CHAPTER 13

ACCOUNTING FOR ACCOUNTING FOR

GOVERNMENT &
NON-PROFIT
NON-PROFIT ORGANIZATIONS
ORGANIZATIONS MODULE CONTENTS

This provides discussion of accounting for Non-profit Organizations, Voluntary Health

and Welfare Organizations, Not-for-profit Colleges and Univerisities in accordance
with applicable financial reporting framework and Accounting Standard Update (ASU)
No. 2016-14 amending the Statement of Financial Accounting Standards (SFAS ) No.
117.

NON-PROFIT ORGANIZATIONS
The Securities and Exchange Commission Philippines defines the following:

 Non-stock Corporation refers to a corporation with no authorized capital stock

and no part of its income is distributable as dividends to its members, trustees or
officers.

 Non-Profit Organization (NPO) refers to an SEC registered Non-Stock

Corporation that primarily engages in raising or disbursing funds for purposes
such as charitable, religious, cultural, educational, social or fraternal purposes, or
for the carrying out of other types of good works.

 Foundation refers to a non-stock, non-profit corporation established for the

purpose of extending grants or endowments to support its goals and/or raising
funds to accomplish charitable, religious, educational, athletic, cultural, literary,
scientific, and social walfare or other similar objectives and registered as a
Foundation with the Commission.

For NPOs to fulfill their goals and objectives as well as to realize stakeholders’
expectations effectively, they must be governed by the principles of Fairness,
Accountability, and Transparency.

 Fairness – rights of stakeholders should be observed and respected;

 Accountability – Board and management should be answerable on their
performance to stakeholders;
 Transparency – timely, accurate and sufficient information must be disclosed.

These are some of the stakeholders of NPOs:

Stakeholders Expectations (Social and Economic)
Members/beneficiaries Services, ROI, social justice
Governing board Prestige, self-reliance
Management/staff Better career
Donors Attainment of the purposes of funds
compliance with agreements
Government Regulation, partnership in development
Volunteers Contribution to the development of specific
concerns
General public Contribution to the development of society,
in general.

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ACCOUNTING FOR ACCOUNTING FOR
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NON-PROFIT ORGANIZATIONS
ORGANIZATIONS MODULE CONTENTS

Basic differences between commercial organizations and NPOs

1. NPOs do not operate primarily for profit but for specific needs of the
community, group, organization or its membership.

2. Most of NPOs revenue came from funds contributed, donated, granted or given
as other forms of support. Revenue from income generating activities, if, any are
eventually plowed back program operation. Unlike in the business community
where an exchange transaction occurs, in NPOs, resources providers do not
expect to receive either repayment or economic benefits proportionate to the
resources provided. There is no defined ownership interest that can be sold,
transformed or redeemed or that convey entitlements to a share to a share to a
residual distribution or resources in the event that the organization is dissolved.

3. NPOs have the responsibility to account for these funds designated for a specific
purpose for specified period of time. The nature of the revenues received
requires ensuring that separate types of the funds are properly tracked and
reported.

Users and their information needs as applied to NPOs

External users Internal users
Donors/grantors/ funding agencies Members
 Degree of attainment of  Information on how fees, donations,
development objectives as grants, and proceeds from fund
indicated in financial statements raising activities were used
and reports  Other information needs such as
 Degree of compliance with agreed management efficiency, etc.
amount and manner of using the
funds
 Degree of compliance with
prescribed financial accounting and
reporting system and procedures
Creditors (Bank/ Financing Institutions) Management Team
 Information on ability to pay ratios  Board of directors/ trustees for
of solvency, liquidity, and stability policy-making, strategic decision-
as well as status of their security making, and fulfilling its trusteeship/
stewardship role
 Executive director for operational
decision-making
 Program/ project managers for
project/program-related decision
making
Government agencies
 Compliance with laws, government
rules and regulations, payment of
taxes (if any) and reportorial
requirements
General public
 Effect of the activities of NPOs to
the community and society in
general

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 CHAPTER 13
ACCOUNTING FOR ACCOUNTING FOR
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NON-PROFIT ORGANIZATIONS
ORGANIZATIONS MODULE CONTENTS

COLLEGES AND UNIVERSITIES

The usual objective of college or universities is to provide educational services
including teaching and research. They may be public, profit-oriented and private non-
profit institutions. It provides their services on the bases of social desirability and
finance them, at least in part, without reference to those receiving the benefits. The
objectives of college and universities accounting are to show the sources from which
resources have been received and how those resources were used in achieving
educational objectives. Most colleges and universities used fund accounting and
maintain their accounts using accrual basis of accounting. Funds used by colleges and
universities are divided into six groups. These groups are further divided into sub-
groups as needed for planning, control, decision making, and reporting purposes.
These are:

 Current funds are used to account for resources that are expendable in carrying
out day-to-day operations. For example, expenditures for instruction, research,
extension program, and auxiliary enterprise activities
o Unrestricted current fund – is used to account for resources that have
no restrictions as to the operating purposes for which they may be
expended.
o Restricted current fund – is used to account for resources to be
expended for operating purposes that are specified by an outside
donor or grantor.

The board may decide to transfer funds from current fun to another fund for a
certain purpose. The transfer is either mandatory or non-mandatory; the fund
transfer is called board designated funds. Mandatory transfers arise from
binding legal agreements or agreement with donors. Non-mandatory transfers
are transfers made at the discretion of the governing board.

 Loans funds are used to account for resources that are available for making loans
to students, faculty and staff because the resources may be restricted externally
by donors or internally by the governing body, the accounting records must
enable the sources and the restriction to be identified.

 Endowment and similar funds are used to account for resources where the
outside donor has specified (as a condition of the gift) that the principal is to
remain intact in perpetuity. The principal is invested, the income from which
may be expended or added in the principal.
o Term endowment funds are similar to endowment funds, except that after
a specified period of time has passed or a condition has been fulfilled, the
governing body may expend all or part of the principal as long as in
accordance with the provision of the endowment.
o Quasi-endowment funds are function as endowment funds but consist of
resources that are set aside by the governing board (board-designated

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ORGANIZATIONS MODULE CONTENTS

funds) rather than by an outside donor. They are accounted for in the
same manner as endowment funds, but since the resources are internally
designated, they may return to unrestricted funds at any time by the
governing board.

Accounting treatment of income from endowment depends on the term of the

agreement under which the funds are established. If the income may be used
without restriction, it is recognized as revenue in the unrestricted current fund.
If it is restricted to specific purposes, it is credited to the restricted current fund
balance.

 Annuity and life income funds - Annuity funds are used to account for
resources given to college or university with the provision that specified peso
amounts will be paid to designated individuals over a specified period of
time. Life income funds are used to account for resources that are given to
the institution with the provision that the income earned on the assets will be
paid to a designated individual over his or her lifetime (or other designated
period). In both annuity funds and life income funds, after the payment
period has ended, the principal would be transferred to the fund specified by
the donor (or to the unrestricted current fund if no designation was made). In
an annuity the payment to the beneficiary is a fixed amount each period,
while in a life income fund, the payment to the beneficiary could vary each
period, since it is the investment income that are distributed.

 Plant funds
o Unexpended plant fund – used to account for the acquisition or
construction of property, plant and equipment
o Renewal and replacement plant fund – used to account for resources
that are set aside for the renewal or replacement of the existing
property, plant and equipment
o Retirement of indebtedness plant fund – used to account for resources
set aside for debt service and debt retirements related to property,
plant and equipment
o Investment in plant fund – used to account for property, plant and
equipment and liabilities that are related to amount expended for plant
assets.

 Agency funds used to account for resources held by college or university as

custodian or custodian for student, faculty, and staff.

HOSPITALS AND OTHER HEALTH CARE ORGANIZATIONS

Health care entities may be organized as not-for-profit entities, government entities or
private business enterprise owned by investors (stockholders, partners, or sole

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proprietors). Health care providers include clinic, hospitals, government owned health
care entities and nursing homes that provide health care.

Accounting and reporting for non-government, non-for-profit hospital is based upon

the same standards and principles as for any other non-government, not-for-profit
organization. However, there are unique revenue sources such as patient service
revenues and premium fees. Also, the expense classification used is relatively unique.

CONCEPTUAL FRAMEWORK
Although the IFRSs/PFRSs are designed to apply to business entities, they can also be
applied to non-profit organizations.

Accounting standards in the Philippines are adopted by the Philippines Financial

Reporting Standards Council (PFRSC) and approved by the Securities and Exchange
Commission (SEC). The PFRSC has formed the Philippine Interpretations Committee
(PIC), which issues implementation guidance on PFRSs.

Financial reporting frameworks applicable in the Philippines are:

a. Philippine Financial Reporting Standards (Full PFRS);
b. PFRS for Small and Medium-sized Entities (PFRS for SMEs); and
c. PFRS for Small Entities (PFRS for SEs).

1. Publicly Accountable Entities (adopting Full PFRS)

The PFRSC has adopted most IFRSs, in some cases with modifications, and in some
cases the most recent amendments to IFRSs have not been adopted. These standards are
known as Philippine Financial Reporting Standards (PFRSs) and Philippine Accounting
Standards (PASs). Philippine standards apply to all entities with public accountability.
That includes:

a. entities whose securities are listed in a public market or are in process of listing;
b. holder of secondary licenses issued by regulatory agencies;
c. all financial institutions including banks, insurance companies, security brokers,
pension funds, mutual funds, and investment banking entities; public utilities;
and
d. other economically significant entities, defined as total assets in 2004 of at least
₱250 million or liabilities of at least ₱150 million.

However, only item (d) is applicable to a Non-profit Organization.

2. Small and Medium-sized Entities (adopting PFRS for SMEs)

The IFRS for SMEs was adopted in the Philippines effective 1 January 2010. It is known
as the Philippine Financial Reporting Standard for SMEs (PFRS for SMEs). The
Philippine Securities and Exchange Commission, in its En Banc Resolution dated
August 13, 2009, adopted a definition of 'small and medium-sized entities' that includes
a size criterion. An entity is an SME if:

 The entity has total assets of between ₱3 million and ₱350 million or total
liabilities of between P3 million and P250 million;
 It is not required to file financial statements under SRC Rule 68.1;

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 It is not in the process of filing its financial statements for the purpose of issuing
any class of instruments in a public market;
 It is not a holder of a secondary license issued by a regulatory agency, such as a
bank (all types of banks), an investment house, a finance company, an insurance
company, a securities broker/dealer, a mutual fund and a pre-need company;
and
 It is not a public utility.

3. Small Entities (adopting PFRS for Small Entities)

The Securities and Exchange Commission has issued SEC Memorandum Circular No.
05 (2018) adopting, as part of its financial reporting rules and regulations, the Philippine
Financial Reporting Standards (PFRS). A small entity shall adopt this PFRS for annual
periods beginning on or after January 1, 2019.

Small entities are those that meet all the following criteria:
1) Total Assets of between ₱3 million to ₱100 million or total liabilities of between
₱3 million to ₱100 million. If the entity is a parent company, the said amounts
shall be based on the consolidated figures;
2) Are not required to file financial statements under Part II of SRC Rule 68;
3) Are not in the process of filing their financial statements for the purpose of
issuing any class of instruments in a public market, and;
4) Are not holders of secondary licenses issued by regulatory agencies.

4. Micro-business entities
Micro-business entities are entities whose total assets or total liabilities are below the ₱3
million floor threshold. Micro-business entities have the option to use any of the
following bases of accounting in the preparation of the financial statements:
a. Full PFRS
b. PFRS for SMEs
c. Another acceptable basis of accounting

Conceptual Framework for general purpose financial statements

 The financial statements must “present fairly” the financial position, financial
performance and cash flows of an entity. Fair presentation requires the faithful
representation of the effects of transactions, other events, and conditions in
accordance with the definitions and recognition criteria for assets, liabilities, income
and expense set out in the Framework.

 The Conceptual Framework notes that financial statements are normally prepared
assuming the entity is a “Going Concern” and will continue in operation for the
foreseeable future.

 PAS 1 requires that an entity prepare its financial statements, except for cash flow
information, using the accrual basis of accounting.

 The presentation and classification of items in the financial statements shall be

retained from one period to the next unless a change is justified either by a change in
circumstances or a requirement of a new PFRS. Meaning there should be
consistency in the presentation.

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 Each material class of similar items must be presented separately in the financial
statements. Dissimilar items may be aggregated only if they are individually
immaterial. However, information should not be obscured by aggregating or by
providing immaterial information, materiality considerations apply to the all parts
of financial statements, and even when a standard requires a specific disclosure,
materiality considerations do apply.

 Assets and liabilities, and income and expenses, may not be offset unless required
or permitted by a PFRS.

 PAS 1 requires that comparative information to be disclosed in respect of the

previous period for all amounts reported in the financial statements, both on the face
of the financial statements and in the notes, unless another Standard requires
otherwise. Comparative information is provided for narrative and descriptive
where it is relevant to understanding the financial statements of the current period.

 There is a presumption that financial statements will be prepared at least annually.

If the annual reporting period changes and financial statements are prepared for a
different period, the entity must disclose the reason for the change and state that
amounts are not entirely comparable. This is referring to reporting period.

In practice, the accounting for NPOs 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 NPO’s purpose, and the presentation and
disclosure of equity.

FUND THEORY AND 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 stewardship over those
funds.

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. Although fund accounting is an off-shoot of the fund theory, it
is not required.

Fund theory-based FS Fund accounting-based FS

Focuses on the reporting entity concept; Views the entity as being made up of
thus, the accounting unit is the component parts; thus, the accounting
organization as a whole. units are the various funds held.
Adheres to the accounting point-of-view of Adheres to the bookkeeping point-of-view
providing useful information to external of providing useful information to
users. managers.
The term “funds” is more commonly used The term “funds” is used to refer to specific
to refer to the net assets. funds consisting of cash and other non-
cash assets.

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Fund theory-based FS Fund accounting-based FS

Provides disclosures on the types of Focuses on classifying assets, net assets,
restrictions on net assets and revenues and changes in them strictly in accordance
(i.e., unrestricted, temporarily restricted, or with their fund classifications (i.e.,
permanently restricted). unrestricted, temporarily restricted, or
permanently restricted).
Current trend Traditional

ACCOUNTING FOR GRANTS, DONATIONS, REVENUE AND GAINS

NON-PROFIT ORGANIZATION
Grants and Donations
Accounting for grant and donations is a major concern of NPOs with regard to the
accrual basis. NPOs record a donor’s unconditional commitment to contribute as
revenue (receivable), provided that the contribution is realizable and enforceable.
Grants and donations may be accrued subject to following conditions: 1) completed
contract; and 2) fulfilment of conditions/agreements previously set forth. In many
occasions, grants received (or a portion thereof) are intended for other periods other
than the period that these are received. It may be that grant remittance is intended to
cover previous period activities or that is intended for the next period/s.

Pledges
Pledge or promise to give is a written or oral agreement to contribute cash or other
assets to another entity. The promise should be verifiable by evidence such as pledge
cards or tape recording of oral promises. Pledges may be conditional or unconditional
a conditional pledge depends on the occurence of a specified future and uncertain event
to bind the promise. Conditional pledges should be recognized as contribution revenue
and receivables when the conditions are substantially met. An unconditional pledge
depends only on the passage of time or demand by the promise for performance.
Pledges are considered unconditional if the possibility that a condition will not be met
is remote. Unconditional pledges are recognized as contribution revenue and
receivables in the period in which the promise is received. Unconditional pledges
payable in the future, or multi-year pledges, are treated restricted revenue or support
and then reclassified to the unrestricted net asset class when the period of the donor
stipulation is met. Contribution receivable in cash should be recorded at present value
of estimated future cash flows. Contribution receivable collectible within one year need
not to be discounted. An allowance for doubtful contribution should be established
based on historical experience and other factors to cover uncertainties concerning
collectivity. An unconditional pledge with no donor restriction is recognized as
follows:

Account Title Debit Credit

Contribution receivable xxx
Revenues – unrestricted contributions xxx
To recognize unconditional pledge with no donor restriction

Account Title Debit Credit

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Provision for uncollectible contributions xxx

Allowance for uncollectible contributions xxx
To recognize the uncollectible contributions

Government grants
Government grants that require performance by the NPOs will be accounted for as
refundable deposits (liability) until earned. Unrestricted revenue will be earned when
expenses are made in conjunction with the grant.

Grant received from the government

Account Title Debit Credit
Cash xxx
Government Grants Refundable xxx
To recognize grant received from the government

Expenses incurred in conjunction with provision of grant

Account Title Debit Credit
Expenses xxx
Cash xxx
To recognize expenses

Recognition of revenue
Account Title Debit Credit
Government grant receivable xxx
Unrestricted revenue xxx
To recognize revenue upon performance

Restricted and unrestricted support

Generally, restricted and unrestricted contribution are measured at fair value and
recognized as revenues or gains in the period they are received, and as assets, decrease
in liabilities, or expenses, depending on the form of the benefits received. Contributions
are classified into (a) those that increase unrestricted net assets; (b) those that increase
restricted net assets. Unconditional promises to give with payments due in future
periods-next year or later are reported as restricted support in the period the promises
are received, even if the resources are not restricted for specific purposes. Contributions
made are recognized as expenses in the period made and are measured at fair value.

a. Donor imposed restriction distinguished from donor-imposed condition

A donor-imposed condition provides that the donor’s money is returned or the
donor is released from the promise to give if the conditions are not met. Donor
imposed restriction simply limit the use of contributed assets. If it is unclear
whether donor stipulations are conditions or restrictions, the promise is
presumed to be conditional.

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b. Gifts of Property, plant and equipment

Gits of PPE may be restricted or unrestricted, depending on the organization’s
accounting policy or the donor’s restriction. If the contributed PPE are restricted
by the donor for use for a certain period of time, the assets are reported as
restricted support. Depreciation is recorded as an expense in unrestricted net
assets, and there is a reclassification for the amount of the depreciation from
restricted to unrestricted net assets. If the donor contributes PPE with no
restrictions or if the assets are purchased with contributions restricted to the
acquisition of PPE, the organization can choose either of two accounting
methods, which should be used consistently. The accounting policy must be
disclosed in the notes to the financial statements.

1. The NPO may adopt an accounting policy that implies time restriction that
expires over the life of the donated asset.
2. If no policy implying a time restriction exists and there are no donor –
imposed restrictions, the donation are unrestricted support

c. Expiration of donor-imposed restrictions

Expiration of the donor imposed restriction is recognized in the period in which
the restriction is satisfied when (a) the stipulated time has elapsed; (b) the
stipulated purpose has been satisfied; (c) the useful life of the donated assets has
been ended. If a given contribution is subject to more one restriction, the effect of
the expiration of the restrictions is recognized in the period in which the last
restriction expires. When the restriction is met (either by the passage of time or
by the incurrence of expenses for the restricted purposes), resources in the
temporary restricted net assets are reclassified as unrestricted net assets and
reported as net assets released from restriction in the activities statement. The
expense is reported on the financial statements as decrease in unrestricted net
assets. Net assets released from restrictions is reported in the statement of
activities as an increase in unrestricted net assets and a corresponding decrease
in temporary restricted net assets.

When an expense is incurred for which there are both unrestricted and restricted
net assets available, the donor imposed restriction is fulfilled to the extent of the
expense.

If donor imposed restriction are met in the same period the contributions are
received, the contributions may be reported as unrestricted if the following
conditions are met: (1) the policy must be disclosed in the notes and followed
consistently; and (2) the organization must have the same policy for restricted
investment income whose restrictions are met in the same period as income is
recognized.

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A cash contribution restricted by the donor for a specific purpose is recorded

when received as:
Account Title Debit Credit
Cash xxx
Revenue – temporarily restricted contribution xxx
To recognize cash contribution restricted by the donor

Expenses paid in compliance with donor restrictions are funded by the restricted
resources are recorded as:
Account Title Debit Credit
Expenses xxx
Cash xxx
To recognize expenses paid

Temporarily restricted net assets are released with reclassification entry as:
Account Title Debit Credit
Temporarily restricted Net assets xxx
Unrestricted net assets xxx
To recognize reclassification of restricted net assets to unrestricted net assets

d. Investment and investment income [endowment funds]

Permanent restricted contributions are called endowments. Endowment fund is
an established fund of cash, securities or other assets to provide income for the
maintenance of an NPO. Income from endowment investments are reported in
the period earned as a credit to either unrestricted revenue or temporarily
restricted revenue depending on donor imposed restrictions as to the use of the
earnings. Investment in equity securities that have readily determinable values
and debt securities are reported at fair value. Reporting at original cost,
amortized cost, or lower of cost or market is not allowed. Unlike businesses,
NPO is not required to classify their investments into financial assets at fair value
through profit or loss, financial assets at fair value through Other
Comprehensive income, financial assets at amortized costs. Realized and
unrealized gain on endowment investments are reported as increases or
decreases in unrestricted net assets unless their use is temporarily or
permanently restricted by explicit donor stipulations or by law. Losses on
endowment investments reduce temporarily restricted net assets to the extent
that donor imposed restriction on net appreciation have been met before the
losses occurs. Any remaining loss would reduce restricted net assets.

COLLEGES AND UNIVERSITIES

The term revenue is used only for current unrestricted funds and current restricted
funds. Other fund groupings use the term additions to report increase in funds.
Current fund revenue includes:
 Tuition fees
 Government grants and contracts
 Private gifts, grants and contracts

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 Endowment income
 Sales and services of educational activities
 Sales and services of auxiliary enterprise
 Sales and services of hospitals
 Other sources
 Independent operations

Revenue of unrestricted current funds group – revenue of unrestricted funds includes

tuition fees, unrestricted gifts, grants, as well as unrestricted income earned from
unrestricted resources. It also includes unrestricted income, earned by endowment and
similar funds, but it does not include net capital gains of endowment funds. Capital
gain and losses from endowment funds investments typically are accounted for in those
funds.

Revenue of restricted current funds groups – revenue of restricted current funds is

recognized to the extent that such funds are expended during the period for the
specified purposes. The timing of revenue recognition coincides with the removal of
donor restrictions. Thus, the revenue of current restricted funds for the period is equal
to current restricted fund expenditures for the period. Additions to current restricted
funds consist of restricted gifts, restricted endowment fund income, restricted contracts
and grants from private organizations or government units, and restricted from
investments of current restricted fund resources.

Revenue of auxiliary enterprise – the revenue of auxiliary enterprise includes the

amounts earned in providing facilities and services to faculty, staff and students. It
includes amount charged for residence halls, food services, as well as, sales and receipts
from the school stores, and used for school facilities and so on. The revenue of auxiliary
enterprise does not include inter-departmental transactions of service departments.

Service department activities – in accounting for the activities of service departments,

such as storerooms, motor pools, and printing, the accounting records are normally
maintained on a cost-reimbursement basis, and no revenues or expenditures are
recorded. Instead, the cost is reflected in the expenditures of the departments or
divisions receiving the goods and services.

HOSPITALS AND OTHER HEALTH CARE ORGANIZATIONS

Revenue is reported in the period in which services are rendered. Operating revenues
consist of patient service revenues, premium fee revenues and other operating revenue.

Patient service revenue – include room and board, nursing services, and other
professional services. Patient service revenue typically are recorded at established gross
rates as the services are provided but are reported net of amounts that are considered
deduction from revenues. The objective is to report the amount that the hospital is
entitled to collect and intends to collect as patient service revenues.

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Charity care – service provided free of charge to patients who qualify under a hospital’s
charity care policy are excluded from both gross and net service revenues

Allowance accounts – are used to reduce receivables for estimated deductions from
revenues as well as for bad debts. Deductions from revenues include:
 Courtesy allowances – discounts for doctors and employees
 Contractual adjustment – discount arranged with third-party payors (Philhealth,
Health cards) that frequently have agreement to reimburse at less than
established rates

Premium fees – also known as subscriber fees or capitation fees, are revenues from
agreement under which a hospital provides any necessary patient services perhaps
from a contractually established list of services for a specific fees. The fee is used
usually specific fee per member per month. The fees are earned whether the standards
charges for services actually rendered are more or less than the amount of the fee
without regard to services actually provided in the period. Therefore, they are reported
separately from patient service revenues.

Other operating revenues – this includes revenue from services provided to patients
other than for health care and revenues from sales and services provided to non-
patients. This includes tuition fee from school operated by hospital, rentals of hospital
space, charges for preparing and reproducing medical records, room charges for
telephone calls and television, proceeds from cafeterias, gift shops, snack bars, and so
on.

ACCOUNTING FOR EXPENSES

NON-PROFIT ORGANIZATION
Non-profit organizations recognize expenses on an accrual basis rather than as
expenditures. All expenses are reported as decrease in unrestricted net assets; whereas,
expenditures denote outlays of resources, expenses denote using up of resources.
Flows of resources involving outlay of cash to purchase other assets are not presented
in the statement of activities but instead in the statement of cash flows. Depreciation of
capital assets, including contributed capital assets, is recorded as an expense (FASB
Statement No. 93, Recognition of Depreciation by NPOs). Land and individual works
of arts or historical treasures that have an extraordinary long life are not depreciated.

Non-profit organizations segregate expense between programs functions and those

functions supporting the programs. Program expenses include the direct and indirect
cost of providing or conducting a particular mission or part of the organizational
mission. Supporting expenses include management and general expenses and fund
raising activities. Salaries, supplies and telephone are allocated to functions.
Depreciation expenses are allocated to programs as well as to support function expense.

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Non-profit organizations often conduct activities that combine program and fund
raising. In the past, the cost of the joint activity often was reported entirely as a
functional program expense with no allocation to the functional support expense of
fund raising.

a. Cost of all materials and activities that include a fund-raising appeal should be
reported as fund raising costs unless a bona fide program or management
function
b. Criteria of purpose, audience, and content must be met in order to conclude that
a bonafide program or management and general function has been conducted in
conjunction with the appeal of funds
c. If a bona fide program or management function has been conducted, the joint
costs should be allocated using an equitable allocation base.
d. Certain information must be disclosed if joint costs are allocated.

COLLEGES AND UNIVERSITIES

Expenses are used only in accounting for the current funds. Current fund expenses
include expenditures incurred in carrying out the operation of colleges or universities
except purposes, current fund expenditures are classified as educational and general
expenditures and expenditures of auxiliary enterprises. Expenditures are classified on a
functional basis in the statement of current fund revenues, expenditures and other
changes. Functional classifications include:
 Instruction – expenditures for the instruction program
 Research – expenditures to produce research outcome
 Public service – expenditures for activities to provide non-instructional services
to external groups
 Academic support – expenditures to provide support for instruction, research
and publications
 Student services – amounts expended for admissions and registrar, and amounts
expended for students’ emotional, social and physical well-being
 Institutional support – amounts expended for administration and long-range
planning of the university
 Operation and maintenance of property, plant and equipment – expenditures of
current operating fund for maintaining PPE.
 Scholarship and fellowship – expenditures from restricted or unrestricted funds
in the form of grants to students

HOSPITALS AND OTHER HEALTH CARE ORGANIZATIONS

Operating expenses of hospitals are reported on an accrual basis and normally include:
 Functional categories for nursing services (medical and surgical, intensive care,
nurseries, operating rooms)
 Other professional services (laboratories, radiology, anaesthesiology, pharmacy)
 General services (housekeeping, maintenance, laundry)
 Fiscal services (accounting, cashier, credits and collections, data processing)

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 Administrative services (personnel, purchasing, insurance, governing board)

 Interest and depreciation charges
 Provision for bad debts
 Malpractice insurance expense, if not already allocated.

The provision for bad debts is an expense. The difference between charity care and bad
debts expense is that charity care results from the hospital’s policy of providing health
care to individuals who meet certain financial criteria; whereas, bad debts expense
result from extending credit. Health care services provided as charity care were never
intended to provide cash flows. Although accounts are maintained for employee and
contractual allowances, these items are not expenses, but rather, they are revenue
deductions that are subtracted from gross patient service revenues to arrive at net
patient service revenue reported in the statement of operations.

FINANCIAL REPORTING
Financial reports of NPO consist of the basic financial statements or the general purpose
financial statements than an organization should prepare Statement of Financial
Position, Statement of Activities, Statement of Cash Flows and Notes to Financial
Statements.

Statement of Financial Position

it presents the financial position of the organization at a certain date. It may be used as
a tool to evaluate the resource controlled, solvency, liquidity, and stability of the
organization’s financial standing. For NPOs, net assets are the equivalent of equity.
Net assets are divided into unrestricted and restricted. Restriction may be imposed by
the donor or by legal requirements. Restricted net assets are those whose use is limited
by either a time restriction or a purpose restriction. A time restriction requires that the
resources be used during a certain period of time. Sometimes time restriction specifies
that the resources cannot be used until after a specific point in time. A purpose
restriction, as its name suggests, requires that resources be used for a specific purpose,
such as a specific program/project of the organization.

Statement of Activities or Performance

This financial statement reports on the sum all support and revenue received and
expenses disbursed for a given period of time. It measures how financial resources
were derived and utilized.

The NPOs may have an option to present “Changes in net assets” in the Statement of
Financial Position or Statement of Activities.

Option 1: Statement of Financial Position

Net Assets, beginning
Net Excess (deficit) for the period [from the Statement of Activities]
Net Assets, ending

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Option 2: Statement of Activities

Net Excess (deficit) for the period
Add: Net Assets, beginning
Net Assets, ending [forwarded to Statement of Financial Position]

Statement of Cash Flows

The statement of cash flows provides a summary of available cash and its use during
the accounting period. It also shows the information about methods of financing
activities and use and investment resources during the period (this statement can be
called “Statement of Receipts and Payments” if cash the cash basis is allowed and used).
Cash flows are classified into operating activities, investing activities, and financing
activities. Statement of cash flows can be presented using one of two methods: indirect
method and direct methods. The direct method reports actual receipts and
disbursement for each item of cash inflows and outflows. The indirect method begins
with the results of operating activities reported in the statement of activities. Most
NPOs use the direct method, while auditors prefer the indirect method. While the title
is statement of cash flows, the statement is required to report non-cash transaction as
well. The statement of cash flows should include non-cash investing and financing
activities either by narrative or by including a schedule of non-cash transactions as part
of statement of cash flows.

Operating Activities reflect all cash transactions that are not classified as either
investing or financing activities.

Cash inflows from operating activities include:

 Grant
 Contributions (other than long term restricted contributions)
 Receipts from the sale of goods and services

Cash outflows for operating activities include:

 Disbursements made for program/ project activities
 Disbursement to employees, vendors, and contractors
 Payment of taxes, if any
 Grants made by the organization to other organization, if any.

Investing activities include acquiring and disposing of debt and equity investments,
granting and collecting loans, and acquiring and disposing of property, plant and
equipment

Cash inflows from investing activities include:

 Sales of property, plant and equipment
 Collections of loan

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Cash outflows for investing activities include:

 Purchase of property, plant and equipment
 Disbursements of loans

Financing activities include borrowing money and repaying amounts borrowed, and
obtaining and paying for other resources obtained from creditors using long term
credit. This also includes cash received for contributions from donors that is restricted
for long-term purposes for which the restrictions have yet been satisfied and the cash is
still being held.

Cash inflows from financing activities include:

 Receipts of contributions from donors that are restricted for long term purposes
 Interest and dividends restricted for long term used
 Short and long-term borrowings

Cash outflows for financing activities include:

 Repayment of short and long-term debt
 Repayment of capital leases

Notes to Financial Statements

The minimum disclosure requirements of NPOs are the following:
 Nature and purpose of the organization, including the domicile and legal form o
the organization
 Description of funds/projects/services
 Number of members of the governing board/body, general assembly/
membership and employees and changes during the reporting period
 Basis of preparation of the financial statements
 Accounting policies to be disclosed which will assist users in understanding the
way in which transactions and events are reflected in the financial statements
 Major resource providers
 Recipients of material donations given, if any
 Explanation to significant impairment of assets
 Contingent, commitments and other financial disclosures
 Lien on assets and other restrictions
 Other disclosure requirements prescribed by the Securities and Exchange
Commission Philippines for NPOs

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ACCOUNTING STANDARD UPDATES

FASB Accounting Standard Update (ASU) No. 2016-14, Not-for-Profit Entities (Topic
958): Presentation of Financial Statements of Not-for-Profit Entities, brings significant
changes for all not-for-profit organizations, and implementation may require a
significant investment of time and effort.

The accounting standard update is an enhancement, not an overhaul, of existing

guidance. The goal is to reduce some of the complexities of not-for-profit reporting
while making it easier for financial statement users to understand an organization’s
financial position and related activities.

The changes are designed to improve the presentation of information communicated in

not-for-profit financial statements, in particular net assets, liquidity, financial
performance, and cash flows. ASU 2016-14 emphasizes liquidity and statement of
financial position improvements.

ASU 2016-14 is effective for organizations with calendar year 2018 and fiscal year 2019
year ends. The impact on smaller organizations depends on the complexity and nature
of their financial statements. There are several aspects that affect nearly every
organization, including net asset classifications, liquidity and availability of resources,
and the functional allocation of expenses. The remaining changes, such as endowments,
board-designated net assets, and statement of cash flows, affect a smaller number of
organizations.

These are some of the amendments and changes in financial reporting of NPOs:

Net asset classifications

Previously, not-for-profit organizations had three distinct net asset classifications:
unrestricted, temporarily restricted, and permanently restricted. ASU 2016-14 combines
temporarily restricted and permanently restricted net assets into “net assets with donor
restrictions” and renames unrestricted net assets as “net assets without donor
restrictions.” This reflects the fact that permanently restricted net assets can be spent as
long as the organization acts prudently.

Previously Reported New Reporting

Unrestricted net assets without donor restrictions
Temporarily Restricted net assets with donor restrictions
Permanently Restricted

Information about liquidity and availability of resources

NPOs are now required to disclose qualitative information about how they manage
liquid resources available to meet cash needs for general expenditures within one year
of the date of the statement of financial position. Quantitative information is required
to disclose the availability of the not-for-profit’s financial assets to meet cash needs for

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general expenditures within one year of the date of the statement of financial position,
either on the face of the statement of financial position or in the notes.

Functional allocation
NPOs are now required to provide an analysis of expenses by their natural classification
(such as salaries, rent, and depreciation) as well as their functional classification
(program, management and general, and fundraising) in one location. This can be on
the face of the statement of activities, in a separate statement, or in the notes to the
financial statements. Previously, only voluntary health and welfare organizations were
required to include the statement of functional expenses as part of a complete set of
basic financial statements.

The analysis of expenses by nature and function should show, by their natural
classification, expenses that are reported by other than their natural classification, such
as salaries included in cost of goods sold or facility rental costs of special events, and
reported as direct benefits to donors. Items excluded from the presentation include
investment expenses netted against investment returns, gains and losses, and certain
other items such as foreign currency translation and pension and post-retirement prior
service costs.

ASU 2016-14 includes clarifying guidance on the definition of management and general
activities to assist in better depicting costs that can (or cannot) be allocated among
program or support functions. Supporting activities are clarified to mean those “that are
not directly identifiable with one or more program, fundraising, or membership
development activities.” The update does not change the definition of program expense
or supporting service. In addition, it requires a disclosure on how expenses are
allocated (allocation methodology used).

Endowments
NPOs are able to spend from endowment funds even if the funds are below the original
gift or historical amount. ASU 2016-14 no longer requires that the underwater amount
be disaggregated within the overall endowment fund amount and separately classified
as net assets without donor restrictions. The update instead requires classifying the full
amount of donor-restricted endowment funds, including underwater endowments,
within net assets with donor restrictions. Enhanced disclosures on underwater
endowment funds are now required, including the fair value of underwater
endowments, their original gift amount, and the aggregate of the amount of underwater
deficiencies.

Board-designated net assets

NPOs are required to disclose board-designated net assets either on the face of the
financial statements or in the notes to the financial statements. Board-designated net
assets are net assets without donor restrictions that are subject to self-imposed limits by

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action of the governing board. They may be earmarked for a specific purpose, for
example, and they can be undesignated at the board’s discretion.

Statement of cash flows

ASU 2016-14 eliminates the requirement to provide reconciliation from the direct
method to the indirect method when presenting the statement of cash flows using the
direct method. The indirect method works well for less complex organizations because
the approach is to begin with the total change in net assets and then generally adjust for
noncash transactions and changes to operating statement of financial position accounts,
such as accounts receivable and accounts payable. In contrast, the direct method lists
cash received from customers and donors, cash paid to vendors and employees, and
other receipts and payments. This is often easier for an average reader to understand if
the organization is more complex, with a large noncash and non-operating statement of
financial position accounts.

REFERENCES
 SEC Memorandum Circular No. 25 series of 2019
 Accounting Standard Update No. 2016-14
 Statement of Financial Accounting Standards No. 117

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SAMPLE FINANCIAL STATEMENTS

Under the Statement of Financial Accounting Standards No. 117, the following are the
presentations of financial statements:

ABC FOUNDATION, INC.

(Non-stock, non-profit corporation)
STATEMENTS OF FINANCIAL POSITION
DECEMBER 31, 2020 AND 2019

Amounts in Philippine Pesos

Notes 2020 2019
ASSETS
Current assets
Cash P XXX P XXX
Receivables XXX XXX
Other current assets XXX XXX

Total current assets XXX XXX

Non-current assets
Investments XXX XXX
Property and equipment XXX XXX
Other non-current assets XXX XXX

Total non-current assets XXX XXX

TOTAL ASSETS P XXX P XXX

LIABILITIES AND NET ASSETS

Current liabilities
Trade payable and accrued expenses P XXX P XXX
Deferred support XXX XXX

Total current liabilities XXX XXX

Non-current liabilities
Deferred support, net of current portion XXX XXX
Small enterprise fund facility XXX XXX

Total non-current liabilities XXX XXX

Total liabilities XXX XXX

Net assets
Unrestricted net assets XXX XXX
Temporarily restricted net assets XXX XXX
Restricted net assets XXX XXX

Total net assets XXX XXX

TOTAL LIABILITIES AND NET ASSETS P XXX P XXX

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ABC FOUNDATION, INC.

(Non-stock, non-profit corporation)
STATEMENTS OF ACTIVITIES
FOR THE YEARS ENDED DECEMBER 31, 2020 AND 2019

Amounts in Philippine Pesos

2020 2019
Temporarily Temporarily
Notes Unrestricted Restricted Restricted Unrestricted Restricted Restricted

RECEIPTS
Support
Membership donation P XXX XXX XXX P XXX XXX XXX
Grants and other contributions XXX XXX XXX XXX XXX XXX

Total support XXX XXX XXX XXX XXX XXX

INCOME
Investment income XXX XXX XXX XXX XXX XXX
Income from small enterprise XXX XXX XXX XXX XXX XXX
Other income XXX XXX XXX XXX XXX XXX

Total income XXX XXX XXX XXX XXX XXX

TOTAL RECEIPTS XXX XXX XXX XXX XXX XXX

EXPENSES
Program expenses XXX XXX XXX XXX XXX XXX
Administrative expenses XXX XXX XXX XXX XXX XXX
Fund raising expenses XXX XXX XXX XXX XXX XXX
Other expenses XXX XXX XXX XXX XXX XXX

TOTAL EXPENSES XXX XXX XXX XXX XXX XXX

EXCESS OF RECEIPTS
OVER EXPENSES
DURING THE PERIOD XXX XXX XXX XXX XXX XXX

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ABC FOUNDATION, INC.

(Non-stock, non-profit corporation)
STATEMENTS OF CHANGES IN NET ASSETS
FOR THE YEARS ENDED DECEMBER 31, 2020 AND 2019

Amount in Philippine Pesos

Notes 2020 2019

UNRESTRICTED NET ASSETS

Balance at December 31, 2019 P XXX P XXX

Changes in 2020 net assets

Excess of receipts over expenses during the period XXX XXX
Net transfer to (from) temporarily restricted net assets XXX XXX
Net transfer to (from) restricted net assets XXX XXX

Balance at December 31, 2020 XXX XXX

TEMPORARILY RESTRICTED NET ASSETS

Balance at December 31, 2019 XXX XXX

Changes in 2020 net assets

Excess of receipts over expenses during the period XXX XXX
Net transfer to (from) unrestricted net assets XXX XXX

Balance at December 31, 2020 XXX XXX

RESTRICTED NET ASSETS

Balance at December 31, 2019 XXX XXX

Changes in 2020 net assets

Excess of receipts over expenses during the period XXX XXX
Net transfer to (from) unrestricted net assets XXX XXX

TOTAL NET ASSETS P XXX XXX

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ABC FOUNDATION, INC.

(Non-stock, non-profit corporation)
STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED DECEMBER 31, 2020 AND 2019

Amounts in Philippine Pesos

Notes 2020 2019

CASH FLOWS FROM OPERATING ACTIVITIES

Cash received from service recipients P XXX P XXX
Cash received from donors XXX XXX
Cash received from contributions receivable XXX XXX
Interest and dividends received XXX XXX
Interest paid XXX XXX
Cash paid to employees and suppliers XXX XXX
Donations given XXX XXX

Net cash from operating activities XXX XXX

CASH FLOWS FROM INVESTING ACTIVITIES

Acquisition of property and equipment XXX XXX
Proceeds from sale of investment XXX XXX
Investment made XXX XXX

Net cash used in investing activities XXX XXX

CASH FLOWS FROM FINANCING ACTIVITIES

Proceeds from contributions restricted for:
Investment in endownment XXX XXX
Investment in plant XXX XXX
Investment subject to annuity agreements XX XXX
Other financing activities:
Interest and dividends restricted for reinvestment
Proceeds from notes payables XXX XXX
Proceeds from long-term debts XXX XXX
Payments on notes payables XXX XXX
Payments on long-term debts XXX XXX

Net used in financing activities XXX XXX

NET CHANGE IN CASH XXX XXX

CASH - BEGINNING XXX XXXX

CASH - END P XXX P XXX

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Under the Accounting Standard Update No. 2016-14, the following are the
presentations of financial statements:

ABC FOUNDATION, INC.

(Non-stock, non-profit corporation)
STATEMENTS OF FINANCIAL POSITION
DECEMBER 31, 2020 AND 2019

Amounts in Philippine Pesos

Notes 2020 2019
ASSETS
Current assets
Cash P XXX P XXX
Receivables XXX XXX
Other current assets XXX XXX

Total current assets XXX XXX

Non-current assets
Investments XXX XXX
Property and equipment XXX XXX
Other non-current assets XXX XXX

Total non-current assets XXX XXX

TOTAL ASSETS P XXX P XXX

LIABILITIES AND NET ASSETS

Current liabilities
Trade payable and accrued expenses P XXX P XXX
Deferred support XXX XXX

Total current liabilities XXX XXX

Non-current liabilities
Deferred support, net of current portion XXX XXX
Small enterprise fund facility XXX XXX

Total non-current liabilities XXX XXX

Total liabilities XXX XXX

Net assets
Unrestricted net assets XXX XXX
Restricted net assets XXX XXX
Board-designated net assets XXX XXX

Total net assets XXX XXX

TOTAL LIABILITIES AND NET ASSETS P XXX P XXX

Note: Unrestricted net assets or “Net assets net assets without donor restrictions”
Restricted net assets or “Net assets with donor restrictions”

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ABC FOUNDATION, INC.

(Non-stock, non-profit corporation)
STATEMENTS OF ACTIVITIES
FOR THE YEARS ENDED DECEMBER 31, 2020 AND 2019

Amounts in Philippine Pesos

2020 2019

Notes Unrestricted Restricted Unrestricted Restricted

RECEIPTS P P
Support
Membership donation XXX XXX XXX XXX
Grants and other contributions XXX XXX XXX XXX

Total support XXX XXX XXX XXX

INCOME
Investment income XXX XXX XXX XXX
Income from small enterprise XXX XXX XXX XXX
Other income XXX XXX XXX XXX

Total income XXX XXX XXX XXX

TOTAL RECEIPTS XXX XXX XXX XXX

EXPENSES
Program expenses XXX XXX XXX XXX
Administrative expenses XXX XXX XXX XXX
Fund raising expenses XXX XXX XXX XXX
Other expenses XXX XXX XXX XXX

TOTAL EXPENSES XXX XXX XXX XXX

EXCESS OF RECEIPTS
OVER EXPENSES
DURING THE PERIOD XXX XXX XXX XXX

Note: Unrestricted net assets or “Net assets net assets without donor restrictions”
Restricted net assets or “Net assets with donor restrictions”

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ABC FOUNDATION, INC.

(Non-stock, non-profit corporation)
STATEMENTS OF CHANGES IN NET ASSETS
FOR THE YEARS ENDED DECEMBER 31, 2020 AND 2019

Amount in Philippine Pesos

Notes 2020 2019

UNRESTRICTED NET ASSETS

Balance at December 31, 2019 P XXX P XXX

Changes in 2020 net assets

Excess of receipts over expenses during the period XXX XXX
Net transfer to (from) temporary board-designated net assets XXX XXX
Net transfer to (from) restricted net assets XXX XXX

Balance at December 31, 2020 XXX XXX

RESTRICTED NET ASSETS

Balance at December 31, 2019 XXX XXX

Changes in 2020 net assets

Excess of receipts over expenses during the period XXX XXX
Net transfer to (from) unrestricted net assets XXX XXX

Balance at December 31, 2020 XXX XXX

BOARD-DESIGNATED NET ASSETS

Balance at December 31, 2019 XXX XXX

Changes in 2020 net assets

Net transfer to (from) restricted net assets XXX XXX
Net transfer to (from) unrestricted net assets XXX XXX

TOTAL NET ASSETS P XXX XXX

Note: Unrestricted net assets or “Net assets net assets without donor restrictions”
Restricted net assets or “Net assets with donor restrictions”

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ABC FOUNDATION, INC.

(Non-stock, non-profit corporation)
STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED DECEMBER 31, 2020 AND 2019

Amounts in Philippine Pesos

Notes 2020 2019

CASH FLOWS FROM OPERATING ACTIVITIES

Cash received from service recipients P XXX P XXX
Cash received from donors XXX XXX
Cash received from contributions receivable XXX XXX
Interest and dividends received XXX XXX
Interest paid XXX XXX
Cash paid to employees and suppliers XXX XXX
Donations given XXX XXX

Net cash from operating activities XXX XXX

CASH FLOWS FROM INVESTING ACTIVITIES

Acquisition of property and equipment XXX XXX
Proceeds from sale of investment XXX XXX
Investment made XXX XXX

Net cash used in investing activities XXX XXX

CASH FLOWS FROM FINANCING ACTIVITIES

Proceeds from contributions restricted for:
Investment in endownment XXX XXX
Investment in plant XXX XXX
Investment subject to annuity agreements XXX XXX
Other financing activities:
Interest and dividends restricted for reinvestment
Proceeds from notes payables XXX XXX
Proceeds from long-term debts XXX XXX
Payments on notes payables XXX XXX
Payments on long-term debts XXX XXX

Net used in financing activities XXX XXX

NET CHANGE IN CASH XXX XXX

CASH - BEGINNING XXX XXX

CASH - END P XXX P XXX

Note: Indirect method can also be used for the presentation of Statement of Cash
Flows

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