CHAPTER 16

NON-PROFIT ORGANIZATION
Introduction 
Although the IFRSs/PFRSs are designed to apply to business entities, they can also be
applied to non-profit organizations. This is evidenced by the following excerpts from the
IFRSs/PFRSs: 

 IFRSs are designed to apply to the general purpose financial statements and
other financial reporting of profit-oriented entities. Although the IFRSs are not
designed to apply to not for-profit activities, entities with such activities may find
them appropriate." (Preface to IFRSs.9) 
  PAS 1 Presentation of Financial Statements uses terminology that is suitable for
profit-oriented entities. If entities with not-for-profit activities apply PAS 1, they
may need to amend the descriptions used for particular line items in the
financial statements and for the financial statements themselves. (PAS 1.5) 
 IFRSs generally do not have scope limitations for not-for-profit activities.
Although IFRSs are developed for profit oriented entities, a not-for-profit entity
might be required, or choose, to apply IFRSs. (IFRS 3 Business
Combinations. BC63) 

As can be inferred from the foregoing statements PERSs can be applied to all reporting 
to all reporting entities regardless of their form (i.e., sole proprietorship, partnership,
corporation or cooperative) and purpose (i.e., for-profit or not-for-proni Accordingly,
most of the concepts that we will be learning in this Chapter would be very familiar to
you. 
However, just like in the case of accounting for sole proprietorships, partnerships,
corporations and cooperatives, the accounting for non-profit organizations differs in
respect of accounting for equity. 

Current trend in practice 

In practice, the accounting for non-profit organizations is essentially similar to the
accounting for businesses. The notable differences are the terminologies used in the
financial statements, which are modified to suit the non-profit organization's purpose,
and the presentation and disclosure of equity. 
Non-profit organizations in the private sector are normally organized as non-
stock, non-profit corporations. As such, they are required to file audited annual financial
statements to the Securities and Exchange Commission (SEC). In most cases, the
auditors' reports in these financial statements state an opinion on the organization's
compliance with the PFRSs (or IFRSs, for international organizations). 
Since the PFRSs do not provide specific guidance on the accounting for non-
profit organizations, many non-profit organizations resort to the exemptions provided
under PAS 8 Accounting Policies, Changes in Accounting Estimates and Errors
(i.e., 'hierarchy of financial reporting standards'). For example, in cases where the
PFRSs are silent regarding the accounting treatment for or financial statement
presentation of, a transaction peculiar to non-profit organizations, the organization may
refer to the general guidelines set forth under the Conceptual Framework. 

Characteristics of a non-profit organization 

 Non-profit organization (NPO) - (also called not-for-profit entity NEP' or
noncommercial organization 'NCO') is one that carries out some socially
desirable needs of the community or its members and whose activities are not
directed towards making profit. 

The main objective of NPOs may be educational, religious, social, cultural or

charitable. NPOs may be in the form educational institutions, hospitals and other health
care providers, religious institutions, professional bodies, sports, social or literary dubs,
and other forms of charitable institutions. 
NPOs earn revenues sufficient to cover their expenses. A major portion of these
revenues are derived from charitable donations and other fundraising activities. Surplus
revenues do not inure to the benefit of a particular individual or group of individuals but
rather retained in furtherance of the organization's mission. Accordingly, none of the
surplus revenues are distributed as dividends. 
Because NPOs carry out their activities in the interest of the society and without
the intention of making profit, NPOs are usually exempt from income taxation. 

PFRS principles applicable to NPOs 

As stated earlier, the recognition, measurement, derecognition, presentation and
disclosure requirements of the PFRSs can be applied to NPOs. Examples are
provided below: 
 Recognition criteria for assets and liabilities: 
a. Meets the definition of an asset or liability; 
b. Probable inflow or outflow of resources; and
c. Reliable measurement of cost or other value (e.g., fair value). 
 Measurement of Asset or Liability: 
a. Initial measurement at cost except when a relevant PFRS requires measurement
at fair value or some other value. 
b. Subsequent measurement at amortized cost, under the cost model, or some
other measurement model required by a relevant PFRS. 

 Derecognition of Asset or Liability: 

An asset (or liability) is derecognized when it ceases to provide inflow (or require
outflow) of resources embodying economic benefits. The difference between the
carrying amount and net proceeds (or net settlement), if any, is recognized in
change in net assets. 
 Presentation of Financial Statements: 
General features: Fair presentation and compliance with PFRSs, Going concern,
Accrual basis, Materiality and aggregation, Offsetting, Frequency of reporting,
Comparative information and Consistency of presentation. 
Our succeeding discussions on the accounting for NPOs are based in part on the
accounting principles specifically provided under U.S. GAAP Statement of Financial
Accounting Standards (SFAS or FAS) No. 116 Accounting for Contributions Received
and Contributions Made and SFAS No. 117 Financial Statements of Not for-Profit
Organizations. 
Although these principles do not have the same authority as those of the PFRSs,
they may be adopted and used in conjunction with the PFRSs (to the extent that they
not contravene the provisions of the PFRSs) in order to provide more useful financial
information to users of NPO financial statements. Moreover, CPA board exam questions
on accounting for NPOs have traditionally been based on these principles. 
Various illustrative financial statements are provided in the next chapter. I
encourage you to notice later on how the U.S. GAAP principles are incorporated into
PFRS-based financial statements. 
All throughout our discussions in this chapter, we will use the term "non-profit
organization (NPO)" to refer only to non profit organizations in the private sector.
Those belonging to the public sector (e.g., government entities) are outside the scope of
this chapter. They are discussed in the Government Accounting part of this book. 

Accounting for non-profit organizations 

Fund theory vs. Fund accounting 

The financial statements of most NPOs are based on the fund theory. The fund
theory stresses great importance on the custody and administration of funds.
Accordingly, the source, nature and purpose of the funds held by the NPO are disclosed
in order to give information necessary for users to assess the organization's
štewardship over those funds. 
Although fund accounting is an off-shoot of the fund theory, SFAS 117 and the
PFRSs do not require the use of fund accounting. However, entities are not prohibited
from using it. 
Under fund accounting, the main accounting unit is the fund. Accordingly,
transactions are accounted for in the books and presented in the financial statements
strictly based on their fund classifications as either 
(1) Unrestricted, 
(2) Temporarily restricted, or 
(3) Permanently restricted. 

Fund theory-based financial statements Fund accounting-based financial accounting

 Focuses on the reporting entity  Views the entity as being made up of

concept;  thus,  the accounting component parts;thus,  the
unit is the organization as a accounting units are the various
whole funds held

 Adheres to the accounting point of  Adheres to the bookkeeping point-of-

view or providing useful information to view of providing useful informations
external users. to managers

 The term ‘funds’  is more commonly  The term ‘funds’  is used to refer to
used to refer to the net assets specific funds  consisting of cash and
other non-cash assets.

 Provides disclosures on the types of  Focuses and classifying assets, net

restrictions on net assets and revenues assets, and changes in them strictly
(i.e.,Unrestricted, temporarily restricted, in accordance with their fund
or permanently restricted) classification (i.e.,  unrestricted,
temporarily restricted, or permanently
restricted)

 Current trend  Traditional 

Contributions 
A majority of the revenues of NPOs come from charitable contributions or donations. 
 Contributions refer to resources received in non-reciprocal transactions.
Contributions exclude those that result from exchange transactions (i.e.,
resources received in exchange for other resources or obligations). 

SFAS 116 classifies contributions based on donor's restrictions as follows: 

1. Unrestricted - available for immediate use and for any purpose. 
2. Temporarily restricted – restricted by the donor in such a way that the
availability of the contribution for the NPO's use is dependent upon: 
a. the performance of a specific task; 
b. the happening of a future event; or 
c. the passage of time 
The temporarily restricted contribution is available to the organization when the task
is performed, the event occurred, or the time restraint passes. At that time, the support
is reclassified from temporarily restricted to unrestricted. 
3. Permanently restricted – restricted by the donor in such a way that the
organization will never be able to use the contribution itself; however, the organization
may be able to use the income therefrom. 

Recognition and measurement 

Cash and other Non-cash assets 
Cash and other non-cash assets received as contributions are recognized as revenues
in the period received and as assets, decreases of liabilities, or expenses depending
on the form of the benefits received 
Contributions are measured at fair value at the date of contribution, and are
reported as either: 
a. Unrestricted support - revenue from unrestricted contributions; or 
b. Restricted support – revenue from temporarily restricted or permanently
restricted contributions. 
 Temporarily restricted contributions whose restrictions are met in the same
reporting period may be reported as unrestricted support provided that the NPO
discloses this accounting policy and applies it consistently from period to period. 
Unrestricted support increases unrestricted net assets while restricted support
increases either (a) temporarily restricted net assets or (b) permanently restricted net
assets. 

Unconditional promises 
Unconditional promise to give cash or other non-cash assets in a future period is
recognized when the unconditional promise to give is received from the donor.
Generally, such unconditional promise is classified as a temporarily restricted
contribution because of the time restriction (i.e., to be received in the future). In the
event that the promised contribution becomes doubtful of collection, an allowance for
uncollectibility is recognized. 

Conditional promises 
Conditional promises to give, which depend on the occurrence of a specified future and
uncertain event to bind the promisor, are recognized only when the attached conditions
are substantially met (i.e., when the conditional promise becomes unconditional). A
conditional promise to give is considered unconditional if the possibility that the
condition will not be met is remote (that is, the possibility that the conditions will be met
is reasonably certain). 
A transfer of assets with a conditional promise to contribute them shall be
accounted for as a refundable advance (i.e., liability) until the conditions have been
substantially met. (SFAS No. 116.22) 

Services 
Contributions of services are recognized 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. 

Services requiring specialized skills are provided by accountants, architects,

carpenters, doctors, electricians, lawyers, nurses, plumbers, teachers, and other
professionals and craftsmen. 
Contributed services and promises to give services that do not meet the above
criteria are not recognized. (SFAS No. 116.9) 

Works of art and similar items 

An entity need not recognize contributions of works of art, historical treasures, and
similar assets if the donated items are added to collections that meet all of the following
conditions: 
a. Held for public exhibition, education, or research in furtherance of public service
rather than financial gain; 
b. Protected, kept unencumbered, cared for, and preserved; and 
 c. Proceeds from sales of collection items are to be used to acquire other items for
collections. (SFAS No. 116.11) 

The reason for the non-recognition as an asset or revenue is that, when all of the
conditions above are met, the work of art (or similar item) does not meet the PFRS
asset recognition criterion of "probable economic benefits.” Moreover, the financial
value of some works of art may be difficult to measure reliably. 
In cases, however, where a work of art (or similar item) meets all of the
recognition criteria for an asset, the work of art is recognized as asset and revenue
measured at fair value. 

Other funds held by NPOS 

 Endowment fund - classified into the following: 
a. Term endowment fund - under the donor's restrictions, the NPO can use
a portion of the principal each period. This is classified as temporarily
restricted. 
b. Regular endowment fund - under the donor's restrictions, the NPO
cannot spend any of the principal. This is classified as permanently
restricted. 
Income from either term or regular endowment fund is used according to the donor's
instruction. 
 Agency fund – funds held by the NPO acting as a custodian. Agency funds are
recognized as liabilities. For example, an educational institution may receive
funds from the Commission on Higher Education (CHED) to be disbursed as
student loans. 
 Plant fund - consists of the following: 
a. unexpended funds for the acquisition of plant assets; 
b. funds for the renewal and replacement of plant assets; 
c. funds for the retirement of indebtedness; and 
d. investment in plant assets. 
 Board-designated fund ('quasi-endowment') - funds which are restricted at the
sole discretion of the NPO's governing board (i.e., Board of Trustees). Funds that
are internally restricted are classified as unrestricted. Only contributions with
donor-imposed restrictions are classified as restricted. 

Treating the various funds held by an NPO ass accounting units can make accounting
cumbersome. Thus, SFAS No. 117 and the PFRSs do not require fund accounting.
NPOs normally use fund accounting as a managerial tool rather than a system for
providing general-purpose financial statements. 

Deferral method of recognizing contributions 

In its publication titled "A Guide to Financial Statements of Not-For Profit Organizations
- Questions For Directors to Ask," the Chartered Accountants of Canada suggest a
“Deferral Method" in accounting for restricted contributions received by NPOs. 
 The "deferral method" is similar to the provisions of PAS 20 Accounting for
Government Grants and Disclosure of Government Assistance, in such a way that
income from donations is recognized based on the "matching concept." 
Under the "deferral method," restricted contributions are initially recognized as
liability (i.e., as deferred revenue) and recognized as revenue in the same period where
the related expenditures, for which the contributions were intended to reimburse, are
incurred. 
The "deferral method" parallels more the principles under the PFRSs. However, we
will be using the principles of SFAS 116 and 117, unless otherwise indicated, because
Philippine CPA board exam questions on NPOs have traditionally been based on these
principles. 

Financial statements 
A complete set of general-purpose financial statements of an NPO consists of the
following: 
PFRSs  SFAS NO. 7
(based on IASCF’s published audited financial
statements

 Statement of financial position  Fitment of financial

position

 Statement of activities  Statement of activities

 Statement of cash flows  statement of cash flows

 Notes  Notes 

Statement of financial position 

The statement of financial position shows information on assets. liabilities, and net
assets. 

Classification of Net assets 

SFAS No. 117 requires reporting of net assets in the statement of financial position
according to the following classifications: 
1. Unrestricted net assets 
2. Temporarily restricted net assets 
3. Permanently restricted net assets 

PFRS-based financial statements may present net assets using the

classifications above either on the statement of financial position or in the notes. 

Statement of activities 
The statement of activities shows information on revenues, expenses, and changes in
net assets for a period. This statement takes the place of the income statement and
statement of changes in equity for a business entity. However, NPOs may opt to
present a separate statement of changes in net assets (or statement of changes in
reserves). This separate statement takes the place of a statement of changes in equity. 
SFAS No.117 requires that the statement of activities report the changes in net
assets for each of the three categories of support separately (i.e., unrestricted,
temporarily restricted and permanently restricted). 
PFRS-based financial statements may present changes in net assets using the
classifications above either on the statement of activities or in the notes. 
In a statement of activities, the term “profit" or "net income" is replaced by the
term "change in net assets." 
NPOs adopting the PFRSs shall apply PFRS 15 Revenue from Contracts with
Customers for revenues arising from transactions other than charitable contributions. 

Expenses 
A statement of activities shall report expenses as decreases in unrestricted net
assets. 
SFAS No. 117 requires expenses to be presented in the statement of activities or
in the notes according to their function.
The functional classifications are as follows: 
1. Program services – are the activities that result in goods and services being
distributed to beneficiaries, customers, or members that fulfill the purposes or
mission for which the organization exists. Those services are the major purpose
for and the major output of the organization and often relate to several major
programs. 
2. Supporting activities - are all activities other than program services. Generally,
these include management and general, fund-raising, and membership-
development activities. (SFAS No. 117, 26 to 28) 

Statement of cash flows 

The statement of cash flows of an NPO is similar to that of a business entity and can
also be prepared using the direct or indirect method. 
Restricted assets acquired during the period that are used for long-term
purposes because of donor restrictions are classified as financing activities. 

Accounting procedures peculiar to specific types of NPOs 

The principles that we have discussed so far apply to all types of NPOs. In this section,
we will discuss accounting procedures unique to specific types of NPOs. For this
purpose, we will subdivide NPOs into the following: 
1. Health Care Organizations 
2. Private, non-profit, Colleges and Universities 
3. Voluntary Health and Welfare Organizations 
4. Other non-profit organizations 

Health Care Organizations 

Health Care Organizations include hospitals, clinics, medical group practices, individual
practice associations, individual practitioners, emergency care facilities, laboratories,
suro centers, other ambulatory care organizations, continuing care retirement
communities, health maintenance organizations, home health agencies, nursing homes,
and rehabilitation centers. 
In accordance with the "AICPA Audit and Account Guide, Health Care
Organizations," the following are the accounting requirements unique to healthcare
organizations: 
1. Components of a complete set of financial statements 
2. Presentation of revenues in the statement of operations 
3. Presentation of contributions in the statement of operations 
4. Disclosure of performance indicator 

Financial statements of a health care organization 

According to the "AICPA Audit and Accounting Guide, Health Care Organizations,”
health care organizations shall prepare the following statements: 
a. Statement of financial position 
b. Statement of operations (in lieu of a statement of activities) 
c. Statement of changes in net assets 
d. Statement of cash flows, and 
e. Notes to the financial statements. 

Presentation of revenues in the statement of operations 

Revenues in the statement of operations are classified into the following: 
a. Net patient revenue - gross patient service revenue less contractual
adjustments, employee discounts and billed charity care. 
b. Premium revenue – results from capitation agreements 
c. Other revenues – all other revenues not classifiable as net patient revenue or
premium revenue. 

Contractual adjustments
A portion of a hospital's revenues is collectible from third-party payors, such as the
Philippine Health Insurance Corporation (PhilHealth) and other health insurance
providers. In this regard, a contractual adjustment may arise from the reimbursement 
agreement. 
A contractual adjustment is 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 
These are special discounts available only to the NPO's employees (and their
immediate family members) in the form of reduction in the price of patient services.
Employee discounts are accounted for as direct reduction to patient service
revenue. 

Charity care 
Charity care pertains to free services rendered to patients. Charity care is not
recognized but rather disclosed only in the notes. 
Capitation agreements
Capitation agreements are agreements with third parties based on the number of
employees instead of services rendered. SFAS No. 117 requires revenues from
capitation agreements to be shown separately on the statement of operations under the
caption "Premium revenue," which is a line item below net patient revenue. 

Other revenues 
Other revenues consist of revenues other than patient service revenues and premium
revenues. Examples are the revenues from the hospital's pharmacy, parking deck,
flower and gift shop, educational programs, donated materials and services. 

Presentation of contributions in the statement of operations 

Unlike for other NPOs, health care organizations do not present restricted
contributions on the statement of operations as part of revenues. The revenues
discussed above (i.e., net patient service revenues, premium revenues, and other
revenues) pertain only to unrestricted revenues and may include revenues from
unrestricted contributions. Revenues from unrestricted contributions may be separately
indicated as such or included in the other revenues classification. 
Revenues from restricted contributions are presented separately at the bottom
part of the statement of operations, after unrestricted revenues and expenses. 

Disclosure of performance indicator 

According to the AICPA Guide, the statement of operations shall provide a
performance indicator, such as operating income, revenue over expenses, etc. The
policy used in determining the performance indicator shall be disclosed in the notes. 
Unrealized gains and losses on investments in securities are not a part of the
performance indicator, but shall be reported on the statement of operations after the
performance indicator. 

Private, non-profit, Colleges and Universities 

The accounting procedure that is unique to private, non-profit, colleges and universities
is the accounting for scholarships and fellowships. The concepts are provided
below:  
a. Scholarships and fellowships granted freely are treated as direct reduction of
revenues from tuition and fees, e.g., academic scholarship. 
b. Scholarships and fellowships granted as compensation for services rendered by
the grantee are treated as expenses, e.g., scholarships provided to student
assistants and faculty members or their dependents. 
c. Refunds of tuition fees from class cancellations and other withdrawal of
enrolment are treated as direct reduction of revenues from tuition and fees. 

Voluntary Health and Welfare Organizations 

Voluntary Health and Welfare Organizations (VHWO) are non-profit entities that derive
their revenues primarily from donations from the general public to be used for purposes
connected with health, welfare, or community services. Examples include: women and
children's health and welfare societies, human rights advocates, environmental
protection organizations, religious organizations, museums and other cultural and arts
societies libraries, research and scientific foundations, professional associations, private
elementary schools, social clubs, and fraternal organizations. 
What distinguishes a VHWO providing health care services from a Health Care
Organization is the source of revenue rather than the type of services provided. A
VHWO derives its revenues from donations from the general public while a Health Care
Organization derives its revenues from patients. 
The accounting requirement unique to VHWOs is the provision of a statement of
functional expenses that reports expenses by both functional (i.e., program and
supporting) and natural classifications (salaries expense, depreciation expense, etc.).
According to SFAS No. 117, the statement of functional expenses is useful in
associating expenses with service efforts and accomplishments of the organization. 

Other non-profit organizations

The general accounting requirements for NPOs apply to other non-profit organizations.
Thus, there are actually no accounting requirements peculiar to these organizations. 

Accounting for other assets held by NPOs 

As mentioned earlier, the general principles of PFRSs apply to NPOs. Accordingly, an
NPO shall: 
 Use the accrual basis of accounting, in addition to the other ‘general features'
provided under PAS 1. 
 Apply PFRS 9 Financial Instruments (or PFRS for SMEs, as appropriate) for
financial assets and financial liabilities. Usually, NPOs account for marketable
securities at fair value with changes in fair values recognized in the statement of
activities – similar to FVPL securities (the FVOCI classification is not applicable
to NPOs adopting the PFRS for SMEs). - 
Under SFAS 124 Accounting for Certain Investments Held by Not-for-Profit
Organizations, the marketable securities of an NPO, consisting of either equity or debt
instruments, are measured at fair value. Changes in fair values are recognized in the
statement of activities. Also, marketable securities can be classified as either current or
non-current assets. SFAS 124 does not apply to investments which result to significant
influence or control. Accounting Principles Board (APB) Opinion No. 18, also a U.S.
GAAP, requires the use of the equity method for investments held by NPOs that result
to significant influence. 
 Depreciate its depreciable assets in accordance with PAS 16, Property, Plant
and Equipment. 
 Recognize impairment loss in accordance with PAS 36 Impairment of Assets
when an asset's carrying amount exceeds its recoverable amount. 
 Account for leases (other than those qualifying as contributions) in accordance
with PFRS 16 Leases. 

Chapter 16 Summary: 
 Although the PFRSs are designed to apply to business entities they can also be
applied to non-profit organizations. 
 Non-profit organizations carry out socially desirable needs of the community or
its members without the intention of making profit. NPOs can be classified into
the following: (1) Health Care Organizations, (2) Private, non-profit, colleges and
universities, (3) Voluntary Health and Welfare Organizations, and (4) Other non-
profit organizations.
  Accounting principles under U.S. GAAP: 
-Contributions are classified based on donor's restrictions as: (1) unrestricted, (2)
temporarily restricted, and (3) permanently restricted. These classifications are
also applied to the net assets. Internally-restricted funds are unrestricted. 
-Unconditional promises to give contributions are recognized when the promise is
received from the donor. Conditional promises are recognized only when the
performance of the attached condition is reasonably certain. 
-Cash and other non-cash assets received as contributions are recognized as
assets and revenue measured at fair value. 
-Services in-kind that enhance a non-financial asset or require specialized skills
are recognized as revenue and expense. Other services are not recognized. 
-Works of art and similar items received as donation are generally not
recognized, unless they meet the asset recognition criteria. 
-Contributions received by an NPO acting as an agent are recognized as
liabilities. 
-Net assets released from restrictions are presented as a decrease in temporarily
restricted net assets and an increase in unrestricted net assets. 
-NPOs shall prepare the following financial statements: (1) of financial position,
(2) Statement of activities, (3) Statement of cash flows, and (4) Notes. 
-Expenses are presented using the following functional classifications: (1)
Program services and (2) Supporting activities. 
-For a health care organization: 
a. Net patient revenue = Gross patient service revenue less contractual
adjustments, employee discounts and billed charity care. 
b. Premium revenue = revenues from capitation agreements. 
c. Other revenues = all other unrestricted revenues. 
› Restricted contributions are presented separately from the revenues section of
the statement of operations.
-For a private, non-profit, college or university: Net revenue from tuition and fees
= Total assessments less refunds and scholarship grants that are not granted as
compensation for services rendered by the grantee. All other types of
scholarships are expensed.