SFAS No. 116 changes accounting procedures for contributions - Statement of Financial Accounting Standards

Healthcare Financial Management, May, 1995 by David T. Meeting, Edward J. Giniat, Randall W. Luecke

ACCOUNTING PRINCIPLES AND PRACTICES

SFAS No. 116 will significantly change the accounting procedure for contributions received by healthcare organizations. It requires that contributions be recognized as revenue, at fair value, in the period received. In addition, a major change in SFAS No. 116 is that an unconditional pledge must be recognized in the year it is received, even if the actual contribution will be received in installments over future accounting periods.

Before SFAS No. 116 was issued, the guide Audits of Providers of Health Care Services represented generally accepted accounting principles (GAAP) for accounting of donations. Organizations typically would account for an unrestricted donation by debiting cash and crediting operating gains or revenue or non-operating gains. In the case of an unrestricted pledge, the debit would be to accounts receivable-pledges, with a corresponding credit to operating gains or revenue or non-operating gains. A contra-asset account for uncollectible pledges would be maintained to reduce the balance of pledges receivable to those deemed to be truly collectible, based upon past experience. If part of the pledge was to be applied during some future period, that part was to be reported in the general fund in the period in which it was made as deferred revenue or, if restricted, as an addition to donor-restricted funds.(a)

Temporarily restricted donations for specific operating purposes were credited to the appropriate restricted fund balance. Temporarily restricted donations were reclassified as revenue in the general funds when the restrictions were met.(b) Income and net realized gains and losses on investments of restricted funds other than endowment funds were to be added to, or deducted from, the respective fund balance unless such amounts were legally available for other use or chargeable against other funds.(c)

Donations of resources restricted to additions of property and equipment were considered capital contributions and were reported in a restricted plant replacement and expansion fund. When expenditures were made for property and equipment, a reclassification of resources from a plant replacement and expansion fund to a general fund was reported in a statement of changes in fund balance.(d) In effect, no donation revenue was recognized in the statement of revenue and expenses on donations restricted to plant replacement and expansion because the donation was considered a capital contribution.

Principal from endowments could be expended after the donor-imposed time or after other restrictions were met. If and when the endowment funds became available for unrestricted purposes, they were reported in a statement of revenue and expenses. If such resources were further restricted under the provisions of an endowment, they were to be shown as a reclassification to the appropriate donor-restricted fund in a statement of changes in fund balance.(e) Permanently restricted funds (endowments) were recorded as a debit to the appropriate asset and a credit to fund balance in an endowment fund.

Unconditional donations

Before SFAS No. 116 was issued, an organization would typically account for a donation by debiting cash and crediting non-operating revenue. In the case of a pledge, the debit would be to accounts receivable-pledges, with a corresponding credit to non-operating revenue. A contra-asset account for uncollectible pledges would be maintained to reduce the balance of pledges to those deemed to be truly collectible, based on an organization's past experience.

Under SFAS No. 116, unconditional donations are recognized as restricted or unrestricted support (revenue), at the time of the donation or pledge, at fair value. If restricted, the donation may be deemed permanently restricted or temporarily restricted. An example of a permanently restricted donation would be when the organization receives an endowment gift where the principal cannot be spent, but the earnings may be spent. The earnings on the endowment then may represent an increase in temporarily restricted net assets (the earnings may be used only to pay certain expenses) or an increase in unrestricted net assets, if the donor did not restrict the spending of the earnings.

A cash donation also can be an increase in temporarily restricted net assets or an increase in unrestricted net assets based on a donation agreement. If a donor does not dictate the use of a donation, the donation is unrestricted. If a donor places a restriction on a donation (eg, the gift is to be used for the delivery of pediatric medicine to those who cannot afford to pay for services), then the gift would need to be segregated as a temporarily restricted asset unless or until the restriction was met (ie, the funds were expended for that purpose).

Cash pledges due in less than one year are recognized as pledges receivable and donation revenue at the time a donor makes a promise to give. The entry is recorded at the gross amount of the pledge and again can represent an increase in permanently restricted, temporarily restricted, or unrestricted net assets, depending on the pledge agreement. SFAS No. 116 allows restricted contributions, whose restrictions are met in the same reporting period, to be reported as unrestricted support, provided that an organization reports consistently from period to period and discloses its accounting policy in the footnotes to the financial statements.(f) The Financial Accounting Standards Board (FASB) allows this treatment of temporary restricted donations to make day-to-day accounting easier for not-for-profit organizations.