ Anticipated Amount Deemed to be Uncollectible (15%) Net Pledge Balance..................................................... Increase in Unrestricted Net Assets in 2010 Contributed Support (60% of above)......................... Increase in Temporarily Restricted Net Assets in 2010Contributed Support (40% of above)............. $600,000 (90,000) $510,000 $306,000 $204,000

b). Donated services would be valued at $12,000 and recognized as an increase as contributed support while salary expense is recognized for this same amount. Both are in Unrestricted Net Assets. Therefore, no overall effect is created but the impact of the donation is reflected.

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36. (65 Minutes) (Preparation of financial statements for a private not-for-profit organization) a. Statement of Activities
Unrestricted Net Assets Public Support a. Contributions b. ContributionInterest Revenue c. Membership dues d. Investment income $210,000 Temporarily Restricted Net Assets $78,000 3,000 Permanently Restricted Net Assets

30,000 3,900

9,100

e. Net assets released from restriction Total Public Support and Revenue Expenses Program service expenses cure disease f. Salaries g. Depreciation h. Supplies Total Supporting service expenses General and administrative i. Salaries j. Depreciation Total Fund-raising k. Salaries l. Advertising m. Depreciation Total Total Expenses Change in Net Assets Net Assets at Beginning of Year Net Assets at End of Year

72,000 $315,900

(72,000) $18,100

(26,500) (16,000) (93,000) (135,500)

(32,000) (2,000) (34,000) (26,500) (2,000) (2,000) (30,500) (200,000) $115,900 400,000 $515,900 $18,100 200,000 $218,100 -0$100,000 $100,000

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36. (continued) Explanation of Balances a. Contributions. The balance to be reported is the unrestricted gift plus present value of unrestricted pledge. Pledge is viewed as temporarily restricted because it will not be collected for three years. b. Contribution-Interest. The pledge is recorded at its present value. Interest that must be recognized to raise the balance to the pledge amount is reported as contribution revenue. c. Membership dues. The amount received is shown as a revenue and not as public support because rights are being conveyed to the members. d. Investment income. Although this income is earned on permanently restricted net assets, 70 percent is shown as temporarily restricted because the donor has specified that it must be spent on advertising, whereas the remaining 30 percent is unrestricted. e. Net assets released from restriction. Three restricted amounts were properly spent during the period: $20,000 for salaries, $50,000 for equipment, and $2,000 for advertising. No implied time restriction was assumed for the equipment so the reclassification was made immediately. f. Salaries. During the period, $24,000 was paid in salaries and another $2,500 was owed at the end of the year. g. Depreciation. Of the total for the period, 80 percent was allocated to program service expenses because that amount of the equipment was used for that purpose. h. Supplies. A total of $93,000 was acquired and used during the year. i. Salaries. Administrative salaries amounted to $32,000 for the year. j. Depreciation. Of the total for the period, 10 percent was allocated to general and administrative expenses. k. Salaries. During the period, $24,000 was paid in salaries and another $2,500 was owed at the end of the year. l. Advertising. Only $2,000 in advertising costs were incurred during the period. m. Depreciation. Of the total for the period, 10 percent was allocated to fundraising expenses. ---Because it qualifies as a museum piece, recording of the painting is optional. Officials do not want to report the painting, and they are not required to report it. ---The $10,000 gift must be conveyed to an outside beneficiary and is reported by the not-for-profit organization as a liability.

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36. (continued) b. Statement of Financial Position Assets a. Cash b. Pledge Receivable c. Equipment d. Accumulated Depreciation Total Assets Liabilities e. Salaries Payable f. Notes Payable g. Donated Amount That Is Due to Separate Organization Net Assets (see Statement of Activities) Unrestricted Temporarily Restricted Permanently Restricted Explanation of Balances: a. Cash. The final balance is the beginning cash figure of $700,000 plus $210,000 in contributions, less $80,000 for salaries, less $50,000 for equipment, plus $30,000 in membership dues, plus $10,000 contribution that must be conveyed to separate organization, plus $13,000 investment income, less $2,000 paid for advertising, and less $93,000 paid for supplies. b. Pledges receivable. The amount to be reported is the present value as of the end of the year (including the interest accrued for the period). c. Equipment. Organization acquired $300,000 of equipment during the year. d. Accumulated Depreciation. The amount recorded for this initial year of ownership. e. Salaries Payable. The amount owed employees as of the end of the year. f. Notes Payable. The liability incurred in acquiring equipment. g. Donated Amount That Is Due to Separate Organization. Amount given by a donor that must be conveyed to a separate organization. The amount must be shown as a liability since no mention was made that the organization had variance powers that would allow it to change the beneficiary. $738,000 81,000 $300,000 (20,000) 280,000 $1,099,000 $5,000 250,000 10,000 $515,900 218,100 100,000 $265,000

834,000

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37. (50 Minutes) (Effect of various transactions on unrestricted and restricted net assets) a. InvestmentsInternally Restricted ............................... Cash........................................................................ b. Cash................................................................................... Contributed Support Permanently Restricted Net Assets ................. c. Inventory of Medicines..................................................... Cash........................................................................ ReclassificationTemporarily Restricted Net Assets................................................. ReclassificationUnrestricted Net Assets......................................................... d. Accounts ReceivablePatients...................................... Accounts ReceivableThird-Party Payors........................................................................... Patient Service Revenues..................................... e. Depreciation Expense...................................................... Accumulated Depreciation................................... f. Cash................................................................................... Interest Revenue Unrestricted Net Assets (internally restricted) g. Bad Debt Expense............................................................ Allowance for Uncollectible Accounts........................................................... Contractual Adjustment................................................... Allowance for Reduced Charges.......................... 160,000 160,000 80,000 80,000 25,000 25,000 25,000 25,000 120,000 480,000 600,000 38,000 38,000 15,000 15,000 20,000 20,000 30,000 30,000

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37. (continued) h. Supplies Expense ............................................................ Inventory of Medicines.......................................... i. Cash .................................................................................. InvestmentsInternally Restricted..................... Gain on Sale of InvestmentsUnrestricted Net Assets......................................................... Equipment......................................................................... Cash ($172,000 + $15,000 + $25,000)................... ReclassificationTemporarily Restricted Net Assets................................................. ReclassificationUnrestricted Net Assets......................................................... j. Cash................................................................................... Pledges Receivable (present value)............................... Allowance for Uncollectible Pledges................... Contributed SupportUnrestricted Net Assets......................................................... Contributed SupportTemporarily Restricted Net Assets...................................... 25,000 25,000 172,000 160,000 12,000 212,000 212,000 25,000 25,000 12,600 98,000 9,000 12,600 89,000

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Chapter 18 - Accounting and Reporting for Private Not-for-Profit Organizations

37. (continued) Unrestricted Net Assets a. No change b. Donation Income for Salaries c. Stipulation MetReclassification d. Patient Services e. Depreciation f. Interest g. Bad Debts Contractual Adjustment h. Supplies Expense i. Gain on Investments Stipulation MetReclassification j. Pledges Increase (Decrease) In Net Assets Calculation of Changes in Net Assets Temporarily Restricted Permanently Restricted Net Assets Net Assets

80,000

25,000 600,000 (38,000) 15,000 (20,000) (30,000) (25,000) 12,000

(25,000)

25,000 12,600

(25,000) 89,000

576,600

39,000

80,000

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Chapter 18 - Accounting and Reporting for Private Not-for-Profit Organizations

38. (55 minutes) (Produce journal entries for a private university as well as a statement of activities) a. Tuition Receivable 1,200,000 Tuition Revenues 1,200,000 b. Investments ContributionsPermanently Restricted c. Cash ContributionsTemporarily Restricted d. ScholarshipsFinancial Aid Tuition Receivable e. Salary Expenses Cash f. Salary Expense Contributed Service Revenues Unrestricted Net Assets g. Equipment Cash Temporarily Restricted Assets Reclassification Unrestricted Net Assets Reclassification h. Investments Unrealized Gain on Investments Permanently Restricted Assets i. Cash Dividend RevenueUnrestricted Net Assets j. Depreciation Expense Accumulated Depreciation k. CashInternally Restricted Cash 300,000 300,000 700,000 700,000 100,000 100,000 310,000 310,000 80,000 80,000 200,000 200,000 200,000 200,000 30,000 30,000 9,000 9,000 32,000 32,000 100,000 100,000

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Chapter 18 - Accounting and Reporting for Private Not-for-Profit Organizations

38. (continued) l. Pledge Receivable ContributionTemporarily Restricted Assets m. No entry because of choice made by officials n. Utilities and Other Expenses Cash o. No entrydoes not require a specialized skill. 35. (continued)
University of Danville Statement of Activities Unrestricted Net Assets Revenues and Gains -Tuition 1,200,000 -Scholarships (100,000) -Unrealized Gain on Investments -Dividend Revenue Contributions -Cash and Other Assets -Services Total Revenues, Gains, And Contributions Net Assets Released From Restriction Totals Operating Expenses -Salaries -Depreciation -Utilities and Other Expenses Total Expenses Increase in Net Assets 1,100,000 30,000 9,000 Temporarily Permanently Restricted Restricted Net Assets Net Assets Total

7,000 7,000

212,000 212,000

1,100,000 30,000 9,000

707,000 80,000 1,189,000 200,000 1,389,000 390,000 32,000 212,000 634,000 755,000 507,000 707,000 (200,000) 507,000

300,000 _______ 330,000 _______ 330,000

1,007,000 __80,000 2,226,000 ________ 2,226,000 390,000 32,000

212,000 634,000 330,000 1,592,000

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Chapter 18 - Accounting and Reporting for Private Not-for-Profit Organizations

Net AssetsBeginning Of Year Net AssetsEnd of Year

400,000 1,155,000

200,000 707,000

100,000 430,000

700,000 2,292,000

39. (30 Minutes) (Series of questions about private not-for-profit organizations) a. Many private non-for-profit organizations depend heavily on gifts and grants from outside parties. An earning process is not present in connection with such b. receipts; asset inflows are simply created by donations. Such amounts are reported as public or contributed support. These same organizations, however, do sometimes earn (in an accounting sense) some of the funds that are received. Membership dues, for example, are not viewed as gifts if rights that have value are conveyed to the members. The organization may also have receipts from sources such as interest or dividend income. Money derived in this fashion is not the same as a donation and is, thus, recorded as revenue. c. The statement of functional expenses is required to be reported by voluntary health or welfare organizations and is permitted for all other private not-for-profit organizations. It enables the reader to determine the ultimate usage of the money that has been raised by the organization. Expenses are separated according to program service expenses (directed towards activities of the organization that relate to its goals and mission) and supporting service expenses (dealing with the cost of running the organization and raising funds). This statement permits interested parties such as potential donors to see the allocation being made of the organizations resources. d. Some charitable organizations (Goodwill Industries and the Salvation Army, for example) receive a large portion of their contributions in the form of donated materials such as clothing and furniture. If the value of these goods has a clearly measurable basis, recording the gifts as contributed support is appropriate. e. A not-for-profit organization may receive gifts (or unconditional promises to give) from outside parties that (1) must be expended for a particular purpose or (2) cannot be expended until a

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particular point in the future. Because the organization does not have the free use of these assets, they are labeled as "Temporarily Restricted Assets." At the time that the stipulation is met or the

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Chapter 18 - Accounting and Reporting for Private Not-for-Profit Organizations

time period arrives, the asset is reclassified into the Unrestricted Net Asset category. Other gifts may be given where the donor specifies that only the subsequent income can be expended (frequently for a designated purpose). Because the assets received in the original gift cannot be expended, they are termed Permanently Restricted Assets." f. Donated services are extremely common in the operation of many not-forprofit organizations. Literally thousands of individuals solicit funds for organizations such as the Heart Fund, Salvation Army, and March of Dimes. In addition, individuals often voluntarily fill positions of responsibility throughout many of these organizations. Donated services are formally recognized in the accounting records but only if specific circumstances are met: 1. The service creates or enhances a nonfinancial asset or 2. The service requires a specialized skill possessed by the donor that the organization would have had to be purchased if not donated. f. Prior to 1987, the costs of direct mailings and other solicitations for support were recorded by private not-for-profit organizations as fund raising expenses even if educational materials were included. In that year, this requirement was modified so that an allocation of the joint costs could be made between educational expenses (a program service cost) and fund raising (a supporting service cost). Some organizations then took advantage of this rule because it made their statements look like they were spending more to meet their goals. In 1998, the AICPA issued its Statement of Position 98-2 Accounting for Costs of Activities of Not-for-Profit Organizations and State and Local Governmental Entities That Include Fund-Raising. This SOP stated that direct mailing costs should be assigned entirely to fund-raising costs unless a specific call for action was being made that was not limited to potential donors. This call for action had to be one that would further the mission of the organization. If these requirements were met, a portion of the direct mailing costs could be assigned to program service expenses. g. Donated materials are normally reported as assets at their fair market value accompanied by an increase in unrestricted net assets (see answer [c] above). However, the recording of art works, historical treasures, and museum pieces is optional. An item qualifies for such treatment if (1) it is part of a collection for public exhibition, education, or research, (2) it is protected and preserved, and (3) if sold, the money received must be used to acquire other collection

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Chapter 18 - Accounting and Reporting for Private Not-for-Profit Organizations

items. If these criteria are met, no recording is required (although it is allowed). 40. (25 Minutes) (Determine impact of various transactions on a private college.) (1)---False. The January 1, Year One restriction is internal and, therefore, causes no changes in the amount of unrestricted net assets. Such changes can only be created by external donors. (2)---True. The stipulation of the April 1, gift is that only subsequent cash income can be used for the designated purpose. Therefore, changes in value are shown as adjustments to the permanently restricted net assets. (3)---True. As indicated in (2), the donor has indicated that only cash income can be used for the football stadium. The change in value increases the amount of the assets held in permanently restricted net assets. (4)---True. The school has properly spent the $500,000 earned on the investments. The school has not set a policy that assumes a time restriction on the use of this stadium. Therefore, the reclassification to unrestricted net assets is made immediately at the time of proper expenditure. (5)---False. Depreciation expense is appropriate for all long-lived assets with a finite life regardless of the policy of the school. (6)---False. This is the same answer as in (5). Depreciation expense is appropriate for all long-lived assets with a finite life regardless of the policy of the school. (7)---True. The acquisition of the football stadium seat has two effects. Because the value of that seat for watching football games is $12,000, the school should recognize that amount as revenue. Dr. Johnson paid an extra $18,000, apparently as a gift to the school. There is no mention of a donor restriction on this additional amount so it is a contribution that also increases unrestricted net assets. (8)---True. This is the same answer as in (7). Dr. Johnson paid an extra $18,000, apparently as a gift to the school. There is no mention of a donor restriction on this additional amount so it is a contribution that also increases unrestricted net assets. (9)---True. These donated services meet the requirement for being reported so that a contributed revenue as well as a salary expense must be recognized.

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(10)---False. Based on the information given, both the revenue and the expense must be reported. Might implies an option which is not available for this type of donation. (11)---False. The answer is the same as in (10). Both the revenue and the expense must be reported. Unrestricted net assets both go up and go down. (12)---False. If this painting does not qualify as a work of art, the school must record the asset at $30,000 along with a contribution revenue of that same amount. If the painting does qualify as a work of art, the school can either make the above entry or simply make no entry. Therefore, under one set of circumstances, the contribution revenue is not required. (13)---False. As in answer (12), the handling depends on whether this painting qualifies as a work of art. However, if the value is $30,000, there is no situation where the school is not allowed to recognize a revenue. 41. (30 Minutes) (Determine changes in net asset balances for several different types of transactions) Part (1) --Unrestricted Net Assets No net change. When the $22,000 is spent properly, a reclassification of that amount is made into Unrestricted Net Assets. At the same time, though, a faculty salary expense of the same amount is recognized. The two balance out for no net impact. --Temporarily Restricted Net Assets Increase by $9,000. The $31,000 of investment income increases this category but it is then reduced by the $22,000 reclassified into Unrestricted Net Assets because it is properly spent. --Permanently Restricted Net Assets Increase by $400,000. The current donation increases this category because only the subsequent income can be spent. Part (2) --Unrestricted Net Assets No net change. Because of the restriction on the use of the machine for this period of time, the $200,000 gift is initially reported as an increase in Temporarily Restricted Net Assets. At the end of the year, the asset balance will be reduced by $20,000 in depreciation. Thus, a $20,000 reclassification moves a $20,000 balance from Temporarily Restricted Net Assets to Unrestricted Net Assets. That $20,000 increase will exactly offset the $20,000 in depreciation expense also recognized within Unrestricted Net Assets. --Temporarily Restricted Net Assets Increase by $180,000. Because of the restriction on the time use of the asset, the $200,000 is initially recorded here in Temporarily Restricted Net Assets. The $20,000 reclassification discussed above reduces that net increase to $180,000.

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Chapter 18 - Accounting and Reporting for Private Not-for-Profit Organizations

--Operating Expenses Increases by the $20,000 in depreciation expense. Part (3) --Unrestricted Net Assets Increase by $1.6 million. The tuition revenue of $2 milion is reduced by the $700,000 in financial aid for a net increase of $1.3 million. However, because $300,000 of previously restricted net assets were used here, a reclassification of that amount from Temporarily Restricted Net Assets to Unrestricted Net Assets causes the overall increase to be $1.6 million. --Operating Expenses There are no operating expenses. Financial aid is a reduction to tuition revenue and not an operating expense. --Temporarily Restricted Net Assets Decreases by $300,000. Money that had previously been restricted was properly utilized. Thus, a reclassification of this amount is reported. 42. (55 Minutes) (Prepare financial statements for a not-for-profit organization.) a. Entries for this not-for-profit organization are presented below. The numbers in parenthesis indicate account totals at that point in time during the period. This method is used as an easy way to gather account balances. Pledges receivable...................................... 20,000 Contribution revenueinterest--unrestricted net assets............................................ Cash ............................................................ 100,000 Allowance for uncollectible pledges......... Pledges receivable.................................. 4,000 104,000 (net of 120,000) (380,000) 180,000 90,000 15,000 15,000 12,000 (180,000) ( 90,000) (290,000) ( 15,000) ( 15,000) (302,000) ( 12,000) (220,000) 20,000 ( 20,000) (200,000)

Cash ............................................................ 180,000 Contributions revenueunrestricted net assets.............................................. Salary expense............................................ Cash ...................................................... Reclassification - Temporarily restricted net assets................................................... Reclassification - Unrestricted net assets..................................................... 90,000

Cash ............................................................ 12,000 Contributions revenuetemporarily restricted

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Chapter 18 - Accounting and Reporting for Private Not-for-Profit Organizations

(To record gift to go to a specified beneficiary. Organization reports a revenue because it has variance powers.) Land, buildings, and equipment ............... 500,000 Note payable............................................ Cash ...................................................... 450,000 50,000 (700,000) (450,000) (252,000) ( 65,000) ( 65,000) (282,000) ( 30,000)

Reclassification - Temporarily restricted net assets................................................... 50,000 Reclassification - Unrestricted net assets..................................................... 50,000 (To record reclassification of restricted amount properly spent.) Cash ............................................................. 30,000 Membership revenueunrestricted net assets 30,000 (Membership dues are listed as revenues and not contributions because members receive substantial benefits.) Cash.............................................................. 30,000 Investment revenueunrestricted net assets 30,000 (Income is earned on permanently restricted net assets but use of the income is unrestricted.)

(312,000) ( 30,000)

Rent expense............................................... Advertising expense .................................. Utilities expense ......................................... Cash ......................................................

12,000 15,000 16,000 43,000

( 12,000) ( 15,000) ( 16,000) (269,000) (269,000) (161,000)

Pledges receivable...................................... 149,000 Contributions revenuetemporarily restricted net assets ............................................ 149,000 (Although pledge is unrestricted, it will not be collected for five years and, therefore, the proceeds are viewed as temporarily restricted.) Pledges receivable...................................... 6,000 Contribution revenueinterest--temporarily restricted net assets ......................... Depreciation expense ................................ Land, buildings, and equipment .......... 40,000 40,000

(275,000) 6,000 ( 6,000)

( 40,000) (660,000)

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Chapter 18 - Accounting and Reporting for Private Not-for-Profit Organizations

Interest expense.......................................... Cash ...................................................... 42. (continued)

15,000 15,000

( 15,000) (254,000)

Based on the final balances computed above, the following statements can be prepared. WATSON ORGANIZATION STATEMENT OF ACTIVITIES For Year Ending December 31, 2010 Unrestricted Net Assets Contributions revenue $ 180,000 Contributions -- interest revenue 20,000 Investment revenue 30,000 Membership revenue 30,000 Total revenues $ 260,000 Net assets released from restriction Total revenues and net assets released from restriction Expenses: General and administrative Rent Salary Advertising Utilities Depreciation Interest Total expenses 65,000 $ 325,000 Temporarily Restricted Net Assets $ 161,000 6,000 _______ $ 167,000 ( 65,000) $ 102,000 Permanently Restricted Net Assets

________

________ ________

$ (12,000) (90,000) (15,000) (16,000) (40,000) (15,000) $(188,000)

Excess of total revenues and net assets released from restriction over expenses $137,000

$102,000

-0-

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Chapter 18 - Accounting and Reporting for Private Not-for-Profit Organizations

Net assets at beginning of year Net assets at end of year 42. (continued) b.

400,000 $537,000

100,000 $202,000

$300,000 $300,000

WATSON ORGANIZATION STATEMENT OF FINANCIAL POSITION December 31, 2010 ASSETS Cash Pledges receivable (net) Investments Land, buildings, and equipment (net) Total assets LIABILITIES Notes payable NET ASSETS - Unrestricted - Temporarily restricted - Permanently restricted $537,000 202,000 300,000 $ 254,000 275,000 300,000 660,000 1,489,000 450,000

$1,039,000

43. (40 minutes) (Accounting for mergers and acquisitions) a. In an acquisition, the assets and liabilities of the acquired organization are included at fair value. Thus, the buildings and equipment reported by Swim For Safety must be increased by $140,000 from $590,000 to $730,000. If the acquisition value ($1 million) exceeds the total fair value recognized for the individual assets and liabilities ($1,470,000 plus $140,000 less $690,000 or $920,000), the excess ($80,000 in this case) is reported as goodwill. Cash held by Help & Save must be reduced by the $1 million payment as must the balance shown for unrestricted net assets. The increases in the buildings & equipment ($140,000) as well as the increase in goodwill ($80,000) are reflected by increases in unrestricted net assets since no external restriction is in place for these assets. Balances To Be Reported:

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Chapter 18 - Accounting and Reporting for Private Not-for-Profit Organizations

--Cash - $1,100,000 ($1,600,000 less $1,000,000 plus $500,000) --Pledges receivable (net) - $280,000 ($70,000 plus $210,000) --Investments - $470,000 ($300,000 plus $170,000) --Buildings & equipment - $1,430,000 ($700,000 plus $730,000) 43. (continued) --Goodwill - $80,000 (above) --Total assets - $3,360,000 (summation) --Accounts payable and accrued liabilities - $180,000 ($110,000 plus $70,000) --Notes payable - $1,720,000 ($1,100,000 plus $620,000) --Total liabilities - $1,900,000 (summation) --Unrestricted net assets - $740,000 ($1,100,000 less $1,000,000 plus $140,000 plus $80,000 plus $420,000) --Temporarily restricted net assets - $440,000 ($250,000 plus $190,000) --Permanently restricted net assets - $280,000 ($110,000 plus $170,000) --Total net assets - $1,460,000 (summation) --Total liabilities and net assets - $3,360,000 ($1,900,000 plus $1,460,000) b. In an acquisition, the assets and liabilities of the acquired organization are included at fair value. Thus, the buildings and equipment reported by Swim For Safety must be increased by $140,000 from $590,000 to $730,000. If the acquisition value ($990,000) exceeds the total fair value recognized for the individual assets and liabilities ($1,470,000 plus $140,000 less $690,000 or $920,000), the excess ($70,000 in this case) is normally reported as goodwill. However, one exception is made. If the acquired company is predominantly supported by contributions and investment income (as is the case here), then the excess $70,000 is not recognized at all as an asset. Cash held by Help & Save must be reduced by the $990,000 payment as must the balance shown for unrestricted net assets. The increase in the buildings & equipment ($140,000) is reflected by an increase in unrestricted net assets since no external restriction is in place for these assets. Goodwill is not recognized so that no additional increase in unrestricted net assets is needed. Balances To Be Reported: --Cash - $1,110,000 ($1,600,000 less $990,000 plus $500,000) --Pledges receivable (net) - $280,000 ($70,000 plus $210,000) --Investments - $470,000 ($300,000 plus $170,000)

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Chapter 18 - Accounting and Reporting for Private Not-for-Profit Organizations

--Buildings & equipment - $1,430,000 ($700,000 plus $730,000) --Total assets - $3,290,000 (summation) --Accounts payable and accrued liabilities - $180,000 ($110,000 plus $70,000) --Notes payable - $1,720,000 ($1,100,000 plus $620,000) 43. (continued) --Total liabilities - $1,900,000 (summation) --Unrestricted net assets - $670,000 ($1,100,000 less $990,000 plus $140,000 plus $420,000) --Temporarily restricted net assets - $440,000 ($250,000 plus $190,000) --Permanently restricted net assets - $280,000 ($110,000 plus $170,000) --Total net assets - $1,390,000 (summation) --Total liabilities and net assets - $3,290,000 ($1,900,000 plus $1,390,000) c. This transaction is a merger: two not-for-profit organizations are brought together to form a new not-for-profit under a newly-formed governing body. As a merger, the carryover method is used. Book values are simply added together to get the new balances to be reported. No cash was spent and no adjustments to fair value are made. Balances To Be Reported: --Cash - $2,100,000 ($1,600,000 plus $500,000) --Pledges receivable (net) - $280,000 ($70,000 plus $210,000) --Investments - $470,000 ($300,000 plus $170,000) --Buildings & equipment - $1,290,000 ($700,000 plus $590,000) --Total assets - $4,140,000 (summation) --Accounts payable and accrued liabilities - $180,000 ($110,000 plus $70,000) --Notes payable - $1,720,000 ($1,100,000 plus $620,000) --Total liabilities - $1,900,000 (summation) --Unrestricted net assets - $1,520,000 ($1,100,000 plus $420,000) --Temporarily restricted net assets - $440,000 ($250,000 plus $190,000) --Permanently restricted net assets - $280,000 ($110,000 plus $170,000) --Total net assets - $2,240,000 (summation) --Total liabilities and net assets - $4,140,000 ($1,900,000 plus $2,240,000)

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44. (15 minutes) (Adjusting totals for an incorrectly reported student tuition) a. The tuition was properly recorded as a revenue. However, the financial aid figure should have been a direct reduction to the tuition revenue rather than an expense. In either case, the aid reduces unrestricted net assets so the $400,000 total computed at the end of the year is correct. 44. (continued) b. As indicated in (a), the financial aid should not have been an expense but, rather, a reduction in the tuition revenue. Removing the $140,000 from the recognized expenses reduces that total from $500,000 to $360,000. 45. (15 minutes) (Adjusting totals for incorrectly recorded restricted giving) a. Because the use of the interest was specified by the donor, both interest balances should have been recorded initially within the Temporarily Restricted Net Assets. When properly spent, these amounts would have been reclassified into Unrestricted Net Assets. The organization recorded the amounts immediately in Unrestricted Net Assets. Since the amounts have been properly spent, they did wind up in the category where they were supposed to be reported. The $400,000 shown as unrestricted net assets is correct. b. Each amount was reported as expenses in unrestricted net assets and that handling was correct. No change is needed so that the $500,000 reported as expenses is shown properly. c. As indicated in (a), the $5,000 and the $7,000 should have gone to Temporarily Restricted Net Assets and then been removed through a reclassification. No net effect is left. Because nothing was recorded by the organization in Temporarily Restricted Net Assets, the total of $300,000 is correct. 46. (20 minutes) (Adjusting the incorrect recording of a donation and subsequent expenditure) a. Because a time restriction has been assumed, only $5,000 ($50,000/10 years) should have been reclassified from Temporarily Restricted Net Assets into Unrestricted Net Assets. However, the organization increased Unrestricted Net Assets by $50,000. The final balance being reported, therefore, is $45,000 too high. Removing this $45,000 inflation reduces the final Unrestricted Net Asset figure from $400,000 down to $355,000.

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b. Depreciation expense of $5,000 ($50,000/10 years) was recorded within the Unrestricted Net Assets. That handling is appropriate so that the $500,000 expense figure that is reported is correct. c. Since the problem says that the correct entry was made in Year One, there is a $50,000 balance in Temporarily Restricted Net Assets. Because a time restriction was assumed, only an amount ($5,000) equal to the depreciation recorded should have been reclassified to Unrestricted Net Assets. That $5,000 amount was never removed. Reclassifying the $5,000 reduces Temporarily Restricted Net Assets from $300,000 to $295,000. The $50,000 reclassification error does not affect this category. 47. (5 minutes) (Incorrect reporting of membership dues) In this case, since nothing was received in exchange for the members dues, these dues should have been recorded as a $100,000 per year contribution which would increase Unrestricted Net Assets. The dues were recorded as a membership revenue which is incorrect but it does increase Unrestricted Net Assets. So, the source is wrongly reported but the total Unrestricted Net Assets is correctly stated at $400,000. 48. (15 minutes) (Reporting of donated services) a. The problem here is that an expense of $70,000 was reported when the donation was a garage that should have been capitalized as an asset. Subsequently, though, this asset would have been depreciated at the rate of $7,000 per year. For this reason, the expenses are overstated by $63,000 which causes Unrestricted Net Assets to be understated by $63,000. Instead of an Unrestricted Net Assets balance of $400,000, the organization should have reported $463,000. b. The organization reported no assets. The organization should have reported a $70,000 garage less $7,000 in accumulated depreciation. The net balance of $63,000 should be added to the reported total for assets of $900,000 to arrive at a corrected figure of $963,000. c. As indicated in (a) above, the expenses were overstated by $63,000. Removing this $63,000 drops the expense total from $500,000 to $437,000. 49. (10 minutes) (Reporting a gift that must be transferred to another party) a. This money is still under the control of the donor. Consequently, the organization should have recorded a liability to the donor until a final

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Chapter 18 - Accounting and Reporting for Private Not-for-Profit Organizations

resolution. Instead, the charity recorded a contribution revenue which served to increase Unrestricted Net Assets. That $40,000 should be removed so that Unrestricted Net Assets are $360,000 and not $400,000. b. This issue is about whether a contribution or a liability should be reported. The amount reported as assets is not in question and is, then, correctly stated at $900,000.

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Chapter 18 - Accounting and Reporting for Private Not-for-Profit Organizations

Develop Your Skills Research Case 1 This is an excellent assignment to demonstrate the wealth of information that is available on the Internet about charities and other not-for-profit organizations. Many individuals want to be generous and help organizations that deserve their assistance. Determining, though, whether an organization is truly worthy of support is not necessarily easy. Every organization will claim that it is effectively helping to improve some element of society that is in need. Obviously, the information that a student finds at this website will depend upon the specific charities that are examined. However, some of the information that is normally available includes: stated purpose of the organization, year it was started, the existence of any affiliated organizations, whether this organization has met all of the standards of the group that created the website and, if not, what was the problem, a discussion of the organizations programs along with the program expenses, identification of the chief executive officer (along with compensation), number of individuals on the board and the number of staff members working in the organization, methods used for fund-raising, tax status, sources of funding, including dollar amounts From this type of information, a student should be able to write a detailed overview of the organization and its operations and finances. RESEARCH CASE 2 This case is designed to introduce students to the information that can be found on the Form 990 that must be made public by tax-exempt organizations. Much of the information is the same as is shown on the organizations financial statements but the availability of the Form 990 ensures that such information is made public. Most not-for-profit organizations that a student might research will qualify as Section 501(c)(3) charities. The salary information will give an opportunity to discuss whether officials of these organizations made too much or too little. Do the amounts seem

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Chapter 18 - Accounting and Reporting for Private Not-for-Profit Organizations

reasonable in comparison to the amount of revenues generated or the amount of assets held? What, for example, would the president of a comparable for-profit business make in salary and other compensation? One exercise that can be done is to simply list on the classroom board the types of information that the students uncover. Which of these is most important and why is each of the items listed included? Analysis Case 1 Many times a potential donor may be interested in an array of information that can best be found by studying the actual financial statements of a not-for-profit organization. The purpose of financial statements is to provide a complete picture of the financial operations and position of the organization to help outsiders make decisions. Students can observe the construction of financial statements in textbooks but only by actually making use of these statements can they come to appreciate the information that is available. One way to approach this assignment is to ask the students to list out the five most interesting pieces of information that they uncover about a particular charity. The web site for many not-for-profit organizations can be found by going to www.give.org and then clicking on Charity Reports and Standards. At that spot, a large number of charitable organizations are listed. By clicking on a specific charity, the student can get considerable information including the organizations website address. The exact information that is found will, obviously, depend on the particular notfor-profit organization that is studied. As just one example, the following information comes from recent financial statements for the American Heart Association for the year ended June 30, 2008: 1--This not-for-profit organization has four different program services listed in its financial statements: research, public health education, professional education and training, and community services. 2--The charity reported total expenses for 2008 in excess of $724 million. Of that total, more than $164 million was incurred in connection with supporting services. Thus, approximately 23 percent of each dollar of expense was incurred in connection with supporting services. 3--In the statement of activities, the American Heart Association recognized $44.0 million in donated services for the year ended June 30, 2008. The

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biggest single source was public service announcements. Note 1, section i, spells out additional information about these donations as well as other donated services that were not recognized. 4--A question that is raised in connection with virtually any charitable organization has to do with the amount of resources that are expended to raise more resources. In the year ended June 30, 2008, the American Heart Association, incurred $112.9 million in fund-raising expenses. That amount makes up approximately 16 percent of the organizations total expenses for the period. 5--The financial statements at June 30, 2008 show that the American Heart Association held $299.5 million in unrestricted net assets, $274.5 million in temporarily restricted net assets, and $159.2 million in permanently restricted net assets. 6For the year ended June 30, 2008, $142.3 million of temporarily restricted net assets were reclassified as unrestricted. Either the related purpose restriction had been satisfied ($91.0 million) or a time restriction expired ($51.3 million). Analysis Case 2 Most private colleges and universities now place their latest audited financial statements on their Web site. However, in some cases, a bit of searching is needed to locate these statements. The method by which the statements are made available is certainly not standardized. The information that will be uncovered by reading through these financial statements will depend entirely on the school being used. Here are the answers to the posed questions for the University of Richmond as of June 30, 2008, and the year then ended (http://controller.richmond.edu/about/FinPosn08.pdf). 1--Tuition and fee revenue for the period totaled $126.4 while the schools scholarship allowance was $45.3 million. Hence, this financial aid covered approximately 35.8 percent of the tuition charged to students. To put this information another way, the average student paid 64.2 percent of the schools tuition charges. 2--The Universitys balance sheet shows pledges receivable of over $35.4 million. A look at note five to the financial statements indicates that over 79 percent of that money is expected to be received beyond one year into the future. Because a lot of these dollars will not be received for some

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time, the actual amount reported is the present value of the expected future cash flows discounted at rates ranging from 3 percent to 11 percent. 3--This is an extremely difficult question for any school to answer because the costs of educating the students can be included within several different accounts: instruction, libraries, academic support, institutional support, and the like. So, no exact comparison between educational costs and research costs is possible here. However, considerable information can be determined about the schools priorities simply by comparing instruction expenses ($58.0 million) and research expenses ($5.5 million). 4--For 2008, the University of Richmond shows $4.7 million in operating contributions and $2.2 million in non-operating contributions (such as for buildings and equipment). 5--At the end of the 2008 fiscal year, the University of Richmond reported $1.61 billion in unrestricted net assets, $85.9 million in temporarily restricted net assets, and $297.2 million in permanently restricted net assets. For these last two figures, the restrictions had to have been put in place by an outside party (probably the donor). 6--The statement of activities shows a total of both realized and unrealized gains for the year of $42.1 million. No explicit indication is made as to what part of that gain resulted from the sale of investments and what part came from changes in fair market value. 7--The problem with this computation is determining exactly what is meant by education expenses. One way to compute that figure for the University of Richmond for 2008 is as follows: Net Tuition and Fees Education Expenses (one way that term can be defined) Instruction $57,967,720 Libraries 11,037,753 Academic Support 22,325,948 Student Services 15,774,125 Institutional Support 32,138,135 Net Loss on Educating Students $81,070,224

(139,243,681) $(58,173,457)

Many students feel that, because of the high amounts being charged, colleges and universities should be making a great profit from tuition. Depending on how

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education costs are defined, most schools will show a monetary loss (and often a considerable loss) from the process of educating students. This is one computation that can really interest a college student. Communication Case There is a considerable amount of information available at this Web site so that a students actual report will vary depending on which pieces are emphasized. A general checklist is available with significant details available for each of these topics. (1) - Develop a Culture of Accountability and Transparency (2) - Adopt a Statement of Values and Code of Ethics (3) - Adopt a Conflict of Interest Policy (4) - Ensure that the Board of Directors Understands and Can Fulfill Its Financial Responsibilities (5) - Conduct Independent Financial Reviews, Particularly Audits (6) - Ensure the Accuracy of and Make Public Your Organizations Form 990 (7) - Be Transparent (8) - Establish and Support a Policy on Reporting Suspected Misconduct or Malfeasance (Whistleblower Protection Policy) (9) - Remain Current with the Law Each of these is then linked to considerably more information. For example, at Be Transparent, the following advice is available: Information that should be made available on an organizations website. --Vision and mission statements; --Statement of values and code of ethics; --Conflict of interest policy; --Form 990 or 990-PF, with all parts and schedules (except contributors list with amounts, which is protected under the Privacy Act); --Most recent audited financial statements; --Information on programs and impact of your work; --Information on evaluation procedures for assessing effectiveness and performance of the organization; --Annual Report or other regular report on accomplishments; --Information on accreditations the organization holds or certifications/standards it may meet; --List of board members and officers, and staff (if you have security concerns you may refer inquiries to your switchboard or to a general information email); --List of contributors (amounts of contributions should be disclosed only with permission of contributor); donor requests for anonymity should be honored;

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--Form 1023 (the organizations original application for recognition of tax-exempt status); --Bylaws or charter documents; and --Other relevant policies and documents.

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