CHAPTER

BLUE NOTES
57 S
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A nonprofit organization is an entity that is operated for the benefit of society as a whole rather than for the
benefit of an individual proprietor or a group of partners or shareholders. The concept of income is irrelevant and
NPOs strive only to obtain revenue sufficient to cover up expenses.

Accounting for NPOs is based on US GAAP, namely FASB SFAS 116, SFAS 117, SFAS 124 and AICPA Audit and
Accounting Guide for health care organizations.
Examples of NPOs:
1. Voluntary health and welfare organizations
2. Schools, colleges and universities
3. Hospitals
4. Cooperatives
5. Labor unions
6. Performing arts organizations
7. Foundations
8. Religious organizations
9. Country clubs
10. Professional associations

Fund Accounting
Internal accounting for many nonprofit organizations is the fund which is an accounting entity with a self-balancing set
of accounts recording cash and other financial resources together with related liabilities and changes therein.

Contributions or donations
Type of contribution Recognition Measurement Corresponding Journal Entries

A. Cash Recognize as revenue in Face value of cash Cash xx

the year received even received Contributions revenue xx
in the presence of
restrictions
Note: If restrictions are
present- reported as
'temporary restricted
revenue' in the
statement of activities.
Still revenue.

B. Materials Recognize as revenue in Fair value of materials Inventory xx

the year received even received Contributions revenue xx
in the presence of
restrictions
Note: If restrictions are
present- reported as

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'temporary restricted
revenue' in the
statement of activities.

C. Services the services require Going rate for Salaries expense xx

specialized skills, are
provided by individuals
possessing those skills
and would typically
need to be purchased if
not provided by
donation
comparable employees Contributions revenue xx
or contractors of the
entity, less any meals or
other living costs
absorbed by the
nonprofit organization

D. Facilities Recognize as revenue in Fair value of the Building xx

the year received even facilities received and Contributions revenue xx
in the presence of this could be either to
restrictions an asset or expense
Note: If restrictions are account
present- reported as
'temporary restricted
revenue' in the
statement of activities.

Expenses for NPOs

Type Definition Reporting in the Statement of activities

A. Program services The organization's activities that Reported as unrestricted in the SOA
result in the distribution of
goods and services to
beneficiaries, customers or
members that fulfill the
purposes or mission of the
organization

B. Support activities Activities of the organization Reported as unrestricted in the SOA

other than program services,
such as management and
general expenses, fund raising
and membership development
activities

Note: Due to the fact that all expenses of NPOs are unrestricted, these expenses can only be deducted from unrestricted revenue.

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Funds of an NPO

A. Unrestricted fund
This includes all the assets of a NPO that are available for use as authorized by the governing board and are not
restricted for specific purposes.
B. Restricted fund
This is used to account for assets available for current use but expendable only as authorized by the donor of
the assets. The donor may impose either 'use' or 'time' restrictions or both.
C. Endowment fund
Classified as:
- permanent endowment fund - one w/c the principal must be maintained indefinitely (permanently restricted)
in revenue producing investments. Only the revenue from the investments may be expended(temporarily
restricted). Also known as 'regular endowment'
- term endowment fund - one for which the principal may be expended after the passage of certain period or
the occurrence of an event specified by the donor(temporarily restricted).
-quasi-endowment fund - a fund established by the governing board of the nonprofit organization. At the
option of the board, the principal may later be expended. Accordingly, this type of fund is included in
'unrestricted net assets' because this is established using unrestricted net assets.
D. Agency fund
Used to account for assets held by the nonprofit organization as custodian. The assets held by the organization
is reported as liability of the NPOs agency fund because most NPOs have no equity in the fund
E. Annuity fund
Established when assets are contributed to the nonprofit organization with the stipulation that the
organization shall pay specified fixed amount to a designated beneficiary periodically during a specified period
of time. At the end of that period, the unexpended assets of the annuity fund are transferred to the
unrestricted fund, restricted fund or endowment fund as instructed by the donor.
F. Life income fund
This is used to account for stipulated payments to a named beneficiary during the beneficiary's lifetime.
However, only the income on the fund is paid to the beneficiary. Thus, payments from a life income fund vary
from period to period.
G. Loan fund
This is usually established by colleges and universities for the purpose of granting loans to students to satisfy
their school needs. Student loan funds generally are resolving, meaning, as old loans are repaid; new loans are
made from the receipts.
H. Plant fund
The fund established for land, building and equipment of the nonprofit organization. In addition to plant
assets, the plant fund may include cash and investments earmarked for additions to plant or payments of
liabilities collateralized by the plant assets. Sinking fund assets set aside for the retirement of debt incurred to
acquire plant assets may also be included in the plant fund.

The components of the financial statements of a nonprofit organization:

1. The Statement of financial position – This statement shall report that “assets should equal liabilities and net
assets”.
Net assets must be broken down into unrestricted, temporarily restricted and permanently restricted.

For hospitals, SFP discloses amounts for unrestricted, temporarily restricted and permanently restricted net

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assets as of a specific date.

2. Statement of activities – This statement shall report the “changes in net assets” and the revenue, gains,
expenses and losses of a nonprofit organization. This is the equivalent of the income statement for commercial
accounting. The statement of activities shall report expenses by functional classification as program services
and supporting services. However, a voluntary health and welfare organization is required to prepare a
“statement of functional expenses”. The statement of functional expenses shall report expenses both by
function (program and support) and by natural classification (salaries, depreciation, etc.).

For hospitals, SOA reports changes in unrestricted, temporarily restricted and permanently restricted net
assets for a period.
3. Statement of cash flows
4. Notes to financial statements
5. Statement of Operations – For hospitals, this discloses only the changes in unrestricted net assets for a period.

Classifications of the “net assets” of a nonprofit organization:

1. Unrestricted net assets – Typically, these are the assets in the “unrestricted fund”.
2. Temporarily restricted net assets – Generally, these are the assets in the restricted fund, loan fund, term
endowment fund, annuity fund, life income fund and plant fund.
3. Permanently restricted net assets – The most significant source of permanently restricted net assets is a
“permanent endowment fund”.

Unconditional promises:
Unconditional promises to give are reported in the period the pledges are made and not in the period of cash
collection.
Accordingly, if the contribution will not be received until next year, the contribution will be reported increase in
the temporarily restricted net assets for the current year because of the time restriction.
A “conditional promise” to give is considered unconditional if the possibility that the condition will not be met is
remote.

Reclassifications of net assets:

For example, in a prior year, a benefactor made a contribution to a private nonprofit university with the stipulation
that the donation be used for faculty travel during the current year.
This contribution is reported under temporarily restricted net assets in the prior year.
When the contribution is used for faculty travel in the current year, it is reported as a “reclassification” in the
current year’s statement of activities.
Reclassifications are reported in the statement of financial activities as “net assets release from restrictions.”
This reclassification is reported in the current year as a negative amount for temporarily restricted net assets and
positive amount for unrestricted net assets.
The travel expense is reported in the current year’s statement of activities as a deduction from unrestricted net
assets. All expenses are decreases in unrestricted net assets.
This means that the use if the contribution for faculty travel has no effect on unrestricted net assets at the current
year-end.
The reason is that the effect is offsetting, meaning, increase in unrestricted net assets upon reclassification from
“temporarily restricted to unrestricted” and decrease in unrestricted net assets when the contribution is used or
expended.

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Classification of cash flows for a nonprofit organization:

 Operating activities – This include “unrestricted” cash contributions, unrestricted revenue and expenses.
 Investing activities include cash flows from acquisition and disposal of property, plant and equipment,
investments and other long-term assets.
 Financing activities include temporarily or permanently “restricted” cash contributions and cash flows from
borrowings and repayment of borrowings.

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