Week 11: Unique Aspects of

Accounting – Non-Profit and

Healthcare Organizations
Public Health Accounting and Budgeting
Lili Elkins-Thompson
Accounting for Non-Profit
Organizations
• According to GAAP, a nonprofit is an entity that:
▫ Receives contributions from providers who do not
expect an equal return
▫ Has goals other than providing goods and services
for a profit
▫ Has an absence of ownership interest
• GAAP has a class of non-profits, Voluntary
Health and Welfare Organizations – these have
their own rules
Statement of Financial Position
 Not-for-profit organizations do not have to segregate
assets and liabilities into current and long term. But they
must either:
- show assets in order of declining liquidity, or
- disclose relative liquidity in the notes to the financial
statements.

Financial Management for Public, Health, and Not-for-Profit Organizations, 4th Ed. © Pearson Education 2013
 Meals for the Homeless
Statement of Financial Position As of Dec.31, 2013

ASSETS LIABILITIES AND NET ASSETS

Cash $ 100 LIABILITIES
Marketable Securities 3,000 Wages Payable $ 2,000
Accounts Receivable, Net 55,000 Accounts Payable 2,000
Inventory (LIFO basis) 2,000 Notes Payable 6,000
Prepaid Expenses 1,000 Mortgages Payable 16,000
Property 40,000 Total Liabilities $26,000
Cash Restricted for Building Acquisition 900
Equipment, Net 35,000 NET ASSETS

Investments 8,000 Unrestricted $84,100

Temporarily Restricted 4,900
Permanently Restricted 30,000
Total Net Assets $119,000

Total Assets $145,000 Liabilities and Net Assets $145,000

Financial Management for Public, Health, and Not-for-Profit Organizations, 4th Ed. © Pearson Education 2013
Statement of Financial Position – Fund
Accounting
 Not-for-profit organizations must segregate assets that are subject to
donor imposed restrictions.

- Fund accounting tracks each restricted pool of assets in a

separate entity.
- Each fund must have its own financial statements (presenting only
information for the fund) and then rolled up into organizational docs.
- Restricted funds may not be commingled for operating
purposes but are for reporting purposes. Only assets not
available for current use are segregated for reporting.

 Net Assets must be divided into unrestricted, temporarily restricted,

and permanently restricted categories.

 Self-Imposed restrictions may also be shown.

Financial Management for Public, Health, and Not-for-Profit Organizations, 4th Ed. © Pearson Education 2013
Rule for Comingling of Funds
• Key question: can the funds be used for current
operations
• If yes, they can be comingled on the balance
sheet.
• If funds are not comingled, they are shown as
part of the organization’s long-term assets.
Other Implications of Restrictions on
Uses of Net Assets
• Net Assets Section of the Balance Sheet must be
divided into three sections:
▫ Permanently restricted
▫ Temporarily restricted
▫ Unrestricted
• Generally notes are included with financial
statement explaining what is in each category
• Self Imposed Restrictions do not have the same
rules as donor imposed restictions
 Meals for the Homeless
Statement of Financial Position As of Dec.31, 2013

ASSETS LIABILITIES AND NET ASSETS

Cash $ 100 LIABILITIES
Marketable Securities 3,000 Wages Payable $ 2,000
Accounts Receivable, Net 55,000 Accounts Payable 2,000
Inventory (LIFO basis) 2,000 Notes Payable 6,000
Prepaid Expenses 1,000 Mortgages Payable 16,000
Property 40,000 Total Liabilities $26,000
Cash Restricted for Building Acquisition 900
Equipment, Net 35,000 NET ASSETS

Investments 8,000 Unrestricted $84,100

Temporarily Restricted 4,900
Permanently Restricted 30,000
Total Net Assets $119,000

Total Assets $145,000 Liabilities and Net Assets $145,000

Financial Management for Public, Health, and Not-for-Profit Organizations, 4th Ed. © Pearson Education 2013
 9

Illustrating Self-Imposed Restrictions

on a Balance Sheet
• Net Assets
▫ Unrestricted
 Board-Designated $8,000
 Undesignated $76,100
▫ Total Unrestricted $84,100
▫ Temporarily Restricted (Note 3) $4,900
▫ Permanently Restricted (note 4) $30,000
• Total Net Assets $119,000
Sample Balance Sheet for Nonprofit
FY 12 FY 13 FY14 FY 15
Assets
Cash 1,583,508 2,363,667 2,692,967 2,775,124
Accounts Receivable 2,532,802 4,077,066 4,680,549 4,500,000
Prepaid Assets 77,146 950,000 1,000,000 1,000,000
Future Fund (Quasi-Endowment) 4,208,288 4,500,000 4,650,000 5,000,000
Investments 1,357,027 1,500,000 1,700,000 1,800,000
Fixed Assets 924,534 839,534 1,869,534 3,789,534
Total Assets 10,683,305 14,230,267 16,593,050 18,864,658

Liabilities and Net Assets

Liabilities:
Accounts Payable 119,747 130,000 150,000 250,000
Accrued Liabilities 270,068 320,000 350,000 450,000
Total Liabilities 389,815 450,000 500,000 700,000

Net Assets
Unrestricted:
Operating 249,640 589,640 510,000 545,000
Book Value Fixed Assets 924,534 839,534 1,869,534 3,789,534
Board Reserved 740,959 500,000 500,000 500,000
Quasi - Endowment 4,245,945 4,500,000 4,650,000 4,750,000
Operating Reserve 1,500,000 2,163,676 3,314,095 3,753,828
Total Unrestricted 7,661,078 8,592,850 10,843,629 13,338,362
Temporarily Restricted - Capital 2,000,000 2,000,000
Temporarily Restricted - Operations 2,632,412 5,187,417 3,249,421 2,826,296
Total Net Assets 10,293,490 13,780,267 16,093,050 18,164,658
Total Liabilities & Net Assets 10,683,305 14,230,267 16,593,050 18,864,658
Change in Net Assets 3,486,777 2,312,783 2,071,608
Statement of Activities
 Revenues and support are shown as increases in unrestricted
net assets unless there are donor-imposed restrictions.
 Expenses are reported as decreases in unrestricted net assets.
Expenses must be reported separately from revenues. Netting is
generally not permitted.
 Gains and Losses on Investments are shown as changes in
unrestricted net assets unless specific donor-imposed restrictions
prohibit their use.
 As donor restrictions expire, donations become unrestricted
support.

Financial Management for Public, Health, and Not-for-Profit Organizations, 4th Ed. © Pearson Education 2013
 Temporarily Permanently
Unrestricted Restricted Restricted Total
Revenues and Support
Client Revenue $ 11,000 $ 11,000
City Revenue 20,000 20,000
County Revenue 10,000 10,000

Meals for Foundation Grants 60,000 $ 10,000 70,000

Annual Ball 12,000 12,000
the Contributions 65,000 5,000 $ 3,000 73,000
Homeless Total Revenue and Support $178,000 $ 15,000 $ 3,000 $196,000
Activity Net Assets Released from Restrictions
Statement Satisfaction of Program Restrictions $ 10,000 $ (10,000)
For the Expiration of Time Restrictions 2,000 (2,000)

Year Total Net Assets Released from Restrictions $ 12,000 $ (12,000) $ 0 $ 0

Total Unrestricted Revenues and Other Support $190,000 $ 3,000 $ 3,000 $196,000
Ending Expenses
December Meals $ 67,000 $ 67,000

31, 2013 Counseling 35,000 35,000

Administration, Fund Raising and General 75,000 75,000
Bad Debts 4,000 4,000
Depreciation 10,000 10,000
Total Expenses $191,000 $ 0 $ 0 $191,000
Increase/(Decrease) in Net Assets $ (1,000) $ 3,000 $ 3,000 $ 5,000
Net Assets at Beginning of Year 85,100 1,900 27,000 114,000
Net Assets at End of Year $ 84,100 $ 4,900 $ 30,000 $119,00012
Financial Management for Public, Health, and Not-for-Profit Organizations, 4th Ed. © Pearson Education 2013
 Changes in Unrestricted Net Assets
Revenues and Support
Client Revenue $ 11,000
City Revenue 20,000
County Revenue 10,000
Meals for the Foundation Grants 60,000
Homeless Annual Ball 12,000
Activity Contributions 65,000
Statement For Total Revenue and Support $ 178,000
the Year Ending Net Assets Released from Restrictions
December 31, Satisfaction of Program Restrictions $ 10,000

2013 Expiration of Time Restrictions 2,000

Total Net Assets Released from Restrictions $ 12,000
Total Unrestricted Revenues and Other Support $ 190,000
AN Expenses
ALTERNATIVE Meals $ 67,000
PRESENTATION Counseling 35,000
Administration, Fund Raising and General 75,000
Bad debts 4,000
Depreciation 10,000
Total Expenses $ 191,000
Increase/(Decrease) in Unrestricted Net Assets $ (1,000)
Financial Management for Public, Health, and Not-for-Profit Organizations, 4th Ed. © Pearson Education 2013 13
 Change in Temporarily Restricted Net Assets
Activity Foundation Grants $ 10,000
Statement
Contributions 5,000

ALTERNTIVE Assets Released from Restrictions (note 5) (12,000)

PRESENTATION Increase/(Decrease) in Temporarily Restricted Net Assets $ 3,000
CONTINUED… Changes in Permanently Restricted Net Assets
Contributions $ 3,000
Increase/(Decrease) in Permanently Restricted Net Assets $ 3,000
Increase/(Decrease) in Net Assets $ 5,000
Net Assets at Beginning of Year 114,000
Net Assets at End of Year $119,000

14
Financial Management for Public, Health, and Not-for-Profit Organizations, 4th Ed. © Pearson Education 2013
Statement of Functional Expenses
 Functional Expenses must be presented either in the activity
statement or the notes for all NFP organizations.

 Voluntary health and welfare organizations (VHWOs) must

report information by both function and nature in a separate
Statement of Functional Expenses.

 Columns two and three represent program services. What are

program services?

 Columns four and five show support services expenses. Why is it

important to separate support services from program services?

Financial Management for Public, Health, and Not-for-Profit Organizations, 4th Ed. © Pearson Education 2013
 Meals for the Homeless
Statement of Functional Expenses
For the Year Ending December 31, 2013
Program Services Support Services
EXPENSES Meals Counseling G&A Fund Raising Total
Salaries and Benefits $35,000 $35,000 $40,000 $17,000 $127,000
Food 17,000 17,000
Supplies and Brochures 2,000 1,000 1,000 2,000 6,000
Office Expenses 1,000 1,000 1,000 3,000 6,000
Rent 14,000 1,000 2,000 1,000 18,000
Professional Fees 3,000 3,000
Bad Debts 4,000 4,000
Depreciation 10,000 ________ _______ _______ 10,000
Total Expenses $83,000 $38,000 $47,000 $23,000 $191,000

This statement is required only for VHWO organizations.

Financial Management for Public, Health, and Not-for-Profit Organizations, 4th Ed. © Pearson Education 2013
Statement of Cash Flows
• Nonprofits must provide statements of cash flows
▫ Must distinguish between cash that has been received
and is available for current operations and cash that is
restricted in the Cash Flows from Operating Activities
section
 If donations are made that are restricted to long-term
investments or permanently restricted investments, they
must be removed from the statement of “Cash Flows for
Operating Activities of the Statement of Cash Flows” and
moved to the “Cash Flows from Financing Activities
Section”
 18

Required Statements…
General For Health Care Orgs. General Not-for Voluntary Health
Profit Profit Orgs. and Welfare
Orgs. Orgs.
Statement of Statement of Statement of Statement of
Financial Position Financial Position Financial Position Financial Position
(Balance Sheet) (Balance Sheet) (Balance Sheet) (Balance Sheet)

Income Statement Operating Statement of Statement of

or Profit and Loss Statement Activities* Activities*
Statement
Changes in Equity Changes in Equity
Statement of Cash Statement of Cash Statement of Cash Statement of Cash
Flows Flows Flows Flows
Statement of
Functional Expenses
Notes Notes Notes Notes
*Note: The statement of activities combines the information contained in the income statement and the
statement of changes in equity.
More on Fund Accounting
 Fund accounting separates the organization into a number of
distinct entities called funds (not used for reporting, which
presents the organization as a whole).
- Unrestricted funds are used to account for day-to-day
operations.
- Restricted funds correspond to pools of assets given to the
organization by donors who have restricted their use in some way.
- In endowment funds organizations are generally only
allowed to use the earnings on the endowment for operating
purposes.
- Custodial funds are those being held for another entity.
- Board designated funds contain resources that have been
internally restricted for some special purpose. For reporting
purposes, these funds are unrestricted.

Financial Management for Public, Health, and Not-for-Profit Organizations, 4th Ed. © Pearson Education 2013
Interfund Transactions
• Loans
▫ Loans between funds are treated the same as loans
between the organization and a bank
▫ Borrowing fund has a liability on its balance sheet
reflect the need to repay the loan (Due To)
▫ Lending fund has a receivable (Due From)
• Sale of Services
• Transfer of Resources
Interfund Transactions
 Interfund transactions reflect the fact that each of the internal
funds is an independent entity.
 Interfund Loans: Suppose the operating fund borrows $1,000
from the building fund.
Assets = Liabilities + Net Assets

Operating Fund
Due to Building
Cash + $1,000 = Fund + $1,000 + No Change
Building Fund
Cash - $1,000
Due from
Op Fund + $1,000 = No Change + No Change
 There is no net change for the organization as a whole.

Financial Management for Public, Health, and Not-for-Profit Organizations, 4th Ed. © Pearson Education 2013
Interfund Transactions
 Interfund Sales: When two internal funds engage in purchase or
sale transactions they use “accounts receivable” and “accounts
payable” rather than “due to” and “due from” accounts.
 Suppose that HOS contracts with its nursing school to provide
$5,000 worth of continuing education services to its nurse
managers. How would that be recorded?
Assets = Liabilities + Net Assets
Nursing School Operating Fund
A/R + $5,000 = No Change + Tuition Revenue $5,000

HOS Operating Fund

No Change = A/P + $5,000 - Tuition expense $5,000

 Notice that there is no net change for HOS as a whole.

Financial Management for Public, Health, and Not-for-Profit Organizations, 4th Ed. © Pearson Education 2013
 Donated Goods and Services
 Contributions, gifts, and donations are recorded at fair market value
at the time of donation.
 Personal Services are recorded as both support and an expense if:
- they create or enhance nonfinancial assets (e.g. equipment), or
- the services require specialized skill, are provided by individuals
with those skills, and they would typically need to be purchased
if they were not donated.

 Which of the following services would be recorded as support and

an expense? Why?
- A parent who transports children to a school soccer match?
- A corporate CEO who makes fundraising calls?
- A plumber who installs a new gas stove?

Financial Management for Public, Health, and Not-for-Profit Organizations, 4th Ed. © Pearson Education 2013
Investments
• Investments in stocks and bonds are reported at their
market value (whether that is higher or lower than the
cost)

• Gains or Losses, both realized and unrealized, on

investments are shown in the activity statement
▫ A realized gain or loss is one that results in the sale of an
asset during the accounting period
▫ An unrealized gain or loss results from the change in the
value of an asset that is still owned by the organization – it
may change again in the future

• This rule forces organization s to report increases or

decreases in the value of their securities portfolio, even
though the securities have not been sold.
Changes in Value of an Endowment

• The principal amount of a permanent

endowment is permanently restricted
• Gains from endowment income are unrestricted
income
• Losses to endowments are treated as
unrestricted losses
• The value of the permanently restricted net asset
does not change.
Taxes
 Not-for-Profit Organizations are generally exempt from federal
income taxes.
 They are also often exempt from property taxes and sales taxes.
(Determined by local government.)
 Not exempt from payroll taxes.
 The Unrelated Business Tax—income tax on profits from activities
that compete with for-profit organizations. For example:
 No tax on an inpatient pharmacy profits in a hospital, but hospital must
pay tax on profits from its outpatient pharmacy that competes with private
for-profit pharmacies.
 Impact on New York City Fiscal Crisis in the 1970’s, Impact on cities today
 Growing pressure to tax all NFP organization profits.
 Separation of church and state issues.
 Failure to provide sufficient charitable benefit to society issue.
 Payments in lieu of taxes – may provide services to community in
lieu of taxes due (often around property taxes)

Financial Management for Public, Health, and Not-for-Profit Organizations, 4th Ed. © Pearson Education 2013
Special Health Care Rules

 Balance Sheet

- Health care organizations must show current and

noncurrent assets separately.

- They must establish “reserves” (liabilities) for the likely

amount of any future adjustments to amounts billed to
third-party payers.

- Not-for-profit health care organizations use NFP reporting

of Net Assets divided into unrestricted, temporarily
restricted, and permanently restricted net assets.

Financial Management for Public, Health, and Not-for-Profit Organizations, 4th Ed. © Pearson Education 2013
Special Health Care Rules
Operating Statement (Not Called Activity
Statement)

- Revenues are reported net of contractual allowances

and charity care. They represent the amount that the
organization is entitled to collect.

- Bad debts are reported as an expense. Charity care is

not included as a bad debt expense.

- If material, charity care amounts must be disclosed

separately in the notes.

Financial Management for Public, Health, and Not-for-Profit Organizations, 4th Ed. © Pearson Education 2013