Private Nor-for-Profit

Entities (NPE): Colleges

and Universities,
Hospitals, VHWO and
other NPE
Learning Objectives
1. Discuss the conceptual framework
for NPE.
2. Account for the assets, liabilities,
equity, revenues and expenses of
NPOs.
3. Discuss the accounting principles
and reporting practices of NPE
Not-for-Profit Entities
 Receives contributions of significant amounts
of resources
 Operates for purposes other than to provide

goods or services
 Does not possess ownership interests like

those of business enterprise

Nongovernmental not-for-profit organizations

are NPE that lack the governmental element.
Not-for-Profit and Public Sector
Entities
 Examples:
1. Central government departments and
agencies
2. Local government departments
3. Publicly-funded bodies providing healthcare
and social housing
4. Public higher education institutions
5. Charitable entities
Conceptual Framework for NPE
 Accountability/Stewardship
 Users and User Groups
 Cash Flow Focus
 Budgeting
 Regulatory Framework
Characteristics of NPE
1. Private Sector –
 To provide goods and services to various recipients
and not to make a profit
 Characterized by the absence of defined ownership
interests sold, transferred or redeemed
 They may have a wide group of stakeholders to
consider
 Their revenues generally arise from contributions
rather than sales
 Their capital are typically acquired and held to deliver
services without the intention earning a return on
them
Characteristics of NPE
Public Sector –
 They are typically established by legislation

 They are characterized by the absence of defines

ownership interests that can be sold, transferred, or

redeemed.
 They typically have a wide group of stakeholders to

consider.
 Their revenue are generally derived from taxes or other

similar contributions obtained through exercise of

coercive powers
 Their capital assets are typically acquired and held to

deliver services without intention earning a return on them

 Accounting for NPE
 The full accrual basis of accounting is used in
accounting and reporting for all not-for
profits
 Accounting standards requires not-for-profit

organizations to provide financial statements

with organization-wide totals of assets,
liabilities and net assets as well as
information concerning organization wide
changes in net assets and cash flows.
Accounting for NPE – cont.
 Fund accounting continues to be used . Three
net assets classes – unrestricted, temporary
restricted, and permanent restricted - are
used instead of fund balances.
 These net assets classes provide a clear

distinction between resources that are

externally restricted and those that are
internally designated by action of the
governing board
 Fund Accounting
 NPE continue to use funds for internal control
and management.
 Fund accounting principles provide a

convenient method for segregating the

accounting records of resources restricted for
specific purposes.
 Financial Statements
Three financial statements that must be
presented:
1. The statement of financial position reports
the assets, liabilities, and net assets
(replaces owner’s equity or fund balance)
and must be classified as unrestricted,
temporarily restricted, or permanently
restricted
Financial Statements – cont.
2. The statement of activities and changes in
net assets reports revenue, expenses, gains,
and losses for the period.
revenues and expenses are determined
using the accrual basis of accounting, and
includes depreciation of fixed assets.
changes in each of these three classes of
net assets must be reported
Financial Statements – cont.
3. The statement of cash flows uses the standard
classifications of cash flows from operations,
investing activities, and financing activities.
cash flows from operating activities may be
presented by either the direct or indirect basis.

In addition to these 3 statements, voluntary health

and welfare organizations are required to
prepare a statement of functional expenses.
 Accounting for Contributions,
Revenues and Gains
Two major sources of revenues in NPE:
1. Contributions
2. Regular type of revenues such as tuition fee
for schools and universities, patient service
revenue for hospitals, membership dues,
sales of publications and supplies and
program service fees such as advising for
voluntary health and welfare organization
 Contributions/Donations
 They are unconditional transfers of cash or other
resources to an entity in a voluntary nonreciprocal
transaction and should be recognized as a general
rule as revenue in the period received at their fair
value.
 Cash
 Securities
 Land and buildings
 Non-cash items or gifts in kind such as free or
discontinued use of facilities or utilities donated
materials and supplies, intangible assets, and
services of unpaid workers
Donated/Contributed Services
NPE recognizes contributed services as revenue
but only if the service provided meets one of
two criteria:1. creates or enhances a
nonfinancial asset, or
Requires a specialized skill possessed by the
contributor that would typically need to be
purchased if not donated.
 Donated Works of Art
 NPE need not recognize contributed art works
of art, historical treasures, and similar assets
as contributions, if the donated items are:
 Held for public exhibition
 Protected
 Subject to an organizational policy that

requires proceeds from sales of collection

items to be used to acquire other items for
collecction.
Pledge (Promise to Give)
 Unconditional pledges – depend only on the
passage of time or the demands by the NPE
to be collected are recognized as a receivable
and revenue in the year made.
 Conditional pledges - depend on the

occurrence of a specified future and uncertain

evens and should be recognized as revenue
and receivables when the conditions are
substantially met.
 Contributions
 Other grants that just specify for support
research or community work and do not have
specific performance or rights to patents or
products may be reported as contributions.
Dues charged to members of NPE may have
characteristics of both contributions and exchange
transactions.
Resources received in exchange transactions are
classified as unrestricted revenues and unrestricted
net assets even if the resource provider limits use
of the resources
 Agency transactions
 An agency transaction is one in which assets
are transferred to the NPE but the NPE has
little or no discretion over the use of those
assets and the assets are passed on to a third
party
 Gifts in Kind
 Gifts in kin are noncash contributions, such
as clothing, furniture, and services.
 They are contributions if the NPE has

discretion over the disposition of the

resources.
 Organizations measure gifts in kind that are

contributions at fair value.

Colleges and
Universities
 Colleges and Universities
 The primary objective of a college or university is
to provide educational services to its
constituents.

 The objectives of college and university

accounting are:
1. To show the sources from which resources have
been received, and
2. To demonstrate how those resources have been
utilized in meeting educational objectives.
Colleges and Universities – cont.
The responsibilities of a not-for-profit
university may be classified as:
a. Academic function
b. The financial sphere
c. Student services
d. Public relations
Colleges and Universities – Major
Groups of Revenues
1. Educational and general revenues – such as
student tuition and fees, government
appropriations, government grants and
contract, gifts and private grants,
endowment income, and other sources
2. Auxiliary enterprise revenues
3. Expired term endowment revenues
Colleges and Universities –
Classification of Revenues
 Operating revenues
 Non-operating revenues
 Tuition and Fees
 Tuition an d Fee reimbursements for

withdrawals
Colleges and Universities - Expenses
Classifications :
 Educational and general expenses
• Instruction
• Research
• Public support
• Academic support
• Student services
• Institutional support
• Operation and maintenance of plant
• Student aid
 Auxiliary enterprise expense
Colleges and Universities -
Contributions
Contributions are defined as unconditional
transfers of cash and other assets to an entity
or a settlement or cancellation of its liabilities
in a voluntary nonreciprocal transfer.
Private colleges and universities recognize
contributions and unconditional promises to
give as revenues or gains in the period
received.
Colleges and Universities - Funds
Categories:
1. Current/operating funds
 current fund-unrestricted
 Current fund – restricted

2. Loan Funds – unrestricted and restricted loan funds

3. Endowment Funds and Similar Funds
 Pure or regular endowment fund
 Term endowment fund
 Quasi-endowment fund
4. Annuity and life Income Funds
5. Plant Funds
6. Agency Funds
Health Care Providers -
Hospitals
 Categories
1. Investor-owned health care entities
2. Government health care entities
3. Voluntary not-for-profit health care entities
 Funds
Classes of Funds:
1. General fund - unrestricted fund
 Assets whose use is limited
 Agency funds
 Property and equipment used for general operations
2. Donor-restricted funds – temporary and
permanently restricted resources
 Specific purpose fund
 Endowment fund
 Plant replacement and expansion fund
 Other donated-restricted funds
 Revenues and Gains
Revenue is reported in the period in which
services are rendered.
Revenues and gains may increase unrestricted
net assets, temporarily restricted net assets,
or permanently restricted net assets
 Operating Revenue
 Revenue is reported in the period in which
services are rendered.
 Operating revenues consist of
 patient service revenues,
 premium fees revenues, and
 other operating revenues such as resident service
revenues

Operating revenue of hospitals are reported on

an accrual basis
 Operating Expenses
Operating expenses of hospitals are reported
on an accrual basis.
Expenses may be reported on the face of the
financial statements using either a natural
classification or a functional classification.
Financial Statements of a Private
Health Care Provider - Hospital
1. Statement of activities
2. Statement of financial position
3. Statement of cash flows
Voluntary Health and Welfare
Organization (VHWO)
 VHWO
 - encompasses a diverse group of not-for-
profit entities that are supported by and
provide voluntary services to the public.
 Are entities that promote humanitarian

activities.
 VHWO depend more on donations, so the

wise utilization of these resources is of

special importance.
VHWO – Optional Fund Accounting

Temporarily Permanently
Unrestricted Restricted Restricted
Funds Net Assets Net Assets Net Assets
Current Unrestricted X
Current Restricted X X
Plant Fund (PPE) X X X
Endowment Fund X X
Agency (Custodian) Fund
VHWO – Classes of Funds
1. Current fund-unrestricted
2. Current fund - restricted
3. Land, Building, and Equipment Fund (or
Plant Fund)
4. Endowment Fund (Pure or Regular)
5. Agency (Custodian) Fund
VHWO - Accounting Principles and
Procedures
 Revenues are recorded using the full accrual
basis.
 Expenses are classified as program services

and supporting services and are reported on

a functional basis under these classifications
 Program services
 Supporting services
VHWO - Financial Statements
 Statement of financial position
 Statement of activities
 Statement of cash flows
 Statement of functional expenses
Other Not-for-Profit Entities
 Cemetery organizations
 Civic and fraternal organizations
 Fraternal organizations
 Labor unions
 Libraries
 Museums
 Other cultural arts
 Performing arts
 Political parties
 Private and community foundations
 Professional associations
 Public broadcasting stations
 Religious organizations
 Research and scientific organizations
 Social and country clubs
 Trade associations
 Zoological societies
 Botanical societies
 The End
Thank you
Colleges and Universities –

Source; advanced Financial Accounting by: Antonio J. Dayag