Chapter 22 – Not-for-Profit Entities

Conceptual Framework – The Objective of Financial Reporting and Qualitative Characteristics of

Decision-Useful Financial Information (Phase G – Application to not-for-profit entities in the private and
public sector) (made by IASB & FASB)

Reasons for the conceptual framework (monitored by ASB members):

1. NFP entities have different objectives, different operating environments and characteristics
2. Issues regarding application of the proposals to NFP entities:
i) Accountability/stewardship
ii) User/user groups (Primary users – providers of fund, taxpayers; public bodies, financial
supporters; charities. Secondary users – recipients of the goods and services.)
iii) Cash flow focus
iv) Budgeting

Regulatory Framework – International Public Sector Accounting Standards Board (IPASB), under
International Federation of Accountants (IFAC)

Characteristics of NFP Entities:

PRIVATE

 Objective is to provide goods and services to recipients and not make profit
 Absence of defined ownership interest
 Wide group of stakeholders to consider
 Revenues generally arise from contributions
 Capital assets are acquired and held to deliver services without earning a return

PUBLIC

 Established by legislation; objective is to provide goods and services to recipients or to develop

of implement policy and not make profit
 Absence of defined ownership interest
 Wide group of stakeholders to consider
 Revenues generally derived from taxes or other contributions obtained through exercise of
coercive power
 Capital assets are acquired and held to deliver services without earning a return

Specific Issues:

 Cost of transition – accrual basis more relevant and better quality financial reporting, but no
actual cost-benefit analysis has been taken.
  Definition of liability – whether commitment to provide public benefit meets the definition of
liability (general and specific commitments; present obligation) (settlement and reliable
measurement)

Nature of NFP/Difference to Commercial Accounting:

1. Receives contributions of significant amounts of resources

2. Operates for purposes other than to provide goods and services
3. Does not possess ownership interests like those of business enterprises

Categories of NFP entities:

1. Colleges and universities

2. Health care entities
3. Voluntary health and welfare organizations
4. Other NFP organizations

Nongovernmental NFP organizations – NPE that lack the governmental element

Accounting for NFP entities:

 Accrual basis of accounting

 Organization-wide totals of assets, liabilities, and net assets
 Fund accounting
 Three net asset clauses

Difference of Financial Statements from those of With-Profit Business Entities:

1. Donations received create transactions that have no counterparts in commercial accounting

2. Contributions often have donor-imposed restrictions with specified purpose or until a specified
time
3. No single reported indicator can describe performance as effectively as net income does for
commercial entities; thus, other indicators are necessary

Financial Statements to be presented by NFE:

1. Statement of Financial Position

2. Statement of Activities and Changes in Net Assets
3. Statement of Cash Flow
4. Statement of Functional expenses* (for VHWO)

Permanently restricted net assets – portion of net assets whose use is limited by donor-imposed
stipulations that do not expire time and cannot be removed by action of the NFP entity
Temporarily restricted net assets – portion of net assets whose use is limited by donor-imposed
stipulations that either expire (time restriction) or can be removed by the organization fulfilling the
stipulation (purpose restrictions)

Unrestricted net assets – portion of net asset that do not carry donor-imposed stipulations

Minimum requirements for statement of activities – organization-wide totals, change in net assets for
each class of asset, and all expenses recognized only un the unrestricted classifications

Items that affect unrestricted net asset:

 NFP revenues increase unrestricted net assets

 Gains and losses on investments increase/decrease unrestricted net assets, unless restricted
 Temporarily restricted net assets reclassified to unrestricted net assets, and vice versa
 Expenses decrease unrestricted net assets

NFP organizations that issue GAAP-basis FS must recognize depreciation expense on long lived assets;
certain works of art and certain historical treasures that meet the definition of contributions need not
be capitalized or depreciated.

Revenues and expenses reported at gross amounts; Gains and losses from peripheral or incidental
transactions or event beyond the control of the organization and investment income can be reported at
net amounts

Causes of reclassification:

1. Money was appropriately expended for an expense as designated by the donor

2. Money was appropriately expended for an asset by the donor
3. Donor restriction based on time was satisfied

Statement of cash flow – financing activities include resources that are donor restricted for long-term
purposes, investing activities of permanent endowments are investing activities; encouraged to use
direct method, but allowed to use indirect.

Temporary restrictions expire:

1. Stipulated time has elapsed

2. Stipulated purpose has been fulfilled
3. Useful life has ended
4.

Definition and/or Criteria Treatment Initial

Measurement
Contributions/Donations Unconditional transfers of cash or Revenue in Fair Value
other assets to an entity or a period received
settlement or cancellation of its
 liabilities
Donated Labor by 1. Creates or enhances a Increase in Fair Value
carpenters, electricians nonfinancial asset both fixed
and masons 2. Requires a specialized skill assets and
possessed by the contributor that contribution
would typically need to be revenue
purchased if not donated.
Accounting or Legal 1. Creates or enhances a Expense and Fair Value
Services nonfinancial asset revenue when
2. Requires a specialized skill contributed
possessed by the contributor that
would typically need to be
purchased if not donated.
Donated work of arts Not recognized if: Not recognized N/A
1. Held for public exhibition when criteria is
2. Protected met
3. Subject to an organizational policy
that requires proceeds from sales of
collection items be used to acquire
other items
Unconditional pledges Written or oral agreement to Receivable and Fair Value
(promise to give) contribute cash or other assets to revenue
another entity which depend only
on the passage of time or the
demands by the NFP
Conditional pledges Written or oral agreement to Revenue and Disclosures in
(promise to give) contribute cash or other assets to receivable notes
another entity which depend on the when
occurrence of a specified future and conditions are
uncertain events substantially
met
Exchange Transactions Reciprocal transfers in which each Revenue Fair Value
party receives and sacrifices
approximately equal value
Government grants that A kind of exchange transaction Refundable Fair Value
require performance wherein a government grant given deposits
to the NFP in which is given for a (liabilities) until
specific performance earned
Dues charged to May have characteristics of both Contribution; Fair Value
members of NPE contributions and exchange revenue when
transactions. received,
Exchange
transaction;
revenue as it is
earned
Agency Transactions One in which assets are transferred Revenue Fair Value
to the NFP entity but NFP has little
 to no discretion over the use of
those assets and assets are passed
on to a third party
Gifts in kind Noncash contributions, such as Contribution if Fair Value; Cost of
clothing, furniture, and services. NFP entity has sales (costs of
discretion, getting inventory
agency ready for sale)
transfers if no
discretion /
Sales revenue if
FV cannot be
measured

University/Colleges Health Care Voluntary Health Other NFP

Providers and Welfare Organizations
Organizations
Descriptions Objectives: A significant VHWO are entities Cemetery
1. To provide educational portion of the fees that promote organizations,
services to its of health care humanitarian labor unions,
constituents service is paid by a activities, such as religious
2. To show the resources third party such as public health clinics, organizations,
from which resources PhilHealth, or some homeless shelters, museums,
have been received other insurance the cure of a libraries,
3. To demonstrate how provider. particular disease, performing
those resources have and the like. arts, political
been utilized in meeting Reimbursed at the parties, etc.
educational objectives basis of cost of Criteria to be
providing services, VHWO: Accounting
Responsibilities: defined by the 1. Primary source of procedure
1. Academic services third-party payor. fund contributed by similar to that
2. Financial services donors who do not of VHWO.
3. Student services themselves directly
4. Public relations benefit form
organization’s
program
2. Program must be
in the area of health,
welfare, or
community service
Revenue Major groups: Operating Public Support: Public
1. Educational & general Revenue: 1. Contributions Support:
revenues (student tuition 1. Patient Service 2. Special Events 1.
and fees, gov Revenue: Support Contributions
appropriations, gov a. Routine services 3. Legacies & 2. Special
grants & contract, private b. Other nursing bequests Events
grants & gifts, services 4. Proceeds from Support
endowment income, c. Professional fund raising 3. Legacies &
 other sources) services) bequests
2. Auxiliary enterprise *Allowance acc: Revenue: 4. Proceeds
revenues a. Courtesy 1. Membership Dues from fund
3. Expired term allowances/ staff Revenue raising
endowment revenues discount 2. Program Service
b. Contractual Fees Revenue:
Classifications: Adjustments 3. Sales of 1.
1. Operating – student 2. Premium Fees Publications & Membership
tuition, government 3.Resident Service supplies Dues
appropriations, Revenue 4. Investment Revenue
government grants 4. Other operating transaction revenue 2. Program
2. Non-operating - gifts, revenues a. Investment Service Fees
investment income, revenue 3. Sales of
endowment income Non-operating b. Realized gain on Publications
Revenue investment & supplies
(unrestricted & transaction 4. Investment
donor-restricted c. Net increase / transaction
pledges, gifts or decrease in carrying revenue
grants, unrestricted value of investment a.
income from Investment
endowment funds, revenue
maturing term b. Realized
endowment funds, gain on
income and gain investment
form investments, transaction
gains on sale of c. Net
hospital property) increase /
decrease in
*institutions carrying value
operated by of investment
religious groups
whose members
receive token
payment or no
payment at all,
value of donated
service charged to
expense account
and credited to
other operating
revenue or non-
operating revenue
Expenses 1. Educational and 1. Nursing Service Program Services: Program
general expenses: Expense 1. Research Services:
a. Instruction (credit & 2. Other 2. Public education 1. Research
noncredit courses) Professional 3. Professional 2. Public
b. Research (for Services Expense education education
researches) (Professional care 4. Community 3.
 c. Public support of patients services Professional
(conferences, seminars, expense) education
consulting) 3. General Services Supporting Services: 4. Community
d. Academic support Expense (Dietary 1. Management and services
(libraries, galleries, Service Expense) general expense
audiovisual services, 4. Fiscal Services 2. Fund-raising Supporting
academic deans) Expense expense Services:
e. Student services 5. Administrative 1.
(student admission Services Expense Management
&registration, cultural & 6. Other Services and general
athletic activities) 7. Malpractice expense
f. Institutional support Insurance Expense 2. Fund-
(depreciation and central 8. Depreciation raising
administration) Expense expense
g. Operation & 9. Interest Expense
maintenance of plant 10. Provision for
h. Student aid Bad Debts
(scholarship, fellowship,
tuition remissions,
outright grants)
Funds
1. Day to day 1. Current – unrestricted 1. General Fund 1. Current – 1. Current –
transactions funds unrestricted funds unrestricted
2. Restricted 2. Current – restricted 2. Specific purpose 2. Current – 2. Current –
day to day funds fund restricted funds restricted
transactions funds
3. Loans to 3. Loan funds 3. N/A 3. N/A 3. N/A
employees (unrestricted/restricted)
and students
Endowment funds &
similar funds
4. Fund 4. Pure/regular 4. Pure/regular 4. Pure/regular 4.
where endowment fund endowment fund endowment fund Pure/regular
principal is endowment
kept intact fund
and income is
used for
current
operations
5. Fund 5. Term endowment 5. Term 5. Term endowment 5. Term
where funds endowment funds funds endowment
principal is funds
kept intact
for a period
of time and
then released
for current
operations
6. An 6. Quasi-endowment 6. N/A 6. N/A 6. N/A
endowment fund
fund where
restrictions
are imposed
by the
organization’s
board of
trustees
Annuity and Life Income
Funds
7. A donor 7. Annuity Fund 7. N/A 7. N/A 7. N/A
receives an
annuity for
life after
which the
principal is
then released
for
operations
8. The 8. Life income fund 8. N/A 8. N/A 8. N/A
income
earned by the
fund is paid
to the donor
for life; the
principal is
then released
for
operations
Plant funds:
9. Cash 9. Unexpended plant 9. Plant 9. Land, building, 9. Land,
and/or fund replacement and and equipment fund building, and
investment expansion fund if equipment
held for from donations; fund
future otherwise, General
acquisitions fund
of plant and
equipment
other
10. Cash 10. Fund for renewal and 10. Plant 10. Land, building, 10. Land,
and/or replacement replacement and and equipment fund building, and
investment expansion fund if equipment
held for from donations; fund
future otherwise, General
acquisitions fund
of renewals
and
replacements
of equipment
11. Cash 11. Fund for retirement 11. General fund 11. Land, building, 11. Land,
and/or of indebtedness and equipment fund building, and
investments equipment
held to repay fund
the debt
incurred to
acquire plant
and
equipment
12. Recording 12. Investment in Plant 12. General Fund 12. Land, building, 12. Land,
of land, asset and equipment fund building, and
building, and equipment
equipment fund
13. 13. Agency Fund 13. Agency Fund 13. Agency Fund 13. Agency
Collections of Fund
monies which
are remitted
to other
organizations
Assets 1. Current Asset
2. Assets whose
use is limited
3. Property &
Equipment

*assets and
liabilities are
sequenced by
liquidity