Kế toán, kiểm toán - Chapter eighteen: Accounting and reporting for private not - For - profit entities

Chapter EighteenCopyright © 2015 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.Accounting and Reporting for Private Not-for-Profit Entities Not-for-Profit OrganizationsGeneral CharacteristicsThey receive contributions from donors who do not expect a return of equal financial valueTheir operating purpose is not providing goods and services for profitThey do not have ownership interests as do for- profitsMay be governmental or privateCharitableEducationalCivic organizationsPolitical partiesTrade organizations18-2Charitable ContributionsRecipients of these contributions represent an eclectic assortment of missions:18-3Charitable ContributionsTotal estimated charitable giving in the United States increased 4.0 percent in 2011 from 2010 to $298.42 billion in contributions from a wide sector:18-4Charitable ContributionsThe 10 largest charities reported receiving $13.6 billion in private support in 2012 with total revenues of $29.8 billion. The entities receive significant revenue from a variety of sources as a list of the five largest charities demonstrates:18-5Learning Objective 18-1Understand the basic compositionof financial statements produced for a private not-for-profit entity.18-6Not-for-Profit OrganizationsSeveral basic goals form the framework for the generally accepted accounting principles for private not-for-profit entities, including:1. Financial statements should focus on the entity as a whole.2. Reporting requirements for private not-for-profit entities should be similar to those applied by for-profit businesses unless critical differences exist in the nature of the transactions or the informational needs of financial statement users.18-7Financial Statement GoalsThe first goal asserts that the financial statements should not highlight individual funds the organizations use for internal record-keeping.For external reporting purposes, FASB emphasized the operations and financial position of the entire organization. The second goal allows the use of many of the same accounting techniques utilized by for-profit entities. Existing authoritative literature for capital leases, pensions, contingent liabilities, and similar issues have not been rewritten for private not-for-profit entities.18-8Not-for-Profit OrganizationsFASB Statement (SFAS) 116, “Accounting for Contributions Received and Contributions Made,” established guidelines for determining when and how donations should be recognized and reported. FASB Statement 117, “Financial Statements of Not-for-Profit Organizations,” specified the required content and format for financial statements distributed by these organizations. 18-9Learning Objective 18-2Describe the differences in assets that are unrestricted, temporarily restricted, or permanently restricted and explainthe method of reporting these categories.18-10Three critical differences exist between private not-for-profit and for-profit businesses. Donations received by private entities are transactions that have no counterpart in commercial businesses.The private entities’ donations often have donor-imposed restrictions.No single figure describes performance as effectively as net income does for commercial entities.Financial Reporting18-11The differences create the need for a unique set of financial statements for not-for-profit entities. FASB requires three financial statements for not-for-profits.Financial ReportingStatement of Financial Position Statement of Activities Statement of Cash FlowsIn addition, the Statement of Functional Expenses is required only for voluntary health and welfare organizations.18-12Statement of Financial PositionReports assets, liabilities, and net assets.Uses term Net assets rather than Owners’ Equity.Restrictions by outside donors results in assets classified as:UnrestrictedIncludes board-designated or internally restricted assets.Temporarily restricted (for a particular purpose or for use in a future time period).Permanently restricted (expected to remain restricted for as long as the organization exists).18-13Statement of ActivitiesReports revenues, expenses, and other changes in net assets.A separate column presents increases and decreases in each of the three categories of net assets.Final totals agree with the net asset balances on the statement of financial position.Statement is sometimes labeled as a statement of changes in net assets.Primary purpose is to provide a clear picture of donations received and any attached restrictions.18-14Statement of ActivitiesWhen a temporary restriction (either time or usage) is fulfilled, that amount of net assets is immediately reclassified as unrestricted. If an expense is incurred to meet a donor stipulation, both the expense and the contribution appear in the statement of activities in the Unrestricted column in the same time period.18-15Statement of ActivitiesAll expenses are presented in the Unrestricted Net Assets column in two categories:Program ServicesSupporting ServicesProgram ServicesActivities relating to social services, research, or other objectives of the organization. Supporting ServicesAdministrative costs and fund-raising expenses.18-16Statement of Cash FlowsStatement of Cash FlowsUse the standard FASB classificationsOperating ActivitiesInvesting ActivitiesFinancing ActivitiesMay use either the direct or the indirect methods.18-17Learning Objective 18-3Explain the purpose andconstruction of a statementof functional expenses.18-18Statement of Functional ExpenseStatement provides a detailed analysis of expenses by function and object. Columns represent functions followed by supporting services.Categories are the same as those reported on the statement of activities and column totals agree with the operating expenses on that statement. Rows list expenses according to their nature.Allocation of joint fund-raising & program service costs is permitted only when certain criteria are met.18-19Learning Objective 18-4Report the various types ofcontributions that a privatenot-for-profit entity canreceive.18-20Accounting for ContributionsContributions, unconditional transfers of cash or other resources, are recorded as support at fair value in the period received.Restricted gifts are not the same as conditional gifts.Donors of restricted contributions specify how they are to be used. These gifts are recognized as temporarily or permanently restricted assets when a promise is received. Conditional promises that require a future action before asset will be transferred from the donor are not recognized until conditions are met. 18-21Accounting for ContributionsDonations of works of art and historical treasures are generally not recognized, but disclosure is required. Exchanges, such as member dues, are treated as accrual revenue.Contributed services are recognized as revenue if one of two conditions is met:The service creates or enhances a nonfinancial asset, OR The services are specialized and would have had to be purchased otherwise. 18-22Learning Objective 18-5Understand the impact of atax-exempt status.18-23Tax-Exempt StatusTax-Exempt Status – Not-for-profits may not have to pay federal income taxes under the following sections of the Internal Revenue Code:Section 501(c)(3) applies to charitable, educational or scientific entities. Section 501(c)(4) applies to social welfare entities, referred to as advocacy groups. Section 501(c)(6) applies to business leagues, boards of trade, chambers of commerce, etc.18-24Tax-Exempt StatusTax-Exempt Status Exempt from federal taxes. Often exempt from state taxes. Donors receive reduction in their taxable income. Non-profit postal permit reduces the cost of postage.Cannot engage in political campaign activity.A not-for-profit must file a Form 990, Return of Organization Exempt from Income Tax.18-25Learning Objective 18-6Account for both mergers andacquisitions of not-for-profitentities.18-26Mergers & AcquisitionsWhy have mergers and acquisitions become prevalent among Not-for-Profits?Efficient use of resourcesCommon goalsEfficiencies of sizeRescue suffering charitiesExpand one organization’s scope of outreach18-27AcquisitionsIn an Acquisition, one organization obtains control over another.Acquired accounts are reported at fair value. If total acquisition value is greater than the total value of identifiable assets and liabilities, excess is reported as goodwill.If future operations are expected to by primarily supported by contributions, the excess value is reported as a reduction in net assets.18-28MergersA merger occurs when two or more not-for-profit entities form a new not-for-profit and turn control over to a newly created governing board.The carryover method is applied in reporting for mergers.In a merger, the newly formed not-for-profit records all accounts at their previous book values as of the date of the merger.18-29Learning Objective 18-7Describe the unique aspectsof accounting for health careentities.18-30Health Care expenditures account for 17.6% of our Gross Domestic Product, much of which is paid by third-party payors.From a financial reporting perspective, these organizations have no need to compute and report net income.However, readers of the financial statements need a way to measure the efficiency of the entity’s operations.FASB requires the reporting of a “performance indicator” to show operational success or failure.Accounting for Health Care Organizations18-31Accounting for Patient Service RevenuesThird-party payors, insurance companies, Medicare, and Medicaid, not the patient, pay some or all of the cost of medical services received. Bad debts and fee reductions for health care providers can be significantly higher than for other kinds of businesses. Entities initially record revenue at standard rates. Amounts that the entity does not expect to collect is reported in a manner that best reflects the activities (contra-revenue or bad debt expense).18-32Insurance companies and Medicare establish contractual arrangements with health care providers stipulating rates to be paid for specific services.The entity must write off the difference in the amount a patient is charged and the amount the payor will pay in a contractual adjustment account.For matching purposes, these reductions must be recognized in the same period that the patient service revenue is earned. Contractual Agreements with Third-Party Payors18-33