NON-PROFIT

ORGANIZATIONS
CHAPTER 16
ILLUSTRATION 5: INTERMEDIARY BETWEEN DONOR AND DONEE

An NPO is formed to help patients find donors of blood. The NPO is not a
blood bank and does not accept blood donations. Instead, the NPO
maintains a list of blood banks that are interested in accepting and
providing blood donations. The blood banks determine how they can serve
the referred patients.
During the period, the NPO helped several patients get blood donations
from blood banks. Without the referrals, the patients would have spent
1,000,000.
REQUIREMENT: HOW MUCH IS THE NPO’S CONTRIBUTION REVENUE?

NONE
ILLUSTRATION 6: ENDOWMENTS
On January 1, 20x1, an NPO receives 100,000 cash donation under a “charitable remainder annuity trust
agreement” with the following provisions:
 The NPO is the designated trustee who undertakes to invest the cash donation and make annual year-end
payments of 5,000 to Mr. A, the annuitant, for the remainder of his life.
 Upon death of Mr. A, the NPO may use its remainder interest for any purpose consistent with its mission.
Per actuarial valuation, the appropriate discount rate is 10% and the annuitant’s life expectancy is 5 years.

REQUIREMENT: PREPARE JOURNAL ENTRY ON JANUARY 1, 20X1.

1/1/20x1 CASH 100,000

ANNUITIES PAYABLE 18,954
CONTRIBUTIONSREVENUE 81,046
(temporarily restricted support)

• (5,000xPV of ordinary annuity of 1 @10%, n=5) 18,954

• (100,000 – 18954= 81,046)
DEFERRAL METHOD OF RECOGNIZING CONTRIBUTIONS
Under “deferral method” restricted contributions are initially recognized as liability and recognized as
revenue in the same period where the related expenditures, for which the contributions were intended to
reimburse, are incurred.

ILLUSTRATION:
ON FEBRUARY 15, 20X1, AN NPO RECEIVES 2,000,000 CASH DONATION CONDITIONED ON THE
ACQUISITION OF A TRUCK.
Feb. 15, 20x1 Cash 2,000,000
Deferred revenue 2,000,000

THE NPO ACQUIRES A TRUCK FOR 2,000,000 ON JANUARY 1, 20X2. THE TRUCK WILL BE
DEPRECIATED OVER A 10 YEAR USEFUL LIFE USING THE STRAIGHT-LINE METHOD.
Jan. 1, 20x2 Transportation equipment – truck 2,000,000
Cash 2,000,000
Dec. 31, Depreciation Expense (2M 200,000
20x2 Accumulated depreciation 200,000

Dec. 31, Deferred revenue 200,000

20x2 Contributions revenue 200,000
FINANCIAL STATEMENTS
Complete set of general-purpose financial statements of NPO

PFRs SFAS No. 117

 Statement of financial position  Statement of financial position

 Statement of activities  Statement of activities

 Statement of cash flows  Statement of cash flows

 Notes  Notes
CLASSIFICATION OF NET ASSETS

[Link] NET ASSETS

[Link] RESTRICTED NET
ASSETS
[Link] RESTRICTED NET
ASSETS
EXPENSES
A STATEMENT OF ACTIVITIES SHALL REPORT EXPENSES AS DECREASE
IN UNRESTRICTED NET ASSETS.

FUNCTIONAL CLASSIFICATIONS:

[Link] SERVICES – RESULTING IN GOODS AND SERVICES

BEING DISTRIBUTED TO BENEFICIARIES, CUSTOMERS, OR
MEMBERS THAT FULFILL THE PURPOSE FOR WHICH THE
ORGANIZATION EXIST.
[Link] ACTIVITIES – INCLUDES MANAGEMENT AND
GENERAL, FUND-RAISING, AND MEMBERSHIP-DEVELOPMENT
ACTIVITIES.
Illustration: Functional classification of expenses

An NPO had the following expenses during the year:

Administrative salaries 50,000
Work to help elderly citizens 150,000
fund- raising costs 25,000
Child care services provided for indigent families 140,000

EXPENSES ARE CLASSIFIED ACCORDING TO FUNCTIONS:

Program Support
Administrative salaries 50,000
Work to help elderly citizens 150,000
Fund- raising costs 25,000
Child care services provided for indigent
families 140,000
290,000 75,000
STATEMENT OF CASH FLOWS
 Using the direct and indirect method
 Donor restriction are classified as financing activities.

ILLUSTRATION:
AN NPO HAD THE FOLLOWING CASH FLOWS DURING THE YEAR:
a. 50,000 UNRESTRICTED CONTRIBUTIONS.
b. 600,000 FROM FUNDRAISING ACTIVITIES TO SUPPORT CURRENT OPERATIONS.
c. 100,000 FROM A DONOR WHO STIPULATED THAT THE MONEY BE SPENT IN ACCORDANCE WITH THE WISHES OF
THE NPO’S GOVERNING BOARD.
d. 200,000 CASH DIVIDENDS RESTRICTED FOR THE PURCHASE OF EQUIPMENT.
e. 200,000 ON ACQUISITION OF EQUIPMENT USING CASH DIVIDENDS ABOVE.
f. 300,000 FROM A DONOR WHO STIPULATED THAT THE CONTRIBUTION BE INVESTED INDEFINITELY. INCOME
FROM THE CONTRIBUTION MAY BE USED IN FURTHERANCE OF THE NPO’S MISSION.

REQUIREMENT: PRESENT THE ITEMS ABOVE IN A STATEMENT OF CASH FLOWS.

0PERATING ACTIVITIES
UNRESTRICTED CONTRIBUTIONS 50,000
FUNDRAISING ACTIVITIES TO SUPPORT CURRENT OPERATIONS 600,000
UNRESTRICTED CONTRIBUTIONS – FOR BOARD- DESIGNATION 100,000
NET CASH FLOWS FROM OPERATING ACTIVITIES 750,000

INVESTING ACTIVITIES
ACQUISITION ON EQUIPMENT (200,000)

FINANCING ACTIVITIES
CASH DIVIDENDS RESTRICTED FOR ACQUISITION OF EQUIPMENT 200,000
PERMANENTLY RESTRICTED CONTRIBUTION 300,000
NET CASH FLOWS FROM FINANCING ACTIVITIES 500,000

TOTAL NET CASH FLOWS DURING THE PERIOD 1,050,000

ACCOUNTING PROCEDURES PECULIAR TO SPECIFIC TYPES OF NPOS
[Link] CARE ORGANIZATIONS
- Includes hospitals, clinics, medical group practices, individual practice associations,
individual practitioners, emergency care facilities, laboratories, surgery centers, other
ambulatory care organizations, continuing care retirement communities, health maintenance
organizations, home health agencies, nursing homes, and rehabilitation centers.
FINANCIAL STATEMENTS OF A HEALTH CARE ORGANIZATION
A. STATEMENT OF FINANCIAL POSITION
B. STATEMENT OF OPERATIONS
C. STATEMENT OF CHANGES IN NET ASSETS
D. STATEMENT OF CASH FLOWS
E. NOTES O FINANCIAL STATEMENTS
 PRESENTATION OF REVENUES IN THE
STATEMENT OF OPERATIONS

Revenues are classifies as follows:

a. Net patient revenue – gross patient service revenue less
contractual adjustments, employee discounts and billed charity
care.
b. Premium revenue – capitation agreements
c. Other revenues – all other revenue not classifiable as net
patient revenue
CONTRACTUAL ADJUSTMENTS
- THE DIFFERENCE BETWEEN WHAT THE HOSPITAL CONSIDERS A FAIR
PRICE FOR A SERVICE RENDERED VERSUS AN AGREED UPON AMOUNT FOR
THE SERVICE WITH THE INSURANCE COMPANY.

EMPLOYEE DISCOUNTS
- ACCOUNTED FOR AS DIRECT REDUCTION TO PATIENT SERVICE REVENUE.

CHARITY CARE
- PERTAINS TO FREE SERVICES RENDERED TO PATIENTS.
- NOT RECOGNIZED BUT RATHER DISCLOSED ONLY IN THE NOTES.
ILLUSTRATION: NET PATIENT SERVICE REVENUE
ABC HOSPITAL AN NPO, BILLS 600,000 RENDERED TO PATIENTS, 500,000 OF WHICH IS
CHARGED TO PHILHEATH. IT IS ESTIMATED THAT ONLY 530,000 WILL BE COLLECTED. OF THE
70,000 DIFFERENCE, 35,000 REPRESENT CONTRACTUAL ADJUSTMENTS WITH PHILHEALTH,
5,000 FOR EMPLOYEE DISCOUNTS. 20,000 FOR CHARITY CARE, AND 10,000 FOR
UNCOLLECTIBLE ACCOUNTS.

REQUIREMENT: HOW MUCH IS THE NET PATIENT SERVICE REVENUE?

GROSS PATIENT SERVICE REVENUE 600,000

LESS: CONTRACTUAL ADJUSTMENTS 35,000
EMPLOYEE DISCOUNTS 5,000
CHARITY CARE 20,000
NET PATIENT SERVICE REVENUE 540,000
JOURNAL ENTRIES:
Accounts receivable- patients 100,000
Accounts receivable- PhilHealth 500,000
Patient service revenue 600,000
to accrue patient service revenue

Patient service revenue 35,000

Accounts receivable- PhilHealth 35,000
to recognize the contractual adjustments representing amounts not
expected to be collected from PhilHealth

Patients service revenue 5,000

Accounts receivable- patients 5,000
to reduce patient service revenue for special discounts allowed to
employees

Patient service revenue 20,000

Accounts receivable- patients 20,000
to reduce patient service revenue for charity care

Bad debt expense 10,000

Allowance for doubtful accounts 10,000
to accrue uncollectible accounts
CAPITATION AGREEMENTS
- ARE AGREEMENTS WITH THIRD PARTIES BASED ON THE NUMBER OF EMPLOYEES
INSTEAD OF SERVICES RENDERED.

ILLUSTRATION: CAPITATION AGREEMENT

ABC HOSPITAL, AN NPO, AGREED TO PROVIDE MEDICAL SERVICES TO XYZ’S 100
EMPLOYEES FOR 500 PER MONTH, PER EMPLOYEE. IN APRIL 20X1, ONLY 20 EMPLOYEES
AVAILED OF THE MEDICAL SERVICES.
April 30,20x1
Accounts receivable 50,000
Premium revenue 50,000
REQUIREMENT: JOURNAL ENTRIES
to accrue billings TO
for the RECOGNIZE
month of April 20x1REVENUE FROM THE CAPITATION
under the capitation agreement.
AGREEMENT.
OTHER REVENUES:
- REVENUES FROM THE HOSPITAL’S PHARMACY, DONATED MATERIALS AND SERVICES.
ILLUSTRATION:
ABC HOSPITAL, AN NPO, HAD THE FOLLOWING TRANSACTIONS DURING THE PERIOD:
a. SALES OF 120,000 FROM GIFT SHOP AND CAFETERIA.
b. RECEIVED 20,000 DIVIDENDS FROM DONATED SHARES. THE USE OF THE DIVIDEND IS UNRESTRICTED.
c. A COMPUTER CONSULTANT UPGRADED ABC’S INFORMATION SYSTEM FOR FREE. ABC WOULD HAVE PAID 50,000 FOR
THOSE SERVICES IF THEY HAD NOT BEEN DONATED.
d. RECEIVED DONATIONS OF MEDICINES WORTH 10,000 FROM A PHARMACEUTICAL COMPANY.

REQUIREMENT: COMPUTE FOR THE TOTAL OTHER REVENUES TO BE PRESENTED IN ABC’S STATEMENT OF
OPERATIONS FOR THE PERIOD.
SALES FROM GIFT SHOP AND CAFETERIA 120,000
DIVIDENDS RECEIVED 20,000
PROFESSIONAL SERVICES RECEIVED 50,000
DONATED SUPPLIES 10,000
OTHER REVENUES 200,000
PRESENTATION OF CONTRIBUTIONS IN THE STATEMENT OF OPERATIONS
 Unlike for other NPOs, health care organizations do not present restricted contribution on the statement of operations as part
of revenues.
 The revenues above, pertain only to unrestricted revenues and may include revenues from unrestricted contributions.
 Revenues from restricted contributions are presented separately at the bottom part of the statements of operations after
unrestricted rev. And expense.
ILLUSTRATION: RESTRICTED CONTRIBUTIONS
ABC HOSPITAL, AN NPO, HAD THE FOLLOWING RECEIPTS DURING THE YEAR.
NET PATIENT REVENUES 1,000,000
PREMIUM REVENUE 200,000
SALES FROM CANTEEN 300,000
INVESTMENT INCOME 50,000
CONTRIBUTIONS TO BE USED IN RENOVATING THE HOSPITAL 400,000

REQUIREMENT: HOW MUCH IS REPORTED AS TOTAL REVENUE?

 1,550,000
PRIVATE, NON-PROFIT, COLLEGES AND UNIVERSITIES
 THE ACCOUNTING PROCEDURES THAT IS UNIQUE TO PRIVATE, NON-PROFIT, COLLEGES AND UNIVERSITIES IS
THE ACCOUNTING FOR SCHOLARSHIPS.

A. FREELY – direct reduction from tuition and fees

B. COMPENSATION – expense

C. REFUNDS – direct reduction of revenues from tuition and fees

ILLUSTRATION: NET REVENUES FROM TUITION AND FEES

FOR THE CURRENT SEMESTER, ABC UNIVERSITY, AN NPO, ASSESSED ITS STUDENTS 1,000,000 TUITION AND FEES.
ADDITIONAL INFORMATION FOLLOWS:
STUDENTS SCHOLARSHIPS GRANTED TO ACADEMIC SCHOLARS 50,000
STUDENTS SCHOLARSHIPS GRANTED TO STUDENT ASSISTANTS 120,000
REFUNDS FOR CLASS CANCELLATIONS AND WITHDRAWALS OF ENROLMENT 20,000
ESTIMATED UNCOLLECTIBLE ACCOUNTS 80,000

REQUIREMENT: HOW MUCH IS THE NET REVENUES FROM TUITION AND FEES?
TOTAL ASSESSMENT OF TUITION AND FEES 1,000,000
STUDENT SCHOLARSHIPS GRANTED TO ACADEMIC SCHOLARS
(50,000)
REFUNDS FOR CLASS CANCELLATIONS
(20,000)
AND WITHDRAWALS OF ENROLMENT
NET REVENUES FROM TUITION AND FEES 930,000

Voluntary Health and Welfare Organizations

- are non profit entity that derive their revenues primarily from
donations from the general public to be used for purposes connected
with health, welfare, or community services.