Not For Profit Org Dayag. 181866
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ing for Not-For-Profit Organizations Dayag:)
Presently, there are two (2) schools of thought on the ing for not-for-profit organizations: 1.
There are little differences between business and not-for-profit ing
Therefore, its advocates believe not-for-profit ing could, with little exceptions, make use of the principles applicable to business ing
Non business ing is going to be essentially like business ing
Non business organizations will prepare operating statements, balance sheets, and funds flow statement
2.
The primary focus will be on the operating statement and its principles will be governed by the same principles that now apply in business ing
Fund ing, as it is currently practiced, will remain in vogue (remain popular).
The advantages of fund ing were extolled from:
The legal point of view
The management control viewpoint
Its advocates believe that fund have legal restrictions or discretionary restrictions
Accordingly, they must be segregated between: o o
Restricted funds
Unrestricted funds
The international ing unit for many not-for-profit organizations is the fund: o
Defined as a fiscal and ing entity with a self-balancing set of s recording cash and other financial resources with all
related liabilities and residual equities, or balances, and changes therein which are segregated for the purpose of carrying on specific activities or attaining certain objectives in accordance with special regulations, restrictions, or limitations: o
Different types of funds are necessary to distinguish between:
o
Fund ing: o
Assets whose use is restricted by donors
Funds commonly used by some of the not-for-profit organizations were as follows:
Assets that may be used as authorized by the BODs
Unrestricted funds (sometimes called unrestricted current fund, general fund, or current unrestricted fund) Restricted funds (sometimes called restricted current fund or current restricted fund) Endowment fund (pure or term endowment)
Agency fund (sometimes called custodian fund)
Annuity fund and life income fund (sometimes called living trust fund) Loan fund
Plant fund (sometimes called land, building, and equipment fund)
Has been used to organize and manage resources for various purposes in accordance with regulations, restrictions, or limitations imposed by parties outside the institution or with discretions issued by the governing board
o
A clear distinction of funds that are externally restricted and those that are internally designated by action of the governing board has been maintained in the s and disclosed on the financial reports
Accrual basis of ing: o o
All not-for-profit organizations ing for revenues and expenses use the accrual basis of ing.
Requires not-for-profit organization that issue GAAP basis financial statements to recognize depreciation expense on long-lived assets
Depreciation should be recorded if:
o
Note:
Financial statements: o
The assets arise because of donations
Works of art and historical treasures that meet the definition of ‘collections’
The assets are gifts
Need not be capitalized nor depreciated
Financial statements prepared in accordance with the present GAAP represent a shift away from the fund reporting to an emphasis on the organization as a whole
o
The ‘equity fund balance’ has been replaced with the term ‘net assets’
o
Under the present GAAP:
o
The financial statements display three (3) classes of net assets:
It requires classifications of the organization’s net assets based on the existence or absence of donor-imposed restrictions Unrestricted
Temporarily restricted
Permanently restricted Note:
© itsjohnsanatomy
Any changes of these three (3) classes of net assets must be reported
Page 1
ing for Not-For-Profit Organizations
Financial statements (continuation): o
The financial statements are:
Statement of financial position (balance sheet)
Which will report organizations-wide total for assets, liabilities, and net assets, and assets identified as unrestricted, temporarily restricted, and permanently restricted
Statement of activities
Which reports revenues, expenses, gains, losses, and reclassifications or changes in the organization’s net assets or change in equity: permanently restricted, temporarily restricted, and unrestricted
Minimum requirements are organization-wide totals, changes in net assets for each class of assets, and all expenses recognized only in the unrestricted classification
A display of a measure of operations in the statement of activities is permitted
Statement of cash flows
With categories similar to regular business enterprises: o
Operating
o
Investing
o
Classification of net-assets o o o
They are accompanying notes to the above statements necessary for disclosure purposes
This division of net assets is the focal point in presenting financial statement for not-for-profit entities
These classes of net assets are totally dependent on the existence or absence of donor-imposed obligations
The organization’s net assets, revenue, expenses, gains, and losses are classified according to the three (3) classes of net assets
Revenues, gains, and losses:
Expenses:
o
Can be reported in each net asset class Are reported only in unrestricted net assets class
The three (3)classes are: 1.
Permanently restricted net assets:
2.
Are the portion of net assets whose use is limited by donor-imposed stipulations that do not expire and cannot be removed by action of the not-for-profit entity
Temporarily restricted net assets:
Are the portion of net assets whose use is limited by donor-imposed stipulations that either: o o
3.
ing for Hospitals: o o
Expire (time restrictions)
Can be removed by the organization fulfilling the stipulations (purpose restrictions)
Unrestricted net assets:
Financing
Notes to the financial statements
Are the portion of net assets that carry no donor-imposed stipulations
Hospitals depend its large part on donations and grants, which often come with restrictions
Hospitals will use normal accrual ing methods, including the classification of costs as expenses rather than expenditure, and will not record budgetary s or encumbrances on the books
o
Fund ing is required for Hospitals
o
In general, there are two (2) types of funds used by a hospital:
1.
In order to maintain ability over restricted resources General (unrestricted) fund:
for all resources of the hospital which are not subject to outside restrictions; they are used for day-to-day operations
Note:
o
Board-designated funds are unrestricted
o
Designation:
o
Restrictions:
Is an internal process which can be altered at the discretion of the BOTs of the hospital Are externally imposed and not subject to alteration by the board
Items in the General (unrestricted) fund category are as follows: o
Assets whose use is limited:
o
Agency funds:
Include assets set aside by the governing board for identified purpose Are included in the General funds as both an asset and a liability
They are used to for fees collected as an agent of physicians who have privatepractice patients coming to hospital offices provided to the staff physicians
o
Property and equipment used for general operations, and the related liabilities
Note:
© itsjohnsanatomy
PPE whose use is restricted are reported in the donor-restricted fund
Page 2
ing for Not-For-Profit Organizations
ing for Hospitals: o
In general, there are two (2) types of funds used by a hospital: 2.
Donor-restricted funds:
s for temporarily restricted and permanently restricted resources This class is subdivided into: 1.
Temporary restricted fund:
May be:
Specific purpose fund o
Is a restricted fund used by health care providers to for principal and income in accordance with donor’s specified restrictions
Term endowment fund o
Used by hospital to for a trust where the principal must be kept
intact and the income be expanded for either current operations or a specific purpose in accordance with grantor’s wishes o
May be in perpetuity, or it may be fixed term or until a specific event occurs
Plant replacement and expansion fund o
A restricted fund used by hospitals and other health care providers to
for donor’s contributions that must be used to acquire property, plant, and equipment
2.
Life income fund
Permanently restricted fund:
Is also an endowment fund but differs from a term-endowment fund in that the principal
must be maintained intact in perpetuity and only the income may be used in accordance with o
ing for Revenues and Expenses:
the donor’s wishes
Revenues and gains 1.
Patient service revenue: o o
Include room and board, nursing services, and other professional services
Typically are recorded at established (gross) rates as the services are provided but are reported net of amounts that are considered deductions from revenues
o
Objective is to report the amount that the hospital is entitled to collect as patient service revenues
Allowance s are used to reduce receivables for estimated deductions from revenues as well as estimated doubtful s
Deductions from revenues include:
Courtesy allowances:
Contractual adjustments:
o o o
Discounts to doctors and employees Discounts arranged with third-party payors (Philhealth for example) that frequently have agreements to reimburse at less-than-established rates
Note:
Charity care services provided free of charge to patients who qualify under a hospital’s charity care policy are excluded from both gross and net patient service revenues
According to the AIA audit guide and ing guide, health care organizations: o
Charity care cases do not qualify for recognition as receivables or revenues in the financial statements
o
Management’s policy for providing charity care, as well as the level of charity care provided, should be disclosed in the financial statements
Such disclosure generally is made in the notes to the financial
statement and is measured based on the provider’s rates, costs 2.
units of service, or other statistical measure
fees o o
Also known as ‘subscriber fees’ or ‘capitation fees’
Are revenues from agreements which a hospital provides any necessary patient services (perhaps from a contractually established list of services) for a specific fee
o
The fee is usually a specific fee per member per month
The fees are earned whether the standard charges for services actually rendered are more or less than the amount of the fee i.e. without regard to services actually provided in the period
o o
© itsjohnsanatomy
Therefore, they are reported separately from patient service revenues Growing portion of hospital revenues in many hospitals
Page 3
ing for Not-For-Profit Organizations
ing for Hospitals: o
ing for Revenues and Expenses:
Revenues and gains 3.
Other operating revenues: o o o o o o o
Revenues from services to patients other than for health care Revenues from sales and services provided to non-patients Tuition from schools operated by the hospital Rentals of hospital space
Charges for preparing and reproducing medical records Room charges for telephone calls and televisions
Proceeds from cafeterias, gift shops, snack bars, donated medicine, linen and office supplies
The control ‘Nonoperating revenues’ o
Records revenue not related directly to an entity’s principal operations
o
These items are primarily financial in nature
o
Include:
Note: o
Operating expenses
Gifts or grants
Unrestricted income from endowment funds Maturing term endowment funds
Income and gain from investments Gains on sale of hospital property
Realized and unrealized gains from investments reported at fair value
The ‘other operating revenue’ and the ‘nonoperating revenue’ s can be lumped as one and be called ‘Other Revenues and Gains’
Operating expenses of hospitals are reported on an accrual basis Classification (Functional categories) of Operating expenses: 1.
Nursing services
2.
3.
Operating rooms Laboratories Radiology
Anesthesiology Pharmacy
Housekeeping Maintenance Laundry
ing Cashier
Credits and collection Data processing
istrative services
Note:
Nurseries
Fiscal services
5.
Intensive care
General services
4.
Medical and surgical
Other profession services
Unrestricted and donor-restricted pledges
Personnel
Purchasing Insurance
Governing board
6.
Interest provisions
o
Although s are maintained for employee and contractual allowances, these items are not expenses
7.
Depreciation provisions
They are revenue deductions that are subtracted from gross patient service revenues to arrive at net patient service revenue reported in the statement of operations
o o
Provision for bad debts is an expense
What is the difference between charity care and bad debts expense?
Charity care results from the hospital’s policy of providing health care to individuals who meet certain financial criteria
© itsjohnsanatomy
Health care services provided as charity care were never intended to provide cash flows
Bad debts result from extending credit
Page 4
ing for Not-For-Profit Organizations
ing for Colleges and Universities o
Colleges and universities are required to use fund ing due to the large amount of restricted resources under their control
Six (6)Types of funds: 1.
Current funds o
for resources of the institution that will be used in carrying out the primary objectives: instruction, research, extension, and public service
o o
Restricted current funds have been restricted by donors or grantors to specific purposes Unrestricted current funds are not subject to outside restraints on usage
Resources designated by the BOTs are still considered ‘unrestricted’
2.
Loan funds o o
Since they lack externally-imposed restrictions
Are established for resources that are to be loaned to students, faculty or staff Not for loans, notes, or bonds payable to others
o
Designed to hold assets, not liabilities
o
Fund balances should separately report ‘restricted’ and ‘unrestricted’ amounts:
Restricted amounts
Represent resources which outside parties provided to the university on condition that it will be used for loans
Unrestricted amounts
3.
Endowment and similar funds o
Represent resources which were placed in the loan fund at the election of the university itself
Endowment funds:
Resources which outside parties contributed to the university on condition that they not be spent but invested to yield earnings which may be spent
o
Term endowment funds:
o
Quasi-endowment funds:
4.
May be spent after a specific period of time has ed or a certain event has occurred Aren’t actually restricted but have been designated by the BORs to be retained and invested
Annuity and Life income funds o
Annuity funds:
Are resources given to the university on condition that regular payments be made to a specific person for a certain period of time, after which all the principal is available to the institution
o
Life income funds:
5.
becomes expendable by the university
Plant funds o o
Require distribution of all earnings to a specified person, upon whose death the balance
All of the assets and liabilities associated with fixed assets of a university are ed for in the plant fund The plant fund balances include: 1.
Unexpended plant funds
2.
Funds for renewals and replacements
3.
Funds for retirement of indebtedness
4.
Contain liquid assets which are to be used to replace existing plant assets as needed Contain resources to be used to make principal and interest payments on debts incurred to acquire plant assets
Investment in plant
Contain liquid assets which are to be used to acquire new plant assets in the future
Consists of the fixed assets themselves and any long-term debt issued in connection with the acquisition of these fixed assets
Note:
The fund balances of the first three (3) funds should be subdivided further into ‘restricted’ and ‘unrestricted’ balances, based on whether classification in the plant fund is the result of external requirements or internal designation
6.
Agency funds o
Investment in plant fund balance isn’t subdivided
Resources received by the institution which belong to others, such as student body fees, are held in agency funds, with a liability equal to the assets collected
o o o
Accrual ing is used
There is never any fund balance in agency funds, since all assets held are owed to others
There are certain similarities to ‘ing of governmental funds’ especially in the reporting of expenditures rather than expenses
© itsjohnsanatomy
Page 5
ing for Not-For-Profit Organizations
ing for Colleges and Universities o
ing for Revenues and Expenses:
Revenues include:
Government appropriations
Government grants and contracts
Private gifts, grants, and contracts Endowment income
Sales and services of educational activities
Sales and services of auxiliary enterprises (such as residence halls, food services, intercollegiate athletics, and college stores) Sales and services of hospitals (if operated by the university)
Other sources(such as expired term endowments, annuities, and life income agreements) Independent operations (such as government research laboratories)
Expenditures include:
Tuition fees
Educational and general expenditures Auxiliary enterprises Hospitals
Independent operations
ing for Voluntary Health and Welfare Organizations o
Voluntary health and welfare organizations adhere to the accrual basis of ing
o
Sources and uses of funds are not merely classified as revenues and expenses
Revenues are generally recognized when earned and expenses are shown when the related services of the organization are provided However, but are instead broken down into categories:
Donations of services
Donated property
Pledges
o o o o
Should be charged to the appropriate expense with an offsetting credit to Should be recorded at fair market value on the date of gift Should be recognized net of uncollectible amounts
Pledges or cash donations that will not be spendable until a future period should be shown as a deferred credit on the balance sheet
o
Voluntary health and welfare organizations must also provide a ‘Statement of Functional Expenses’
This statement reports expenses by both:
o
Function (program and ing)
Natural classification (salary expenses, depreciation expenses, etc)
The five (5) funds used by the Voluntary health and welfare organizations include: 1.
Current fund – unrestricted:
2.
Used for operations that require only the discretion of the organization’s board Includes assets designated by the board for specific purposes
Current fund – restricted:
Used for operations, but only in accordance with a donor or grantor’s specifications
Example: o
3.
This fund is used to for: o o o
4.
Restricted pledges to be used to promote the adoption of handicapped children
Land, building, and equipment fund:
Endowment fund:
Land, building, and equipment acquired by the organization
Liabilities arising from the acquisition or improvement of plant assets Current assets restricted by donors or grantors for future disposition
Used to for: o
‘Permanently restricted endowment principal’
o
‘Temporary restricted term endowments’
5.
Custodian fund:
To be maintained intact either in perpetuity or until a specific event occurs
A fund established to for assets received by an organization to be held or disbursed only on instructions of the person or organization from whom they were received
© itsjohnsanatomy
Similar to ‘Agency fund’ of a college or university The assets do not belong to the organization
Page 6
ing for Not-For-Profit Organizations
ing for Voluntary Health and Welfare Organizations o
ing for Revenues and Expenses:
Revenues
Recorded using the full accrual basis
Inflows of resources resulting from a charge for service from financial activities or from other exchange transactions
Include: o o o o
Expenses:
hip dues
Program service fees
Sales of publications and supplies or proceeds from the sale of these items Investment income e.g. interest, dividends, and other earnings
Recorded using the full accrual basis in a manner similar to that used by business organizations
Recorded in each fund that incurs the expenses
Expenses are classified into ‘program services’ and ‘ing services’ and are reported on a functional basis under these classifications: o
Program services
o
ing services
Relate to the expenses incurred in providing the organization’s social service activities Consist of:
Expenses:
Program services (focus on social services)
Research
Public education
Professional education Community services
ing services (focus on istration and fund-raising activities)
Note:
Fund-raising costs
In reporting expenses in the Statement of Activities, the functional classifications might appear as follows: o
istrative expenses
Management and general Fund raising
Public : o
Is the inflow of resources from voluntary donors who receive no direct, personal benefit from the organization’s usual programs in exchange for their contributions
o
Include:
Contributions
Special events Legacies and bequests
Proceeds from fund raisers
ing for Other Not-For-Profit Organizations o o
A great deal of flexibility is permitted in the ing for these organizations
A wide variety of other organizations have the option of using fund ing
Examples:
© itsjohnsanatomy
Research and scientific organizations Social and country clubs Religious organizations Museums
Page 7
ing for Not-For-Profit Organizations
ing for Voluntary Health and Welfare Organizations (VHWOs) and Other Not-For-Profit Organizations o
Financial statements:
All not-for-profit organizations, including VHWOs, to present three (3) general-purpose financial statements: 1.
Statement of financial position o o
Presented for the entire entity
Its purpose is to provide relevant information about the organization’s assets, liabilities, and net assets
It should provide information about their relationships to each other as of date of the statement
o
Certain principle should be followed in preparing the statement. The focus is on the entity as a whole and should report total assets, liabilities, and net assets.
o
Cash or other assets that have restrictions imposed by the donor, limiting the use of those assets to longterm purposes
o
o
Should be segregated from other assets that are unrestricted
Net assets should be segregated into three (3) classes: Unrestricted
Temporarily restricted
Permanently restricted
The nature and timing of donor restrictions must be disclosed
Voluntary restrictions of unrestricted net assets by the entity’s governing body, resulting in board-designated funds may be disclosed
o
Different types of restrictions that may be placed on assets:
Assets may be permanently restricted:
Example may be a donor-restricted gift, such as artwork, that must be used for a certain purpose and may not be sold
Example may be a donor-restricted gift to be invested with the principal preserved and the income available for expenditure
Assets may be temporarily restricted:
Example may be a donor-restricted gift to be invested for a certain period during which only the income may be expended. After a certain point in time, the principal may be expended as well
Example may be a donor-restricted gift to be expended for certain purposes only, such as a special program or project. The gift might be restricted to the building and equipment fund
Assets may be unrestricted:
Examples: o o o
Assets resulting from operations
Unrestricted gifts of cash and other assets
Temporarily restricted assets released due to satisfaction of the donor’s provisions
o 2.
Statement of activities
Governing board - designated funds
o
Also presented for the entity as a whole
o
Primary focus is to provide relevant information about:
The effects of transactions and other events and circumstances that change the amount and nature of net assets
3.
The relationships of those transactions and other events and circumstances to each other How the organization’s resources are used in providing various programs or services
Statement of cash flows o
A not-for-profit organization presents a statement of cash flows similar to that presented by a business enterprise
o o
They may use either direct or indirect method of presenting operating cash flows
Primary purpose is to provide relevant information about the cash receipts and cash payments of an organization during the period
In addition, VHWOs must present:
Statement of functional expenses o o
Has no parallel in business
Breaks down each category of program and ing expense by type of expense such as:
o
Salaries
Supplies
Depreciation
Provides details omitted from the statement of , revenue and expenses, and changes in fund balances, which only lists expenses by function
© itsjohnsanatomy
Page 8
ing for Not-For-Profit Organizations Punzalan:)
ing for non-governmental (not-for-profit) organizations
All not-for-profit organizations use the accrual basis of ing There are four (4) major non-for-profit organizations: o o o o
Colleges and universities Hospitals
Voluntary health and welfare organizations Other not-for-profit organizations
ing for colleges and universities
Responsibilities for a not-for-profit university may be classified as: o
Academic
o
Research
Public service
Financial
o
issions Records
Counseling Communication and establishment of goodwill
A university levies tuition fees but these tuition fees are not sufficient to cover total operational costs o
Thus, other sources are essential:
Reporting of business
Public relations
Management
Student services
o
Instruction
Gifts
Income from endowment funds
Grants from governmental units or foundations Appropriations (for public universities)
Public college and university funds include three (3) broad categories: o
Current funds
Which may be:
o
Plant funds
1.
Unexpended plant fund
3.
Plant fund for retirement of indebtedness
4.
unrestricted
Plant funds of public universities include four (4) separate, self-balancing subgroups: 2.
o
Restricted
Plant fund for renewals and replacements Investment in plant fund
Trust and agency funds
ing for private colleges and universities o
Shift away from a fund group focus to an organization-wide focus
o
Instead of fund balances, three (3) net asset classes are used:
1.
Unrestricted
3.
Permanently restricted
2. o
In which there is no requirement for external financial statements to include fund group reporting
Temporarily restricted
Events that were previously recorded as changes in fund balance will now be recorded as contributions, exchange transactions, capital acquisitions, or expenses
Financial statements o
The three (3) principal financial statements for public and private universities are:
Public universities 1.
Statement of current funds, revenues, expenditures, and other changes
3.
Statement of changes in fund balance
2.
Private universities 1.
Statement of activities
3.
Statement of cash flows
2.
© itsjohnsanatomy
Balance sheet
Balance sheet
Page 9
ing for Not-For-Profit Organizations ing for health care providers
Health care entities include: o o o o o o
Hospitals Clinics
Continuing care retirement communities Health maintenance organizations Home health agencies Nursing homes
A modern health care provider may be a complex entity with: o o o o o
Medical aspect
Surgical aspect
Research aspect
Teaching aspect
Public service aspect
One very unusual element about health care operations is the manner of payment for services:
Health care entities employs two (2) classes of funds:
o
That is, when a significant portion of the fees for health care services is paid by a third party, like Medicare or Philhealth
1.
General funds
2.
Donor-restricted funds
Which for resources available for general purposes Which for temporarily and permanently restricted resources such as:
Endowment funds
Other donor-restricted funds
Assets of a health care provider comprise three (3) distinct segments:
Current assets
Assets whose use is limited Property and equipment
Revenues, expenses, gains, and losses increase or decrease the net assets of a health care provider entity o
They may be operating if:
o
They may be non-operating if:
Plant replacement and expansion funds
Assets and liabilities of a health care provider are sequenced by their liquidity and are classified as current or non-current o
Specific purpose funds
Financial statements o
Include:
They are related to the principal activity They are from activities that are incidental or from events beyond the entity’s control
Statement of activities
Which present organization-wide totals for changes in unrestricted, temporarily restricted, and permanently restricted net assets
Statement of financial position Statement of cash flows
ing for voluntary health and welfare organizations
To qualify as a voluntary health and welfare organization: o o
The organization’s primary source of revenue should be contributions from donors, who do not benefit directly from the organization The program must be in area of health, welfare, or community services
There are some instances where contributions received by an organization specify the purpose for which they must be expended o
To segregate resources with external restrictions, the organization must report these items under three (3) classes of net assets: 1.
Unrestricted
3.
Permanently restricted
2.
Financial statements o
Temporarily restricted
The four (4) financial statements for VHWOs are as follows: 1.
Statement of financial position
3.
Statement of cash flows
2. 4.
Statement of activities
Statement of functional expenses
© itsjohnsanatomy
Which supplements the operating statement
Presents the total of each functional expense to programs and ing services
Page 10
ing for Not-For-Profit Organizations ing for other not-for-profit organizations
Organizations that have restricted resources may use fund ing for internal control and management reporting purposes
Net assets are classified as:
o o o o
In order to demonstrate compliance with externally imposed restrictions Unrestricted
Temporarily restricted
Permanently restricted
Financial statements o o
Report organization-wide totals for all assets and liabilities Include:
© itsjohnsanatomy
Statement of financial position Statement of activities
Statement of cash flows
Page 11
Presently, there are two (2) schools of thought on the ing for not-for-profit organizations: 1.
There are little differences between business and not-for-profit ing
Therefore, its advocates believe not-for-profit ing could, with little exceptions, make use of the principles applicable to business ing
Non business ing is going to be essentially like business ing
Non business organizations will prepare operating statements, balance sheets, and funds flow statement
2.
The primary focus will be on the operating statement and its principles will be governed by the same principles that now apply in business ing
Fund ing, as it is currently practiced, will remain in vogue (remain popular).
The advantages of fund ing were extolled from:
The legal point of view
The management control viewpoint
Its advocates believe that fund have legal restrictions or discretionary restrictions
Accordingly, they must be segregated between: o o
Restricted funds
Unrestricted funds
The international ing unit for many not-for-profit organizations is the fund: o
Defined as a fiscal and ing entity with a self-balancing set of s recording cash and other financial resources with all
related liabilities and residual equities, or balances, and changes therein which are segregated for the purpose of carrying on specific activities or attaining certain objectives in accordance with special regulations, restrictions, or limitations: o
Different types of funds are necessary to distinguish between:
o
Fund ing: o
Assets whose use is restricted by donors
Funds commonly used by some of the not-for-profit organizations were as follows:
Assets that may be used as authorized by the BODs
Unrestricted funds (sometimes called unrestricted current fund, general fund, or current unrestricted fund) Restricted funds (sometimes called restricted current fund or current restricted fund) Endowment fund (pure or term endowment)
Agency fund (sometimes called custodian fund)
Annuity fund and life income fund (sometimes called living trust fund) Loan fund
Plant fund (sometimes called land, building, and equipment fund)
Has been used to organize and manage resources for various purposes in accordance with regulations, restrictions, or limitations imposed by parties outside the institution or with discretions issued by the governing board
o
A clear distinction of funds that are externally restricted and those that are internally designated by action of the governing board has been maintained in the s and disclosed on the financial reports
Accrual basis of ing: o o
All not-for-profit organizations ing for revenues and expenses use the accrual basis of ing.
Requires not-for-profit organization that issue GAAP basis financial statements to recognize depreciation expense on long-lived assets
Depreciation should be recorded if:
o
Note:
Financial statements: o
The assets arise because of donations
Works of art and historical treasures that meet the definition of ‘collections’
The assets are gifts
Need not be capitalized nor depreciated
Financial statements prepared in accordance with the present GAAP represent a shift away from the fund reporting to an emphasis on the organization as a whole
o
The ‘equity fund balance’ has been replaced with the term ‘net assets’
o
Under the present GAAP:
o
The financial statements display three (3) classes of net assets:
It requires classifications of the organization’s net assets based on the existence or absence of donor-imposed restrictions Unrestricted
Temporarily restricted
Permanently restricted Note:
© itsjohnsanatomy
Any changes of these three (3) classes of net assets must be reported
Page 1
ing for Not-For-Profit Organizations
Financial statements (continuation): o
The financial statements are:
Statement of financial position (balance sheet)
Which will report organizations-wide total for assets, liabilities, and net assets, and assets identified as unrestricted, temporarily restricted, and permanently restricted
Statement of activities
Which reports revenues, expenses, gains, losses, and reclassifications or changes in the organization’s net assets or change in equity: permanently restricted, temporarily restricted, and unrestricted
Minimum requirements are organization-wide totals, changes in net assets for each class of assets, and all expenses recognized only in the unrestricted classification
A display of a measure of operations in the statement of activities is permitted
Statement of cash flows
With categories similar to regular business enterprises: o
Operating
o
Investing
o
Classification of net-assets o o o
They are accompanying notes to the above statements necessary for disclosure purposes
This division of net assets is the focal point in presenting financial statement for not-for-profit entities
These classes of net assets are totally dependent on the existence or absence of donor-imposed obligations
The organization’s net assets, revenue, expenses, gains, and losses are classified according to the three (3) classes of net assets
Revenues, gains, and losses:
Expenses:
o
Can be reported in each net asset class Are reported only in unrestricted net assets class
The three (3)classes are: 1.
Permanently restricted net assets:
2.
Are the portion of net assets whose use is limited by donor-imposed stipulations that do not expire and cannot be removed by action of the not-for-profit entity
Temporarily restricted net assets:
Are the portion of net assets whose use is limited by donor-imposed stipulations that either: o o
3.
ing for Hospitals: o o
Expire (time restrictions)
Can be removed by the organization fulfilling the stipulations (purpose restrictions)
Unrestricted net assets:
Financing
Notes to the financial statements
Are the portion of net assets that carry no donor-imposed stipulations
Hospitals depend its large part on donations and grants, which often come with restrictions
Hospitals will use normal accrual ing methods, including the classification of costs as expenses rather than expenditure, and will not record budgetary s or encumbrances on the books
o
Fund ing is required for Hospitals
o
In general, there are two (2) types of funds used by a hospital:
1.
In order to maintain ability over restricted resources General (unrestricted) fund:
for all resources of the hospital which are not subject to outside restrictions; they are used for day-to-day operations
Note:
o
Board-designated funds are unrestricted
o
Designation:
o
Restrictions:
Is an internal process which can be altered at the discretion of the BOTs of the hospital Are externally imposed and not subject to alteration by the board
Items in the General (unrestricted) fund category are as follows: o
Assets whose use is limited:
o
Agency funds:
Include assets set aside by the governing board for identified purpose Are included in the General funds as both an asset and a liability
They are used to for fees collected as an agent of physicians who have privatepractice patients coming to hospital offices provided to the staff physicians
o
Property and equipment used for general operations, and the related liabilities
Note:
© itsjohnsanatomy
PPE whose use is restricted are reported in the donor-restricted fund
Page 2
ing for Not-For-Profit Organizations
ing for Hospitals: o
In general, there are two (2) types of funds used by a hospital: 2.
Donor-restricted funds:
s for temporarily restricted and permanently restricted resources This class is subdivided into: 1.
Temporary restricted fund:
May be:
Specific purpose fund o
Is a restricted fund used by health care providers to for principal and income in accordance with donor’s specified restrictions
Term endowment fund o
Used by hospital to for a trust where the principal must be kept
intact and the income be expanded for either current operations or a specific purpose in accordance with grantor’s wishes o
May be in perpetuity, or it may be fixed term or until a specific event occurs
Plant replacement and expansion fund o
A restricted fund used by hospitals and other health care providers to
for donor’s contributions that must be used to acquire property, plant, and equipment
2.
Life income fund
Permanently restricted fund:
Is also an endowment fund but differs from a term-endowment fund in that the principal
must be maintained intact in perpetuity and only the income may be used in accordance with o
ing for Revenues and Expenses:
the donor’s wishes
Revenues and gains 1.
Patient service revenue: o o
Include room and board, nursing services, and other professional services
Typically are recorded at established (gross) rates as the services are provided but are reported net of amounts that are considered deductions from revenues
o
Objective is to report the amount that the hospital is entitled to collect as patient service revenues
Allowance s are used to reduce receivables for estimated deductions from revenues as well as estimated doubtful s
Deductions from revenues include:
Courtesy allowances:
Contractual adjustments:
o o o
Discounts to doctors and employees Discounts arranged with third-party payors (Philhealth for example) that frequently have agreements to reimburse at less-than-established rates
Note:
Charity care services provided free of charge to patients who qualify under a hospital’s charity care policy are excluded from both gross and net patient service revenues
According to the AIA audit guide and ing guide, health care organizations: o
Charity care cases do not qualify for recognition as receivables or revenues in the financial statements
o
Management’s policy for providing charity care, as well as the level of charity care provided, should be disclosed in the financial statements
Such disclosure generally is made in the notes to the financial
statement and is measured based on the provider’s rates, costs 2.
units of service, or other statistical measure
fees o o
Also known as ‘subscriber fees’ or ‘capitation fees’
Are revenues from agreements which a hospital provides any necessary patient services (perhaps from a contractually established list of services) for a specific fee
o
The fee is usually a specific fee per member per month
The fees are earned whether the standard charges for services actually rendered are more or less than the amount of the fee i.e. without regard to services actually provided in the period
o o
© itsjohnsanatomy
Therefore, they are reported separately from patient service revenues Growing portion of hospital revenues in many hospitals
Page 3
ing for Not-For-Profit Organizations
ing for Hospitals: o
ing for Revenues and Expenses:
Revenues and gains 3.
Other operating revenues: o o o o o o o
Revenues from services to patients other than for health care Revenues from sales and services provided to non-patients Tuition from schools operated by the hospital Rentals of hospital space
Charges for preparing and reproducing medical records Room charges for telephone calls and televisions
Proceeds from cafeterias, gift shops, snack bars, donated medicine, linen and office supplies
The control ‘Nonoperating revenues’ o
Records revenue not related directly to an entity’s principal operations
o
These items are primarily financial in nature
o
Include:
Note: o
Operating expenses
Gifts or grants
Unrestricted income from endowment funds Maturing term endowment funds
Income and gain from investments Gains on sale of hospital property
Realized and unrealized gains from investments reported at fair value
The ‘other operating revenue’ and the ‘nonoperating revenue’ s can be lumped as one and be called ‘Other Revenues and Gains’
Operating expenses of hospitals are reported on an accrual basis Classification (Functional categories) of Operating expenses: 1.
Nursing services
2.
3.
Operating rooms Laboratories Radiology
Anesthesiology Pharmacy
Housekeeping Maintenance Laundry
ing Cashier
Credits and collection Data processing
istrative services
Note:
Nurseries
Fiscal services
5.
Intensive care
General services
4.
Medical and surgical
Other profession services
Unrestricted and donor-restricted pledges
Personnel
Purchasing Insurance
Governing board
6.
Interest provisions
o
Although s are maintained for employee and contractual allowances, these items are not expenses
7.
Depreciation provisions
They are revenue deductions that are subtracted from gross patient service revenues to arrive at net patient service revenue reported in the statement of operations
o o
Provision for bad debts is an expense
What is the difference between charity care and bad debts expense?
Charity care results from the hospital’s policy of providing health care to individuals who meet certain financial criteria
© itsjohnsanatomy
Health care services provided as charity care were never intended to provide cash flows
Bad debts result from extending credit
Page 4
ing for Not-For-Profit Organizations
ing for Colleges and Universities o
Colleges and universities are required to use fund ing due to the large amount of restricted resources under their control
Six (6)Types of funds: 1.
Current funds o
for resources of the institution that will be used in carrying out the primary objectives: instruction, research, extension, and public service
o o
Restricted current funds have been restricted by donors or grantors to specific purposes Unrestricted current funds are not subject to outside restraints on usage
Resources designated by the BOTs are still considered ‘unrestricted’
2.
Loan funds o o
Since they lack externally-imposed restrictions
Are established for resources that are to be loaned to students, faculty or staff Not for loans, notes, or bonds payable to others
o
Designed to hold assets, not liabilities
o
Fund balances should separately report ‘restricted’ and ‘unrestricted’ amounts:
Restricted amounts
Represent resources which outside parties provided to the university on condition that it will be used for loans
Unrestricted amounts
3.
Endowment and similar funds o
Represent resources which were placed in the loan fund at the election of the university itself
Endowment funds:
Resources which outside parties contributed to the university on condition that they not be spent but invested to yield earnings which may be spent
o
Term endowment funds:
o
Quasi-endowment funds:
4.
May be spent after a specific period of time has ed or a certain event has occurred Aren’t actually restricted but have been designated by the BORs to be retained and invested
Annuity and Life income funds o
Annuity funds:
Are resources given to the university on condition that regular payments be made to a specific person for a certain period of time, after which all the principal is available to the institution
o
Life income funds:
5.
becomes expendable by the university
Plant funds o o
Require distribution of all earnings to a specified person, upon whose death the balance
All of the assets and liabilities associated with fixed assets of a university are ed for in the plant fund The plant fund balances include: 1.
Unexpended plant funds
2.
Funds for renewals and replacements
3.
Funds for retirement of indebtedness
4.
Contain liquid assets which are to be used to replace existing plant assets as needed Contain resources to be used to make principal and interest payments on debts incurred to acquire plant assets
Investment in plant
Contain liquid assets which are to be used to acquire new plant assets in the future
Consists of the fixed assets themselves and any long-term debt issued in connection with the acquisition of these fixed assets
Note:
The fund balances of the first three (3) funds should be subdivided further into ‘restricted’ and ‘unrestricted’ balances, based on whether classification in the plant fund is the result of external requirements or internal designation
6.
Agency funds o
Investment in plant fund balance isn’t subdivided
Resources received by the institution which belong to others, such as student body fees, are held in agency funds, with a liability equal to the assets collected
o o o
Accrual ing is used
There is never any fund balance in agency funds, since all assets held are owed to others
There are certain similarities to ‘ing of governmental funds’ especially in the reporting of expenditures rather than expenses
© itsjohnsanatomy
Page 5
ing for Not-For-Profit Organizations
ing for Colleges and Universities o
ing for Revenues and Expenses:
Revenues include:
Government appropriations
Government grants and contracts
Private gifts, grants, and contracts Endowment income
Sales and services of educational activities
Sales and services of auxiliary enterprises (such as residence halls, food services, intercollegiate athletics, and college stores) Sales and services of hospitals (if operated by the university)
Other sources(such as expired term endowments, annuities, and life income agreements) Independent operations (such as government research laboratories)
Expenditures include:
Tuition fees
Educational and general expenditures Auxiliary enterprises Hospitals
Independent operations
ing for Voluntary Health and Welfare Organizations o
Voluntary health and welfare organizations adhere to the accrual basis of ing
o
Sources and uses of funds are not merely classified as revenues and expenses
Revenues are generally recognized when earned and expenses are shown when the related services of the organization are provided However, but are instead broken down into categories:
Donations of services
Donated property
Pledges
o o o o
Should be charged to the appropriate expense with an offsetting credit to Should be recorded at fair market value on the date of gift Should be recognized net of uncollectible amounts
Pledges or cash donations that will not be spendable until a future period should be shown as a deferred credit on the balance sheet
o
Voluntary health and welfare organizations must also provide a ‘Statement of Functional Expenses’
This statement reports expenses by both:
o
Function (program and ing)
Natural classification (salary expenses, depreciation expenses, etc)
The five (5) funds used by the Voluntary health and welfare organizations include: 1.
Current fund – unrestricted:
2.
Used for operations that require only the discretion of the organization’s board Includes assets designated by the board for specific purposes
Current fund – restricted:
Used for operations, but only in accordance with a donor or grantor’s specifications
Example: o
3.
This fund is used to for: o o o
4.
Restricted pledges to be used to promote the adoption of handicapped children
Land, building, and equipment fund:
Endowment fund:
Land, building, and equipment acquired by the organization
Liabilities arising from the acquisition or improvement of plant assets Current assets restricted by donors or grantors for future disposition
Used to for: o
‘Permanently restricted endowment principal’
o
‘Temporary restricted term endowments’
5.
Custodian fund:
To be maintained intact either in perpetuity or until a specific event occurs
A fund established to for assets received by an organization to be held or disbursed only on instructions of the person or organization from whom they were received
© itsjohnsanatomy
Similar to ‘Agency fund’ of a college or university The assets do not belong to the organization
Page 6
ing for Not-For-Profit Organizations
ing for Voluntary Health and Welfare Organizations o
ing for Revenues and Expenses:
Revenues
Recorded using the full accrual basis
Inflows of resources resulting from a charge for service from financial activities or from other exchange transactions
Include: o o o o
Expenses:
hip dues
Program service fees
Sales of publications and supplies or proceeds from the sale of these items Investment income e.g. interest, dividends, and other earnings
Recorded using the full accrual basis in a manner similar to that used by business organizations
Recorded in each fund that incurs the expenses
Expenses are classified into ‘program services’ and ‘ing services’ and are reported on a functional basis under these classifications: o
Program services
o
ing services
Relate to the expenses incurred in providing the organization’s social service activities Consist of:
Expenses:
Program services (focus on social services)
Research
Public education
Professional education Community services
ing services (focus on istration and fund-raising activities)
Note:
Fund-raising costs
In reporting expenses in the Statement of Activities, the functional classifications might appear as follows: o
istrative expenses
Management and general Fund raising
Public : o
Is the inflow of resources from voluntary donors who receive no direct, personal benefit from the organization’s usual programs in exchange for their contributions
o
Include:
Contributions
Special events Legacies and bequests
Proceeds from fund raisers
ing for Other Not-For-Profit Organizations o o
A great deal of flexibility is permitted in the ing for these organizations
A wide variety of other organizations have the option of using fund ing
Examples:
© itsjohnsanatomy
Research and scientific organizations Social and country clubs Religious organizations Museums
Page 7
ing for Not-For-Profit Organizations
ing for Voluntary Health and Welfare Organizations (VHWOs) and Other Not-For-Profit Organizations o
Financial statements:
All not-for-profit organizations, including VHWOs, to present three (3) general-purpose financial statements: 1.
Statement of financial position o o
Presented for the entire entity
Its purpose is to provide relevant information about the organization’s assets, liabilities, and net assets
It should provide information about their relationships to each other as of date of the statement
o
Certain principle should be followed in preparing the statement. The focus is on the entity as a whole and should report total assets, liabilities, and net assets.
o
Cash or other assets that have restrictions imposed by the donor, limiting the use of those assets to longterm purposes
o
o
Should be segregated from other assets that are unrestricted
Net assets should be segregated into three (3) classes: Unrestricted
Temporarily restricted
Permanently restricted
The nature and timing of donor restrictions must be disclosed
Voluntary restrictions of unrestricted net assets by the entity’s governing body, resulting in board-designated funds may be disclosed
o
Different types of restrictions that may be placed on assets:
Assets may be permanently restricted:
Example may be a donor-restricted gift, such as artwork, that must be used for a certain purpose and may not be sold
Example may be a donor-restricted gift to be invested with the principal preserved and the income available for expenditure
Assets may be temporarily restricted:
Example may be a donor-restricted gift to be invested for a certain period during which only the income may be expended. After a certain point in time, the principal may be expended as well
Example may be a donor-restricted gift to be expended for certain purposes only, such as a special program or project. The gift might be restricted to the building and equipment fund
Assets may be unrestricted:
Examples: o o o
Assets resulting from operations
Unrestricted gifts of cash and other assets
Temporarily restricted assets released due to satisfaction of the donor’s provisions
o 2.
Statement of activities
Governing board - designated funds
o
Also presented for the entity as a whole
o
Primary focus is to provide relevant information about:
The effects of transactions and other events and circumstances that change the amount and nature of net assets
3.
The relationships of those transactions and other events and circumstances to each other How the organization’s resources are used in providing various programs or services
Statement of cash flows o
A not-for-profit organization presents a statement of cash flows similar to that presented by a business enterprise
o o
They may use either direct or indirect method of presenting operating cash flows
Primary purpose is to provide relevant information about the cash receipts and cash payments of an organization during the period
In addition, VHWOs must present:
Statement of functional expenses o o
Has no parallel in business
Breaks down each category of program and ing expense by type of expense such as:
o
Salaries
Supplies
Depreciation
Provides details omitted from the statement of , revenue and expenses, and changes in fund balances, which only lists expenses by function
© itsjohnsanatomy
Page 8
ing for Not-For-Profit Organizations Punzalan:)
ing for non-governmental (not-for-profit) organizations
All not-for-profit organizations use the accrual basis of ing There are four (4) major non-for-profit organizations: o o o o
Colleges and universities Hospitals
Voluntary health and welfare organizations Other not-for-profit organizations
ing for colleges and universities
Responsibilities for a not-for-profit university may be classified as: o
Academic
o
Research
Public service
Financial
o
issions Records
Counseling Communication and establishment of goodwill
A university levies tuition fees but these tuition fees are not sufficient to cover total operational costs o
Thus, other sources are essential:
Reporting of business
Public relations
Management
Student services
o
Instruction
Gifts
Income from endowment funds
Grants from governmental units or foundations Appropriations (for public universities)
Public college and university funds include three (3) broad categories: o
Current funds
Which may be:
o
Plant funds
1.
Unexpended plant fund
3.
Plant fund for retirement of indebtedness
4.
unrestricted
Plant funds of public universities include four (4) separate, self-balancing subgroups: 2.
o
Restricted
Plant fund for renewals and replacements Investment in plant fund
Trust and agency funds
ing for private colleges and universities o
Shift away from a fund group focus to an organization-wide focus
o
Instead of fund balances, three (3) net asset classes are used:
1.
Unrestricted
3.
Permanently restricted
2. o
In which there is no requirement for external financial statements to include fund group reporting
Temporarily restricted
Events that were previously recorded as changes in fund balance will now be recorded as contributions, exchange transactions, capital acquisitions, or expenses
Financial statements o
The three (3) principal financial statements for public and private universities are:
Public universities 1.
Statement of current funds, revenues, expenditures, and other changes
3.
Statement of changes in fund balance
2.
Private universities 1.
Statement of activities
3.
Statement of cash flows
2.
© itsjohnsanatomy
Balance sheet
Balance sheet
Page 9
ing for Not-For-Profit Organizations ing for health care providers
Health care entities include: o o o o o o
Hospitals Clinics
Continuing care retirement communities Health maintenance organizations Home health agencies Nursing homes
A modern health care provider may be a complex entity with: o o o o o
Medical aspect
Surgical aspect
Research aspect
Teaching aspect
Public service aspect
One very unusual element about health care operations is the manner of payment for services:
Health care entities employs two (2) classes of funds:
o
That is, when a significant portion of the fees for health care services is paid by a third party, like Medicare or Philhealth
1.
General funds
2.
Donor-restricted funds
Which for resources available for general purposes Which for temporarily and permanently restricted resources such as:
Endowment funds
Other donor-restricted funds
Assets of a health care provider comprise three (3) distinct segments:
Current assets
Assets whose use is limited Property and equipment
Revenues, expenses, gains, and losses increase or decrease the net assets of a health care provider entity o
They may be operating if:
o
They may be non-operating if:
Plant replacement and expansion funds
Assets and liabilities of a health care provider are sequenced by their liquidity and are classified as current or non-current o
Specific purpose funds
Financial statements o
Include:
They are related to the principal activity They are from activities that are incidental or from events beyond the entity’s control
Statement of activities
Which present organization-wide totals for changes in unrestricted, temporarily restricted, and permanently restricted net assets
Statement of financial position Statement of cash flows
ing for voluntary health and welfare organizations
To qualify as a voluntary health and welfare organization: o o
The organization’s primary source of revenue should be contributions from donors, who do not benefit directly from the organization The program must be in area of health, welfare, or community services
There are some instances where contributions received by an organization specify the purpose for which they must be expended o
To segregate resources with external restrictions, the organization must report these items under three (3) classes of net assets: 1.
Unrestricted
3.
Permanently restricted
2.
Financial statements o
Temporarily restricted
The four (4) financial statements for VHWOs are as follows: 1.
Statement of financial position
3.
Statement of cash flows
2. 4.
Statement of activities
Statement of functional expenses
© itsjohnsanatomy
Which supplements the operating statement
Presents the total of each functional expense to programs and ing services
Page 10
ing for Not-For-Profit Organizations ing for other not-for-profit organizations
Organizations that have restricted resources may use fund ing for internal control and management reporting purposes
Net assets are classified as:
o o o o
In order to demonstrate compliance with externally imposed restrictions Unrestricted
Temporarily restricted
Permanently restricted
Financial statements o o
Report organization-wide totals for all assets and liabilities Include:
© itsjohnsanatomy
Statement of financial position Statement of activities
Statement of cash flows
Page 11
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