AFAR 2305

NOT-FOR-PROFIT ORGANIZATIONS
INSTRUCTOR: DAVE U. CERVAS, CPA U.S. CMA CTT MRITax
Content Author: ARMEE JAY L. CRESMUNDO, CPA MSA

I. Nature of NPOs
• Non-profit organization (NPO) – one that carries out some socially desirable needs
of the community or its members and whose activities are not directed towards
making profit.

• Surplus revenues of NPOs 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.

II. Applicability of PFRSs to NPOs

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

• 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.

• Recognition criteria for assets and liabilities:

1. Meets the definition of an asset (or liability)
2. Probable inflow (or outflow) of resources
3. Reliable measurement of cost or other value

• Measurement of Asset or Liability:

1. Initial measurement at cost except when a relevant PFRS requires measurement
at fair value or some other value.
2. 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.

• General features in the Presentation of FS:

1. Fair presentation and compliance with PFRSs
2. Going concern
3. Accrual basis
4. Materiality and aggregation

AFAR 2305 NOT-FOR-PROFIT ORGANIZATIONS 1

 5. Offsetting
6. Frequency of reporting
7. Comparative information
8. Consistency of presentation

III. Fund Theory vs. Fund Accounting

• The FS 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
3. Permanently restricted.

• Although fund accounting is an off shoot of the fund theory, it is NOT required.

• The following table summarizes the main differences:

Fund theory-based FS Fund accounting-based FS
Focuses on the reporting entity Views the entity as being made up of
concept; 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- Adheres to the bookkeeping point-of-
view of providing useful information to view of providing useful information to
external users. 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 on classifying assets, net assets,
restrictions on net assets and revenues and changes in them strictly in
(i.e., unrestricted, temporarily accordance with their fund
restricted, or permanently restricted). classifications (i.e., unrestricted,
temporarily restricted, or permanently
restricted).
Current trend Traditional

AFAR 2305 NOT-FOR-PROFIT ORGANIZATIONS 2

IV. Contributions
A. Nature
• Contributions refer to resources received in non-reciprocal transactions (i.e.,
donations).

• Contributions are classified based on donor’s restrictions as:

1. Unrestricted
2. Temporarily restricted
3. Permanently restricted

• These classifications are also applied to the net assets. Internally-restricted

funds (restricted based on management’s sole discretion) are unrestricted.

B. Recognition and measurement

• Contributions in the form of cash or non-cash assets are recognized as revenues
measured at fair value and reported as either:
1. Unrestricted support – revenue from unrestricted contributions; or
2. Restricted support – revenue from temporarily restricted or permanently
restricted contributions.

• Unrestricted support increases unrestricted net assets. Restricted support

increases either (a) temporarily restricted net assets or (b) permanently restricted
net assets.

C. Promises to make contributions:

• 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. This is classified as a temporarily restricted contribution because of the
time restriction.

• Conditional promise is recognized only when the attached condition is

substantially met. If the promised contribution is received before the attached
condition is substantially met, it shall be accounted for as a liability.

D. Services:
• Contributions of services are recognized if the services received:
1. create or enhance nonfinancial assets; or
2. require specialized skills, are provided by individuals possessing those skills,
and would typically need to be purchased if not provided by donation.

• Contributed services and promises to give services that DO NOT meet the above
criteria are NOT BE RECOGNIZED.

AFAR 2305 NOT-FOR-PROFIT ORGANIZATIONS 3

 E. 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:
1. Held for public exhibition, education, or research in furtherance of public
service rather than financial gain;
2. Protected, kept unencumbered, cared for, and preserved; and
3. Proceeds from sales of collection items are to be used to acquire other items
for collections. (SFAS No. 116.11)

V. Financial Statements of NPOs

PFRSs
(based on IASCF’s published audited SFAS No. 117
financial statements)
1. Statement of financial position 1. Statement of financial position
2. Statement of activities 2. Statement of activities
3. Statement of cash flows 3. Statement of cash flows
4. Notes 4. Notes

Statement of Financial Position

This statement shall report (1) the amount of the organization’s total assets, total
liabilities, and total net assets, and (2) the amount for each of the three classes of the
organization’s net assets: permanently restricted, temporarily restricted, and
unrestricted.

Statement of Activities
This statement shall report (1) the amount of the change in the organization’s net assets
for the period with a caption such as changes in net assets or changes in equity, (2) the
amount of the changes in each of the three classes of the organization’s net assets;
permanently restricted, temporarily restricted, and unrestricted, (3) gross amounts of
revenues and expenses of the organization, except that investment revenues may be
reported net of expenses and gains or losses on disposal of plant assets may be reported
net, and (4) expenses by functional classifications such as program activities and
supporting services.

Statement of Cash Flows

The statement of cash flows shall be similar to one that is issued by a business enterprise.
This statement shall report (1) cash provided by operating activities, (2) cash flows from
investing activities, and (3) cash flows from financing activities.

A. Functional classification of expenses

• 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

AFAR 2305 NOT-FOR-PROFIT ORGANIZATIONS 4

 for and the major output of the organization and often relate to several major
programs.

• Supporting activities – are all activities other than program services. Generally,
these include management and general, fund-raising, and membership-
development activities.

B. Endowment of Fund
• A permanent endowment fund is one for which the principal must be
maintained indefinitely in revenue producing investment. Only the revenue from
the investments may be expended. A permanent endowment fund is also known
as regular endowment. A permanent endowment fund or permanently
restricted but the revenue from the fund is temporarily restricted.

• A term endowment fund is one for which the principal may be expended after
the passage of certain period or the occurrence of an event specified by the donor.
The term is “temporarily restricted”.

• A quasi-endowment fund is a fund established by the governing board of the

nonprofit organization. At the option of the board, the principal may later be
expended. Accordingly, a quasi-endowment fund is included on unrestricted
net assets because this is established using unrestricted net assets.

Illustrative Financial Statements

1. Statement of Activities
Nonprofit Organization
Statement of Activities
For the Year Ended December 31, 20xx

Changes in Unrestricted Net Assets:

Revenues and Gains:
Contributions Pxxx
Fees xxx
Investment income xxx
Net gains on investments xxx
Others xxx
Total unrestricted revenue and gains xxx
Net assets released from restrictions xxx
Total unrestricted revenues, gains and other support xxx
Expenses:
Programs (xxx)
Management and general (xxx)
Fund raising (xxx)
Increase in unrestricted net assets Pxxx

AFAR 2305 NOT-FOR-PROFIT ORGANIZATIONS 5

Changes in Temporarily Restricted Net Assets:
Contributions Pxxx
Investment income xxx
Net gains on investments xxx
Net assets released from restriction (xxx)
Increase in temporarily restricted net assets Pxxx

Changes in Permanently Restricted Net Assets:

Contributions Pxxx
Investment income xxx
Net gains on investments xxx
Increase in permanently restricted net assets Pxxx
Increase in net assets Pxxx
Net assets, beginning of the year xxx
Net assets, end of the year Pxxx

2. Statement of Financial Position

Nonprofit Organization
Statement of Financial Position
December 31, 20xx

Assets
Cash and cash equivalents Pxxx
Receivables (net) xxx
Inventories xxx
Investments xxx
Plant assets (net) xxx
Total assets Pxxx

Liabilities and Net Assets

Liabilities:
Accounts payable Pxxx
Long-term debt xxx
Total liabilities Pxxx

Net assets:
Unrestricted Pxxx
Temporarily restricted xxx
Permanently restricted xxx
Total net assets Pxxx
Total liabilities and net assets Pxxx

AFAR 2305 NOT-FOR-PROFIT ORGANIZATIONS 6

3. Statement of Cash Flows
Nonprofit Organization
Statement of Cash Flows
For the Year Ended December 31, 20xx

Cash flows from operating activities

Increase in net assets Pxxx
Items not affecting cash or operating activities:
Depreciation expense (xxx)
Net gains on investments in securities (xxx)
Changes in operating assets and liabilities:
Increase in receivables (xxx)
Decrease in inventories xxx
Decrease in accounts payables (xxx)
Net cash provided by operating activities Pxxx

Cash flows from investing activities

Acquisition of investments in securities P(xxx)
Acquisition of plant assets (xxx)
Disposal of plant assets xxx
Net cash used by investing activities P(xxx)

Cash flows from financing activities

Contributions received Pxxx
Interest and dividends received and reinvested xxx
Payment of long-term debt (xxx)
Net cash provided by financing activities Pxxx
Increase in cash and cash equivalents Pxxx
Cash and cash equivalents, beginning of the year xxx
Cash and cash equivalents, end of the year Pxxx

VI. Accounting Procedures peculiar to Specific Types of NPO’s

• The following are the specific types of NPOs with peculiar accounting
procedures/requirements:
1. Health Care Organizations
2. Private, non-profit, Colleges and Universities
3. Voluntary Health and Welfare Organizations
4. Other non-profit organizations

A. Health Care Organizations

• Financial statements:
1. Statement of financial position
2. Statement of operations (in lieu of a statement of activities)
3. Statement of changes in net assets

AFAR 2305 NOT-FOR-PROFIT ORGANIZATIONS 7

 4. Statement of cash flows, and
5. Notes to the financial statements.

• Revenues in the statement of operations are classified into the following:

1. Net patient revenue:
Gross patient service revenue xxx
Less: Contractual adjustments (xxx)
Employee discounts (xxx)
Billed charity care (xxx)
Net patient revenue xxx

2. Premium revenue – results from capitation agreements

3. Other revenues – all other revenues except those that are restricted.

• 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 (e.g., PhilHealth).

• Employee discounts are special discounts available only to the NPO's employees
(and their immediate family members). Employee discounts are directly deducted
from patient service revenue.

• Charity care pertains to free services rendered to patients. Charity care is not
recognized but rather disclosed only in the notes.

• Capitation agreements are agreements with third parties based on the number
of employees instead of services rendered.

• Health Care Organizations present revenues from restricted contributions

separately at the bottom part of the statement of operations, after unrestricted
revenues and expenses.

• 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.

B. Private, Non-profit, Colleges and Universities

• Scholarships and fellowships granted freely are treated as direct reduction
of revenues from tuition and fees, e.g., academic scholarship.

AFAR 2305 NOT-FOR-PROFIT ORGANIZATIONS 8

 • 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.

• Refunds of tuition fees from class cancellations and other withdrawal of

enrolment are treated as direct reduction of revenues from tuition and fees.

C. Voluntary Health and Welfare Organizations

• 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.).

PRACTICE PROBLEMS

Problem 1: Psalm Hospital, a private nonprofit hospital, earned P500,000 revenues from its
gift shop located at the lobby and spent P100,000 on research during the year ended
December 31, 2020. The P100,000 spent on research was part of a P150,000 contribution
received during December 2018 from a donor who stipulated that the donation be used for
medical research. None of the gift shop revenues were spent in 2020. What was the increase
in unrestricted net assets from the events that occurred during 2020?
A. P600,000
B. P400,000
C. P500,000
D. P550,000

Problem 2: AAA Hospital, a nonprofit hospital affiliated with a private university, reported
the following:
Cash contributions received from donors for acquisition of equipment P300,000
Proceeds from sale of hospital gift shop and snack bar 150,000
Dividend income not restricted by donor 50,000

What amount should be reported as “other revenue and gains” in the statement of activities?
A. P50,000
B. P150,000
C. P200,000
D. P500,000

Problem 3: Rev University, a nonprofit university assessed its students P600,000 for tuition
and miscellaneous fees for the 2020 summer session. The net amount realized was only
P580,000 because of the following reductions:
Tuition remissions granted to faculty member families 6,000
Class cancelation refunds 14,000

AFAR 2305 NOT-FOR-PROFIT ORGANIZATIONS 9

How much unrestricted current fund revenues from tuition and miscellaneous fees should
Rev University report for the period?
A. P580,000
B. P586,000
C. P594,000
D. P600,000

Problem 4: The following expenditures were incurred by a nonprofit botanical society:

Printing of annual report 25,000
Unsolicited merchandise sent to encourage contributions 50,000

What amount should be classified as fund-raising costs in the society’s activity statement?
A. P0
B. P25,000
C. P50,000
D. P75,000

Problem 5: The following funds were among those held by URS on December 31, 2020:
Principal specified by the donor as non-expendable P1,250,000
Principal expendable after the year 2020 750,000
Principal designated from current funds 250,000

What amount should be classified as regular endowment funds?

A. P250,000
B. P750,000
C. P1,250,000
D. P2,250,000

Problem 6: In 2020, the board of trustees of TCMC Private University designated P250,000
from its current funds for college scholarships. Also in 2020, the university received bequest
of P500,000 from an estate of a benefactor who specified that the bequest was to be used for
hiring teachers to tutor handicapped students. None of the bequest has been spent. What
amount should be accounted for as restricted net assets?
A. P0
B. P250,000
C. P500,000
D. P750,000

Problem 7: Rizza Foundation, a nonprofit organization, received following cash

contributions during the year to support its childcare center:
• P50,000 restricted by the donor to be used for meals of children
• P37,500 received by subscriptions to a monthly childcare magazine with a fair value
to subscribe of P25,000
• P25,000 to be used only upon completion of a new playroom that was 75% complete
at current year-end

AFAR 2305 NOT-FOR-PROFIT ORGANIZATIONS 10

What amount should be recorded as contribution revenue in current year?
A. P50,000
B. P62,500
C. P25,000
D. P27,500

Problem 8: In April 2020, Ruth donated P250,000 cash to her church, with the stipulation
that the income generated from this gift is to be paid to Claire during her lifetime. The
conditions of this donation are that, after Ruth dies, the principal can be used by the church
for any purpose voted on by the church elders. The church received interest of P20,000 on
the P250,000 for the year ended March 31, 2021, and the interest was remitted to Claire. In
the church’s March 31, 2021, financial statements
A. P20,000 should be reported under support and revenue in the activity statement
B. P230,000 should be reported under support and revenue in the activity statement
C. P250,000 should be reported as deferred support in the balance sheet
D. The gift and its terms should be disclosed only in the notes to the financial statements

Problem 9: In the first year of operations of a nonprofit organization, the following

transactions occurred:
• The NPO received P1,000,000 fund from a donor who stipulated that it shall be
invested indefinitely, and the dividend from such investment shall be used for
research project of the organization. Dividend amounting to P150,000 was received
during the year but only P50,000 was spent for the research project.
• The NPO received P300,000 fund from a donor who stipulated that it shall be used
for the acquisition of service car. The NPO used P100,000 of the fund for the
acquisition of a service car with useful life of 5 years. The car was acquired at the
middle of the year.
• The NPO received P500,000 fund from a donor who stipulated that it shall be used
based on the discretion of the Board of Trustees of the NPO. The NPO used P100,000
for the acquisition of souvenir items which were sold by the NPO for P150,000. The
remaining P400,000 was designated by the Board of Trustees for future fundraising
projects.

Q1: What is the amount of permanently restricted net assets at the end of the first year?
A. P1,100,000
B. P1,300,000
C. P1,200,000
D. P1,000,000

Q2: What is the amount of temporarily restricted net assets at the end of the year?
A. P100,000
B. P300,000
C. P200,000
D. P700,000

AFAR 2305 NOT-FOR-PROFIT ORGANIZATIONS 11

Q3: What is the amount of unrestricted net assets at the end of the year?
A. P640,000
B. P540,000
C. P590,000
D. P630,000

Problem 10: An organization of high school seniors performs services for patients at
Morong Doctors Hospital. These students are volunteers and perform services that the
hospital would not otherwise provide, such as wheeling patients in the park and reading to
patients. Morong Doctors Hospital has no employer-employee relationship with these
volunteers, who donated 500 hours of service. At the minimum wage rate, these services
would amount to P46,875, while it is estimated that the fair market value of these services
was P62,500. In the hospital’s statement of revenues and expenses, what amount should be
reported as non-operating revenue?
A. P62,500
B. P46,875
C. P15,625
D. P0

Problem 11: The following receipts were among those recorded by Jonson College, a non-
profit organization, during the current year:
Unrestricted Gifts 1,250,000
Restricted Current Funds (Expended for Current Operating Purposes) 500,000
Restricted Current Funds (Not yet expended) 250,000

What amount should be included as revenues and current fund revenues, respectively?
A. P2,000,000 and P1,750,000
B. P1,750,000 and P2,000,000
C. P1,500,000 and P1,500,000
D. P1,250,000 and P1,250,000

Problem 12: On December 30, 2020, Barbarian, a non-profit organization received a

P17,500,000 donation of Goblin shares with donor stipulated requirements as follows:
• Shares valued at P12,500,000 are to be sold with the proceeds to be used to construct
a public viewing building
• Shares valued at P5,000,000 are to be retained with P100,000 dividend used to
support current operations

How much should the Barbarian report as temporarily restricted net assets in the 2020
statement of financial position?
A. P12,600,000
B. P5,000,000
C. P12,500,000
D. P17,500,000

AFAR 2305 NOT-FOR-PROFIT ORGANIZATIONS 12

Problem 13: Dr. Tan Hospital, nonprofit hospital affiliated with a religious group, reported
the following information for the year ended December 31, 2020:
Gross patient service revenue at the full rates 1,960,000
Bad debts expense 20,000
Contractual adjustments, VAT 178,180
Allowance for discounts to hospital employees 30,000

In Dr. Tan Hospital’s statement of activities for the year ended December 31, 2020, what
amount should be reported as net patient service revenue?
A. P1,751,820
B. P1,781,820
C. P1,710,000
D. P1,960,000

Problem 14: Trisha Hospital, a nonprofit hospital, had the following cash receipts for 2020:
Patient service revenue 600,000
Gift shop revenue 50,000
Interest income restricted by donor for the acquisition of computer 100,000
equipment

As a result of these cash receipts, the hospital’s statement of cash flows for 2020 would
report an increase in operating activities of what amount?
A. P650,000
B. P750,000
C. P700,000
D. P600,000

Problem 15: A nonprofit organization had the following cash contributions and
expenditures in 2020:
Unrestricted cash contributions 1,000,000
Restricted cash contributions for the acquisition of property 400,000
Cash expenditures to acquire property 400,000

The statement of cash flows should include which of the following amounts?
Operating Investing Financing
A. P1,400,000 P(400,000) P0
B. P1,000,000 P0 P0
C. P1,000,000 P(400,000) P400,000
D. P1,000,000 P0 P800,000

AFAR 2305 NOT-FOR-PROFIT ORGANIZATIONS 13

Problem 16: On January 1, 2020, a nonprofit organization received P1,000,000 cash
donation from a donor who stipulated that the amount should be invested indefinitely in
revenue producing investment. The deed of donation also provided that the dividend income
shall be used for the acquisition of computers of the nonprofit organization.

On December 31, 2020, the NPO received P100,000 cash as dividend income from the
investment of the fund.

On January 1, 2021, the NPO acquired a computer at a cost of P20,000 with a useful life of 5
years without residual value.

Q1: In the statement of activities of the NPO for the year ended December 31, 2020, which of
the following is the proper effect of the transactions?
A. Increase in temporarily restricted net assets by P100,000
B. Increase in unrestricted net assets by P1,000,000
C. Increase in unrestricted net assets by P16,000
D. Decrease in temporarily restricted net assets by P20,000

Q2: In the statement of activities of the NPO for the year ended December 31, 2021, which of
the following is the proper effect of the transactions?
A. Increase in temporarily restricted net assets by P100,000
B. Increase in unrestricted net assets by P1,000,000
C. Increase in unrestricted net assets by P16,000
D. Decrease in temporarily restricted net assets by P20,000

Q3: How should the cash flows be reported in NPO’s Statement of Cash Flows for the year
ended December 31, 2020?
A. Cash receipts from operating activities by P100,000
B. Cash receipts from financing activities by P1,100,000
C. Cash disbursements for investing activities by P50,000
D. Cash disbursements for financing activities by P1,000,000

Q4: How should the cash flows be reported in NPO’s Statement of Cash Flows for the year
ended December 31, 2021?
A. Cash receipts from operating activities by P100,000
B. Cash receipts from financing activities by P1,100,000
C. Cash disbursements for investing activities by P20,000
D. Cash disbursements for investing activities by P100,000

AFAR 2305 NOT-FOR-PROFIT ORGANIZATIONS 14