Chapter 19 – NOT-FOR-PROFIT ENTITIES
CHAPTER 19
NOT-FOR-PROFIT ENTITIES
OVERVIEW OF CHAPTER
Chapter 19 presents the accounting and reporting for not-for-profit entities. The
beginning of the chapter provides an overview of FASB standards that directly address not-for-
profit entities. ASC 958 provided authoritative guidance for the various types of not-for-profit
entities related to accounting for contributions and dealing with financial statement issues. ASC
958 also provides guidance dealing with accounting for transfers of assets to not-for-profit
entities that raise or hold contributions for others.
GASB 35 requires that public colleges and universities follow the standards of
governmental entities as specified by GASB 34 (GASB 34 was discussed in Chapter 18). The
Financial Accounting Standards Board promulgates accounting and financial reporting
requirements for private colleges and universities. A not-for-profit college or university must
provide three financial statements. These are (1) a statement of financial position, (2) a statement
of activities, and (3) a statement of cash flows. If private colleges and universities have a profit
objective, accounting standards applicable to any for-profit business entity apply.
Profit-seeking hospitals often use the same type of financial reporting as other
profit-seeking corporate entities and are not covered in this chapter. Not-for-profit hospitals often
utilize a fund structure similar to other not-for-profit entities. The Sol City Community Hospital
illustration in this chapter was adapted from the AICPA’s audit and accounting guide for Health
Care Organizations. The statements are presented in accordance with ASC 958, as amplified and
presented in the AICPA’s audit and accounting guide for Health Care Organizations.
The major focus of the chapter is on hospitals; however, the accounting and financial
reporting guidelines are the same for all health care organizations included within the scope of
the AICPA’s audit and accounting guide.
Hospitals utilize two major fund classes, unrestricted and restricted. The general fund is
the primary unrestricted fund and accounts for the resources used in providing health care.
Restricted funds can be temporarily or permanently restricted. Temporarily restricted funds of a
hospital are often termed “holding funds” because they hold resources until the restrictions are
met and the resources can then be transferred to the general fund for expenditure. Temporarily
restricted funds of a hospital include specific purpose and plant replacement and expansion
funds. Endowment funds frequently are permanently restricted.
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One of the more difficult points for students to learn is the revenue recognition process
for a hospital’s general fund. Operating revenue is obtained from patient services or
patient-related services. Operating revenue also includes the fair value of donated supplies. The
value of donated services is recorded in accordance with ASC 958. The fair value of donated
services may be recognized as a contribution revenue, together with a corresponding expense, if
the services received (a) create or enhance nonfinancial assets, or (b) require specialized skills,
are provided by individuals possessing those skills, and would typically need to be purchased if
not provided by donation. Donated medical supplies are typically recorded as a contribution
revenue. Donated property and equipment are usually recorded in the plant fund until the assets
are placed into service at which time they are transferred to the general fund.
The general fund of a hospital includes investments, plant assets, and long-term debt.
Depreciation must be recognized in the general fund for the plant assets.
Not-for-profit hospitals prepare the following financial statements: (1) a balance sheet,
(2) a statement of operations (which shows a performance indicator that includes both operating
income and other income available for operations), (3) a statement of changes in net assets
(which shows the changes in each of the three net assets categories), and (4) a statement of cash
flows. The balance sheet must clearly distinguish between the three classes of net assets:
permanently restricted net assets, temporarily restricted net assets, and unrestricted net assets.
The statement of operations reports income and expenses available for operations above the
performance indicator line (often termed as the Excess of Revenues and other Support over
Expenses and Other Items), while the change in the fair value of nontrading securities and net
assets released from restrictions for acquisition of property, plant, or equipment, are shown
below the performance indicator line.
Accounting for investments is based on the type of hospital. Profit-seeking hospitals use
ASC 320 to account for their investments. Not-for-profit hospitals use ASC 958, which requires
fair value accounting and reporting of the investments. Governmental health-care organizations
use GASB 31 to account for their investments.
Voluntary Health and Welfare Organizations (VHWO) include organizations such as the
American Cancer Association, the March of Dimes, and the Red Cross. The illustration in the
chapter is adapted from the AICPA’s 1995 audit guide for Not-for-Profit Organizations, with the
financial statements prepared in accordance with ASC 958.
Larger VHWOs typically use a fund structure that normally includes both unrestricted
and restricted current funds; a current unrestricted fund, a current restricted fund, a land,
buildings, and equipment fund, and an endowment fund. VHWOs must use the accrual system
of accounting to record the full cost of offering services. VHWOs often obtain pledges which
must be recorded in accordance with ASC 958. Unconditional pledges are recognized as revenue
in the period in which the pledge is made. Conditional pledges are recognized as revenue only
when the condition has been removed. In addition, a sufficient allowance for uncollectible
pledges should be recognized. Pledges expected to be received in future years should be recorded
at their present value and an interest component should be recognized for each period on the
uncollected pledges.
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In accordance with ASC 958, VHWOs must prepare the following financial statements:
(1) a statement of financial condition, (2) a statement of activities, (3) a statement of cash flows,
and (4) a statement of functional expenses. The fourth statement is required of VHWOs in order
that donors, creditors, and other interested parties can assess the costs of the organization’s
services and how it utilizes resources. The statement of functional expenses provides a
comprehensive breakdown of the VHWO’s expenses by type of program service and by type of
support service.
The accounting and financial reporting standards for Other Not-For-profit Organizations
(ONPO) is fairly flexible in order to meet the many needs of these organizations. The
illustration in Chapter 19 presents the financial statement formats required by ASC 958.
Financial statements for an ONPO include the following: (1) a statement of financial position,
(2) a statement of activities, and (3) a statement of cash flows.
LEARNING OBJECTIVES
When students finish studying this chapter, they should be able to:
LO 19-1 Understand financial reporting rules and make basic journal entries for private, not-
for-profit entities.
LO 19-2 Understand financial reporting rules for not-for-profit colleges and universities.
LO 19-3 Understand financial reporting rules and make basic journal entries for not-for-profit
health care providers.
LO 19-4 Understand financial reporting rules and make basic journal entries for not-for-profit
voluntary health and welfare organizations.
LO 19-5 Understand financial reporting rules for other not-for-profit organizations.
SYNOPSIS OF CHAPTER 19
Not-For-Profit Entities
United Way Worldwide
LO 19-1 Understand financial reporting rules and make basic journal entries for private, not-
for-profit entities.
Financial Reporting for Private, Not-For-Profit Entities
Additional Standards for Not-for-Profit Entities
LO 19-2 Understand financial reporting rules for not-for-profit colleges and universities.
Colleges and Universities
Special Conventions of Revenue and Expenditure Recognition
Board-Designated Funds
Chapter 19 – NOT-FOR-PROFIT ENTITIES
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Public Colleges and Universities
Private Colleges and Universities
LO 19-3 Understand financial reporting rules and make basic journal entries for not-for-profit
health care providers.
Health Care Providers
Hospital Accounting
Financial Statements for a Not-for-Profit Hospital
Comprehensive Illustration of Hospital Accounting and Financial Reporting
Temporarily Restricted Funds
Summary of Hospital Accounting and Financial Reporting
LO 19-4 Understand financial reporting rules and make basic journal entries for not-for-profit
voluntary health and welfare organizations.
Voluntary Health and Welfare Organizations
Accounting for a VHWO
Financial Statements for a VHWO
Summary of Accounting and Financial Reporting for VHWOs
LO 19-5 Understand financial reporting rules for other not-for-profit organizations.
Other Not-For-Profit Entities
Accounting for an ONPO
Financial Statements of an ONPO
Summary of Accounting and Financial Reporting for an ONPO
NOTES ON POWERPOINT SLIDES
We have attempted to provide PowerPoint slides that will be useful to a broad set of users. Since
instructors often have different styles and preferences, we have attempted to include slides that
will accommodate different approaches and that can be adapted to classes with different levels of
preparation. For example, some instructors prefer to introduce the material before students have
read the chapter. We have tried to facilitate these types of introductory discussions by including
slides that replicate key points from the chapter. Other instructors expect students to have read
the chapter and attempted homework problems before coming to class. As a result, they may not
find it useful to review all of the topics in the chapter or to include slides that simply review
many of the details they expect students to study before class. However, instructors following
this approach often like to use sample exercises and problems built into the slides that allow
them to have extended discussions or to facilitate group interaction in class.
If instructors elect to spend two class periods on the same subject, they might find a combination
of both styles to be useful by first introducing foundational material before students have read
the chapter and studied the topic, followed by an extended discussion the next class period after
Chapter 19 – NOT-FOR-PROFIT ENTITIES
19-5
students have read the chapter and attempted homework problems.
We have tried to develop slides that can facilitate a flexible approach to allow instructors to
select the slides that best match their objectives and style for class discussions. This is the reason
we are including over 100 slides for some chapters in the text. We do not expect all instructors
to use all slides, but the slide files should help support different teaching approaches and allow
instructors to select the subset of slides that best matches their specific discussion objectives.
The slides are organized by learning objective. We have included a slide at the beginning of
each learning objective to show where the new material begins. Instructors may or may not want
to use these learning objective slides in class. We provide them primarily as a way of organizing
the material. We also include short multiple-choice questions at the end of most learning
objectives. Some instructors find it useful to pause periodically during class to assess students’
level of understanding. For this reason, we include several “practice quiz questions” that can be
used throughout class discussions to engage students, help them focus on key points, or to
facilitate group interaction. Finally, we provide longer exercises and problems that many
instructors find useful in assessing understanding and encouraging group learning.
LO 19-1 Understand financial reporting rules and make basic journal entries for private, not-
for-profit entities.
• Slide 3 summarizes the various types of not-for-profit organizations (NPOs).
• Slide 4 explains the types of entities that do not qualify as not-for-profit entities.
• Slide 5summarizes the characteristics of NPOs.
• Slide 6 emphasizes the differences between NPOs and businesses.
• Slides 7-10 explain important differences between the accounting rules (and their
sources) for private and public NPOs, as well as the method for the identification of
assets in NPOs. Generally, public NPOs follow GASB standards, whereas private
NPOs follow FASB standards.
• Slides 11-18 provide details about accounting according to ASC 958. These rules are
broadly applicable to all private NPOs, regardless of the specific “type” of
organization (health care organizations, colleges and universities, voluntary health
and welfare organizations, or other NPOs. Instructors interested in covering details
related to the accounting for contributions will want to cover this material. Other
instructors may choose to skip some of the details if they plan to focus more on the
details applicable to specific types of organizations.
LO 19-2 Understand financial reporting rules for not-for-profit colleges and universities.
• Slides 22-26 summarize the nuances of accounting for colleges and universities.
Instructors interested in teaching students the subtle differences associated with the
accounting for institutions of higher learning will want to cover this segment of the
slides.
• Slide 27 summarizes differences between public and private colleges and universities.
LO 19-3 Understand financial reporting rules and make basic journal entries for not-for-profit
health care providers.
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• Slides 31-44 summarize the nuances of accounting for health care providers.
Instructors interested in teaching students the subtle differences associated with the
accounting for hospitals and other health care providers will want to cover this
segment of the slides.
LO19-4 Understand financial reporting rules and make basic journal entries for not-for-profit
voluntary health and welfare organizations.
• Slides 48-55 summarize the nuances of accounting for voluntary health and welfare
organizations (VHWOs). Instructors interested in teaching students the differences in
accounting for VHWOs will want to cover this segment of the slides.
LO 19-5 Understand financial reporting rules for other not-for-profit organizations.
• Slides 59-62 briefly introduce ONPOs and explain a few general concepts that
students should know about the accounting for most NPOs.
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TEACHING IDEAS
1. The instructor could ask a student who is a member of a sorority or fraternity (e.g., Beta
Alpha Psi) to present an overview of the accounting records maintained by the entity. The
discussion can center on the types of records and financial statements, not necessarily on
the specific amounts in individual accounts. Often, accounting students serve as treasurer
of these entities and a student presenter should be readily available.
2. Students could be asked to access the FASB website at www.FASB.org and review
FASB’s agenda to determine whether any projects/issues relating to not-for-profit entities
still are pending.
3. If time is short in a course for discussing NPOs, we often focus on broad concepts
applicable to all private NPOs in slides 14-38. The latter part of the chapter delves into
the details applicable to specific types of NPOs. Instructors planning to spend multiple
days on this chapter will be able to cover the latter part of the chapter while instructors
with only one day for chapter 19 may want to focus solely on the first part of the chapter
and the first 40 slides.