CH 19

Advanced
Accounting
Jeter ● Chaney
Accounting For
Nongovernment
Nonbusiness Organizations:
Colleges And Universities,
Hospitals And Other Health
Care Organizations
1
Prepared by Sheila Ammons, Austin Community College
Learning Objectives
• Describe the source of accounting standards for
nongovernment nonbusiness organizations (NNOs).
• Identify the three basic statements for NNOs.
• Describe the basic funds used by nongovernment
nonbusiness organizations.
• Distinguish between a current restricted fund and an
unrestricted fund.
• Explain the term “assets whose use is limited.”
• Distinguish between a mandatory and a nonmandatory
transfer.
• Explain how contributions are recorded by NNOs.
2
Copyright © 2015. John Wiley & Sons, Inc. All rights reserved.
Learning Objectives
• Understand how donated services are recorded.
• Describe the funds used to account for property, plant
and equipment.
• Explain the basic accounting used by endowment funds.
• Indicate how equity investments are reported in the
financial statements.
• Explain the change in accounting for loan funds
brought about by new standards.
• Understand the use of an annuity or life income fund.
• Discuss the special reporting issues of hospitals.
3
Nongovernment Nonbusiness Organizations
(NNOs)
• Four Major Classifications of NNOs:
– Nonprofit institutions of higher education.
– Hospitals and other health care providers.
– Voluntary health and welfare organizations
(VHWOs).
– Other nongovernment nonbusiness organizations
(ONNOs).
4
Hierarchy of Reporting Standards
(NNOs)
• The hierarchy used to establish generally accepted
reporting standards for NNOs other than government-
owned special entities
– is the same as that for profit oriented business
organizations
– and included in the FASB Codification.
• FASB standards for nonprofits are found in FASB ASC
Topic 958, Not-for-Profit Entities.
LO 1 The source of accounting standards.

5
Financial Reporting for Not-for-
Profit
• Three basic financial statements required:
1) Statement of financial position (balance sheet)
• Net Asset categories:
– Unrestricted net assets
– Temporarily restricted net assets – resources that
must be used for a specific purpose or in a
specific time period (restriction is donor
imposed).
– Permanently restricted net assets – endowments:
interest might be spend but not the principal.
2) Statement of activities
3) Statement of cash flows
LO 2 Three basic financial statements. 6
Fund Accounting
• Most NNOs use fund accounting for recordkeeping and
reporting purposes.
• Six funds commonly used:
– Current Fund (restricted and unrestricted).
– Plant Fund.
– Endowment Fund.
– Loan Fund.
– Agency or Custodial Fund.
– Annuity and Life Income Fund.
LO 3 Basic funds used by NNOs. 7

Accrual Basis of Accounting
• Financial statements for NNOs (accrual basis)
– Revenues are reported when earned and realized or
realizable, and
– Expenditures are reported when materials or services are
received,
– Expenses incurred before the reporting date are accrued,
– Expenses applicable to future periods are deferred.
• For external reporting purposes,
– Revenues are classified by source, and
– Expenses and expenditures are classified by function or
activity.
8
Accounting for Current Funds
• Current Unrestricted Funds
Financial resources that may be expended at the discretion of the
governing board
Current Restricted Funds

Resources restricted because of legal, contractual, or external
restrictions on their use.
Current unrestricted resources may be expended at the discretion of the

governing board, whereas current restricted resources may be expended
only in accordance with externally imposed restrictions.
LO 4 Distinguish between restricted and unrestricted funds. 9

Accounting for Board Designated Funds
– Part of current unrestricted fund.
– Resources designated by governing board for
specific purposes, projects, or investments.
– Aid in planning and control of expenditures and limit
discretion of management.
– Governing board can reverse or modify designations.
Do not confuse these designations with donor or
external restrictions on the use of resources
LO 4 Distinguish between restricted and unrestricted funds.

10
Assets Whose Use is Limited
• Hospitals = classified as assets whose use is limited.
• Assets set aside by the governing board of a hospital for
board-designated purposes.
– Assets whose use is limited under terms of debt
indentures, trust agreements, third-party
reimbursement arrangements, or similar
arrangements are also presented as assets whose use
is limited.
LO 5 Assets whose use is limited. 11

• Colleges and Universities
– Board designated funds for specific current operating
purposes are accounted for by footnote or by
reclassification of the Unrestricted Current Fund
Balance.
– Some board-restricted current resources can be
transferred to other funds.
LO 4 Distinguish between restricted and unrestricted funds.

12
Mandatory and Nonmandatory Transfers
• Unique to colleges and universities
• Mandatory transfers
– Transfers from Current Funds group to other fund groups
arising from
• binding legal agreements
• grant agreements
• Nonmandatory transfers
– Transfers from Current Funds group to other fund groups
at discretion of governing board.
LO 6 Mandatory vs. nonmandatory transfers.

13
Contributions
• All NNOs under FASB jurisdiction are required to
recognize contributions as revenue in the period received.
– This includes unconditional promises to give.
– The standard does not apply to tax exemptions,
abatements or incentives, or to transfers of assets from a
government to a business enterprise.
• Contributions include gifts of cash, pledges, donated
services, and gifts of noncash assets.
• Conditional promises to give are recognized when they
become unconditional (when the conditions are
substantially met).
LO 7 How contributions are recorded. 14

Contributions
• Pledges are recorded as revenues when a promise to
give is nonrevocable and unconditional, at present
value of expected receipts.
– Pledges are signed commitments to contribute
specific amounts of money to an organization on a
future date or in installments.
– Although resembling promissory notes, pledges
generally are not enforceable contracts.
– All NNOs should establish an allowance for
uncollectible pledges.

Contributions
• Exercise 19-6: A well-known celebrity sponsored a
telethon for the Help for the Blind Foundation on
November 1, 2015. Pledges in the amount of
$1,000,000 were called in. Using similar telethon
campaigns as a basis, it is estimated that 25% of the
pledges will be uncollectible. During 2016, $700,000
of contributions from these pledges were collected. The
remainder were uncollectible.
• Required: Identify the appropriate fund(s) and prepare
the journal entries necessary in 2015 and 2016 to record
these transactions.
Contributions
Exercise 19-6: Prepare the journal entries necessary in 2015.
Current Unrestricted Fund
Pledges Receivable 1,000,000

Revenue - Contributions 1,000,000
Expense - Provision for Uncollectible Pledges 250,000

Allowance for Uncollectible Pledges 250,000

Contributions
Exercise 19-6: Prepare the journal entries necessary in 2016.
Cash 700,000
Pledges Receivable 700,000
Expense - Provision for Uncollectible Pledges 50,000

Allowance for Uncollectible Pledges 250,000
Pledges Receivable 300,000

Contributions
Donated Services
• Recognized only if the services received:
– Create or enhance nonfinancial assets, or
– a. Require specialized skills,
b. Are provided by individuals possessing those
skills, and
c. Would need to be purchased if not provided
by or
Recorded as revenue donation.
support with an amount equal to the revenue recognized
as an expense in the appropriate expense account.
LO 8 How donated services are recorded. 19

Contributions
Exercise 19-2: During 2015 volunteer pinstripers donated their
services to General Hospital at no cost. The staff at General Hospital
was in control of the pinstripers’ duties. If regular employees had
provided the services rendered by the volunteers, their salaries would
have totaled $6,000. While working for the hospital, the pinstripers
received complimentary meals from the cafeteria, which normally
would have cost $500. Required: Prepare the journal entry necessary
in the General Fund to record the donated services on the books of
General Hospital.
General Services Expense 5,500

Donated Services (Nonoperating Revenue) 5,500
20
Contributions
Donor-Imposed Restricted Contributions
• Recorded as contribution revenues in period received,
thus increasing either temporarily or permanently
restricted net assets.
• When expenditures are made, or restriction expires, net
assets are released from temporarily (or permanently)
restricted net assets and are reported as unrestricted net
assets on the Statement of Activities.
LO 7 How contributions are recorded.

21
Contributions
• Exercise 19-3: The Franklin Public Library received a
restricted contribution of $300,000 in 2015. The donor
specified that the money must be used to acquire books
of poetry written in the sixteenth century. As of
December 31, 2015, only $100,000 of the restricted
resources had been expended.
• Required: Prepare the journal entries necessary to
record these events during 2015. Indicate the fund in
which each journal entry is recorded.
22
Contributions
Exercise 19-3: Prepare the journal entries necessary to record these
events during 2015.
Restricted Current Fund
Cash 300,000
Contribution Revenue – Poetry Collection 300,000
Net Assets Released from Restrictions 100,000
Cash 100,000
Unrestricted Current Fund

Cash 100,000
Net Assets Released from Restrictions 100,000
Expenses – Poetry Collection 100,000
Cash 100,000
23
Accounting for Plant Funds
The plant fund is used to account for
– property, plant and equipment (PP&E) owned by the
organization and the net investment,
– accumulation of financial resources for acquisition or
replacement of PP&E,
– acquisition and disposal of PP&E,
– liabilities relating to acquisition of PP&E, and
– depreciation expense and accumulated depreciation.
All types of NNOs are required by GAAP to
record depreciation expense.
LO 9 Funds used to account for PP&E.
24
College and Universities
• Divided into four separate self-balancing subgroups:
– Unexpended Plant Fund
– Funds for Renewals and Replacements
– Funds for Retirement of Indebtedness
– Investment in Plant
Both board-designated funds and externally restricted funds are accounted for in
the plant fund; therefore, a distinction is made between restricted and unrestricted
fund balances.

25
• Exercise 19-8: After the election of a prominent
political figure, the principal from a term endowment
fund was expendable by Crandall University. The
official was elected this year. The fund was restricted to
the construction of a Political Science building annex.
The following transactions occurred because of this
event.
• Required: For each of the following transactions,
record the journal entries and identify the fund or fund
subgroup in which each entry is recorded.
26
Exercise 19-8:
1. A transfer of $3,000,000 is made from the Endowment Fund (Term)
to the Unexpended Plant Fund.
Endowment Fund
Endowment fund balance 3,000,000
Cash 3,000,000
Unexpended Plant Fund

Cash 3,000,000
Fund Balance - Restricted 3,000,000
27
Exercise 19-8:
2. Construction is begun on the Political Science annex. Costs of
construction during the year amounted to $1,000,000, of which $30,000
remained unpaid at the end of the year. (The financial controller does
not record transfers to the Investment in Plant subgroup until a project
has been completed.)

Construction in process 1,000,000
Cash 970,000
Accounts payable 30,000
28
Exercise 19-8:
3. By the end of the following year, the annex is completed at an
additional cost of $2,100,000. All costs have been paid.

Construction in process 2,100,000
Accounts payable 30,000
Cash 2,130,000
Building 3,100,000
Work in process 3,100,000
29
Exercise 19-8:
3. By the end of the following year, the annex is completed at an
additional cost of $2,100,000. All costs have been paid.

Fund Balance - Restricted 3,000,000
Fund Balance Unrestricted 100,000
Building 3,100,000

30
Exercise 19-8:
4. The completed building is recorded in the Investment in Plant
subgroup.
Net Investment in Plant Fund

Building 3,100,000
Net investment in plant 3,100,000

31
Hospitals
• Property, plant and equipment (PP&E) transactions are
accounted for in the General Fund.
• Contributed resources restricted to acquire PP&E are
accounted for in a plant replacement and expansion
(restricted) fund.
– Upon expenditure, the assets acquired and the related
fund balance are transferred to the General Fund.

32
Voluntary Health and Welfare and ONNOs
• Single Plant Fund and report the fund balance in two
classifications:
– Expended Fund Balance is equal to the
organization’s net investment in PP&E.
• Net Investment = Gross assets less related
liabilities and accumulated depreciation.
– Unexpended Fund Balance represents the amount
of resources available to replace or acquire additional
PP&E.
LO 9 Funds used to account for PP&E. 33

Accounting for Endowment Funds
• Pure Endowment Fund - donated funds have been
given in perpetuity.
• Term Endowment Fund - donor has specified a
particular date or event after which the principal of the
endowment fund may be expended.
• Income from endowment funds generally may be
expended as earned either for specified purposes or at
the discretion of the governing board.
LO 10 Basic accounting by Endowment Funds.

34
• Exercise 19-7 (partial): Jefferson Hospital received
money from a donor to set up an endowment fund. The
following information pertains to this contribution.
Prepare the journal entries necessary to record the
events in the endowment fund.

35
Exercise 19-7 (partial): During 2015
1. $2,000,000 was received to establish the fund. The requirements were
(a) $100,000 of the endowment fund’s income must be used for research
grants each year. (b) The remainder of income is under the discretion of
the governing board. (c) The principal is expendable after the donor’s
death. It shall be used to purchase equipment.
Endowment Fund
Cash 2,000,000
Revenue Contribution - Restricted 2,000,000

36
2. The cash received was invested in a number of securities.
Endowment Fund
Investment 2,000,000
Cash 2,000,000

37
3. Dividends of $100,000 and interest of $300,000 were received.
Endowment Fund
Cash 400,000
Due to General Fund 300,000
Due to Specific Purpose Fund 100,000

38
4. The income was transferred to the appropriate funds.
Endowment Fund
Due to General Fund 300,000

Due to Specific Purpose Fund 100,000
Cash 400,000

39
8. The hospital was notified of the donor death.
Endowment Fund
Transfer to Plant Replacement and Expansion Fund 2,000,000
Cash 2,000,000

40
Accounting for Investments
• FASB ASC paragraph 958-320-35-1 requires NPOs to
report investments in equity securities with readily
determinable fair values and all debt securities at fair
value in unrestricted, temporarily restricted, or
permanently restricted net asset categories.
• Unrealized and realized gains and losses are to be
recognized in the Statement of Activities.
• To improve effectiveness and flexibility, NNOs often
pool investments of different funds into a single
portfolio.
LO 11 Equity Investments. 41
Accounting for Loan Funds
• Loans to:
– Students and staff of colleges and universities,
– Employees of hospitals, and
– Beneficiaries of the interests of certain ONNOs.
• Example: Loans to music students by symphony
orchestra societies.
LO 12 Accounting for loan funds.

42
Exercise 19-4: The following events relate to Grearson University Loan
Fund:
1. $100,000 is received from an estate to establish a faculty and student loan
fund. Annual interest rates range from 8% for students to 10% for faculty.
2. Loans to students totaled $60,000, and $40,000 was disbursed to faculty
members (of the total loans made, 10% are estimated to be uncollectible).
3. Grearson wrote off a $1,000 student loan as uncollectible.
4. The following loans were repaid.
Principal Interest
Faculty $ 5,000 $500
Student 10,000 800

43
transactions in the Loan Fund.
1. $100,000 is received from an estate to establish a faculty and student
loan fund. Annual interest rates range from 8% for students to 10% for
faculty.
Cash 100,000
Revenue – Contributions Restricted 100,000

44
transactions.
2. Loans to students totaled $60,000, and $40,000 was disbursed to
faculty members (of the total loans made, 10% are estimated to be
uncollectible).
Loans Receivable – Students 60,000
Loans Receivable – Faculty 40,000
Cash 100,000
Bad Debt Expense 10,000

Allowance for Uncollectible–Students 6,000
Allowance for Uncollectible–Faculty 4,000
45
transactions.
3. Grearson wrote off a $1,000 student loan as uncollectible.
Allowance for Uncollectible–Students 1,000


46
transactions.
4. The following loans were repaid.
Principal Interest
Faculty $ 5,000 $500
Student 10,000 800
Cash 16,300
Loans Receivable – Faculty 5,000
Interest Income 1,300
Accounting for Agency (Custodial)
Funds
• Use to account for assets held by NNO as custodian for
others.
• Unless significant amounts are involved, resources held
by an NNO as an agent for others are often accounted
for as assets and liabilities in the unrestricted or general
fund rather than in a separate agency fund.
48
Accounting for Annuity and Life Income
Funds
• Contribution to the organization on the condition that
the organization make annuity payments to a specified
recipient for a specified period of time (annuity fund)
or that the organization pay the income earned on the
contributed assets to a specified recipient during his or
her lifetime (life income fund).
• At the end of the annuity or on the death of the life
income beneficiary, the unexpended assets of the fund
are transferred to the unrestricted fund or to an
endowment fund, loan fund, plant fund, or other fund
specified by the donor.
LO 13 The use of an annuity fund. 49
Issues Relating to Colleges and Universities
• Recognition of Service Fee Revenue
• Operating versus Nonoperating Income
Issues Relating to Hospitals
 Charity care
 Contractual allowances
 Capitation revenues
 Malpractice
 Presentation of Bad Debts on the Statement of Operations
LO 14 Reporting issues of colleges, universities, and hospitals.50

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LO 1 The source of accounting standards.

LO 3 Basic funds used by NNOs. 7

Current Restricted Funds

Current unrestricted resources may be expended at the discretion of the

LO 4 Distinguish between restricted and unrestricted funds. 9

LO 4 Distinguish between restricted and unrestricted funds.

LO 5 Assets whose use is limited. 11

LO 4 Distinguish between restricted and unrestricted funds.

LO 6 Mandatory vs. nonmandatory transfers.

LO 7 How contributions are recorded. 14

LO 7 How contributions are recorded. 15

Pledges Receivable 1,000,000

Expense - Provision for Uncollectible Pledges 250,000

LO 7 How contributions are recorded. 17

Expense - Provision for Uncollectible Pledges 50,000

LO 7 How contributions are recorded. 18

LO 8 How donated services are recorded. 19

General Services Expense 5,500

LO 7 How contributions are recorded.

Unrestricted Current Fund

LO 9 Funds used to account for PP&E.

Unexpended Plant Fund

Unexpended Plant Fund

Unexpended Plant Fund

Unexpended Plant Fund

LO 9 Funds used to account for PP&E.

Net Investment in Plant Fund

LO 9 Funds used to account for PP&E.

LO 9 Funds used to account for PP&E.

LO 9 Funds used to account for PP&E. 33

LO 10 Basic accounting by Endowment Funds.

LO 10 Basic accounting by Endowment Funds.

LO 10 Basic accounting by Endowment Funds.

LO 10 Basic accounting by Endowment Funds.

LO 10 Basic accounting by Endowment Funds.

Due to General Fund 300,000

LO 10 Basic accounting by Endowment Funds.

Transfer to Plant Replacement and Expansion Fund 2,000,000

LO 10 Basic accounting by Endowment Funds.

LO 12 Accounting for loan funds.

LO 12 Accounting for loan funds.

LO 12 Accounting for loan funds.

Bad Debt Expense 10,000

Allowance for Uncollectible–Students 1,000

LO 12 Accounting for loan funds.

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