Chapter Eighteen

Accounting and
Reporting for
Private Not-forProfit
Organizations

McGraw-Hill/Irwin

Copyright 2013 by The McGraw-Hill Companies, Inc. All rights reserved.

Not-for-Profit Organizations
General Characteristics
They receive contributions from donors who do

not expect a return of equal financial value

Their operating purpose is not providing goods
and services for profit
They do not have ownership interests as do forprofits

They may be governmental or private

Charitable
Educational
Civic organizations
Political parties
Trade organizations
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LO 1

Financial Reporting
FASB has jurisdiction over private Not-ForProfits, and two basic ideas form the FASBs
framework for not-for-profit standards:
The financial statements should focus on the
entity as a whole.
Reporting requirements for not-for-profits
should be similar to business entities, unless
there are critical differences in the needs of
users.
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A Little History.
Prior to 1993, there was a confusing variety of
private not-for-profit accounting practices.
In that year, FASB issued guidance to
standardize the reporting,

emphasize reporting the operations

and financial position of the entire
entity, and

allow the use of many of the same

accrual-based techniques utilized by
for-profit entities.
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LO2

Financial Reporting
FASB requires three financial statements for
not-for-profits.
1)
2)
3)
4)

Statement of Financial Position

Statement of Activities and Changes in Net Assets
Statement of Cash Flows
Statement of Functional Expenses (required only for
voluntary health and welfare organizations).

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Statement of Financial Position

Report assets,
liabilities, and net
assets.
Use the term Net
assets rather than
owners equity or fund
balance.

Net assets are

presented in
three categories:
Unrestricted
Temporarily
Restricted
Permanently
Restricted

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Statement of Financial Position

Restrictions by an outside donor results in an
asset that is classified as:
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

Unrestricted
Board-designated or internally restricted

assets
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Statement of Activities and

Changes in Net Assets
Change in net assets = difference between
revenues and expenses.
The change in net assets is reported instead
of net income. Donors unconditional
promises to give are recognized as both
revenue and a receivable in the period of
promise.
Revenues and expenses are measured on
the accrual basis.
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Statement of Activities and

Changes in Net Assets
Expenses are presented in two categories:
Program Services
Supporting Services
Program Services
Activities relating to social services, research, or
other objectives of the organization.
Supporting Services
Administrative costs and fund-raising expenses.
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LO 3

Statement of Functional Expense

Statement of Functional Expenses
A detailed analysis of expenses by both
function and object. Allocation of joint
fund-raising & program service costs is
permitted only when certain criteria are
met.

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LO 4

Accounting for Contributions

Unconditional
promises to
give are
recognized as
revenue when
the promise is
made.

Restricted gifts are

not the same as
conditional gifts.

Pledges that allow donors

to change their minds are
not unconditional.
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LO 5

Tax-Exempt Status
Tax-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.

Section
501(c)(4)
Applies to
advocacy
groups

Section 501(c)(6)
Applies to
business leagues,
boards of trade

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LO 6

Mergers & Acquisitions

Why have mergers and acquisitions
become prevalent among Not-for-Profits?
Efficient use of resources
Common goals
Efficiencies of size
Rescue suffering charities
Expand one organizations scope of
outreach
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Mergers & Acquisitions

The respective Boards of Directors make
the decision to acquire another entity, there
are no shareholders to buy out or consider.
In an Acquisition, the acquired accounts
are added at FMV.
In a Merger, the newly formed not-forprofit records all accounts at their previous
book values.
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LO 6

Accounting for
Health Care Organizations
Health Care expenditures account for 16% 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
entitys operations.
FASB requires the reporting of a performance
indicator to show operational success or failure.
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Accounting for
Patient Service Revenues
Amounts that the
entity does not intend
to collect should not
ultimately be reported
as revenues.

In many cases, the patient is not responsible for the

entire bill. Third-party payors, such as insurance
providers, are an important part of the process.
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