Healthcare News InContext | November 2007

PRACTICAL GUIDE ON HOW TO ACCOUNT FOR

CONTRIBUTIONS RECEIVED
First the good news, your facility just received a BIG contribution. Now the bad news, you have
to figure out how to properly record it in your financial statements. Since receiving
contributions is not an everyday occurrence (unfortunately) for most, the recording of grants
and contributions can be a challenge. So, how do you record contributions and grants received?
As with most accounting rules, it depends. Is your facility not-for-profit or governmental? Is the
contribution restricted as to a purpose or certain time period? Is the contribution really an
endowment? You get the picture.
In this article, I will try to give some practical advice on how to account for contributions
received. The advice I will share is not necessarily the only way to deal with contributions
received. The accounting rules do allow a couple of shortcuts that I will not be mentioning here
due to the fact the shortcuts can create some confusion for those that dont deal with
contribution accounting on a daily basis. The guidance related to contributions received comes
from the Financial Accounting Standards Board (FASB) Statement No. 116. This guidance was
issued back in 1993, but we all still struggle with contributions received on occasion.
I will go ahead and answer the first question above regarding governmental facilities. FASB No.
116 and what I will be writing about here do not apply to governmental entities. We will tackle
how governmental entities deal with contributions in another article. The proper accounting for
any contribution or grant is a step-by-step process.
Step 1: Determine the Purpose of the Contribution
A contribution received is going to be classified into 1 of 3 net asset (equity) categories:

Unrestricted contribution is received with no restrictions on how it is to be used

Temporarily restricted contribution is received with a restriction as to what it is to be

used for or when

Permanently restricted endowments

An important note about endowments; to be considered a true endowment and treated as a

permanently restricted contribution the endowment has to be setup by an outside party. It is a
common practice for boards to take cash balances or otherwise unrestricted contributions and
pass a resolution to treat them as an endowment. When this is done, it creates what is called a
quasi-endowment. These quasi-endowments are not permanently restricted as defined by FASB
No. 116 and therefore would be reflected in unrestricted net assets on the balance sheet. It is
permissible to disclose a quasi-endowment in the notes to the financial statements and/or
include as a separate line item on the balance sheet under the unrestricted net assets category;

but they are not permanently restricted because the board could just as easily pass a resolution
to dissolve the quasi-endowment.
Step 2: Make the Journal Entry
The contribution is unrestricted. The contributor says, Here is $1 million to use wherever it is
needed most.
Cash
Other revenue

1,000,000(debit)
1,000,000(credit)

The contribution is temporarily restricted. The contributor says, Here is $1 million you must
use to offset operating expenses in connection with a diabetes education program.
Before we get to the journal entry, lets talk a little about temporarily restricted contributions.
The intent of FASB No. 116 is to make sure that the revenue generated from a contribution is
properly matched with the expense or outflow of cash. If you understand that, it will help you
better understand how to account for this type of contribution. If you were to record the $1
million contribution in fiscal year 2007 as revenue and then incur the expense in starting up the
diabetes education program in 2008, what would happen? Net income for 2007 would be
overstated and net income for 2008 would be understated. According to FASB No. 116 the $1
million should go into a temporarily restricted category of net assets on the balance sheet until
you incur the expense and then release that money into revenue in the year that you incur
the expense to properly match up the revenues and expenses. Now lets look at some journal
entries.
When the $1 million is received it is a balance sheet entry:
Cash
1,000,000(debit)
Temporarily restricted net assets

1,000,000(credit)

When you incur at least $1 million in expense related to the diabetes program:
Temporarily restricted net assets
1,000,000(debit)
Net assets released used for operations
1,000,000(credit)
The line item, net assets released used for operations, is on the statement of operations in the
revenue section. This is the mechanism used to move the contribution out of the balance sheet
under temporarily restricted net assets to the statement of operations and show as revenue
since you have now incurred the expense.
Lets change the example a little. The contributor says, Here is $1 million to be used for
purchasing a new CT scanner.
When the $1 million is received it is a balance sheet entry:
Cash
1,000,000(debit)
Temporarily restricted net assets
When you purchase the CT scanner:
Temporarily restricted net assets

1,000,000(debit)

1,000,000(credit)

Net assets released used for purchase of PP&E

1,000,000(credit)

The line item, net assets released used for purchase of PP&E, is on the statement of operations
below net income (excess of revenues over expenses). This is referred to as a below the line
adjustment meaning that it increases unrestricted net assets but does not affect net income. You
might ask yourself why is there a difference in where a contribution is recorded on the
statement of operations depending on whether it is for operating or capital purposes. Again, it
goes back to the matching principle.
The first example had an operating expense related to diabetes services to offset the revenue.
When you purchase property and equipment, like a CT scanner, there is no expense on the
statement of operations. So, it would not make sense to show contributions restricted for
purchases of property and equipment as revenue because there would be no operating expense
to offset the revenue. Make sense? Even though it would be nice to run a contribution related to
property and equipment through net income on occasion, that unfortunately would overstate
your net income and the accounting rules and your auditors tend to frown on that, so it is an
important distinction.
The contribution is permanently restricted (an endowment). The contributor says, Here is $1
million that you can never spend, but you can spend the earnings on whatever you want to.
When the $1 million is received it is a balance sheet entry:
Cash
1,000,000(debit)
Permanently restricted net assets

1,000,000(credit)

As investment earnings are generated (lets say $10,000):

Cash
10,000(debit)
Permanently restricted net assets

10,000(credit)

To record the release of the investment earnings:

Permanently restricted net assets
10,000(debit)
Net assets released used for operations

10,000(credit)

As you might imagine, the balance of permanently restricted net assets would stay at $1 million
forever. Now, if the contributor restricts the earnings for a particular purpose that complicates
things. You would need to move the earnings to temporarily restricted net assets and then
follow the guidance above related to when and how to release temporarily restricted net assets
into revenue (operations) or unrestricted net assets (property and equipment).
Step 3: Determine the Timing of the Contribution
All the above applies to when you receive an unconditional promise to give NOT just when you
get the actual contribution. A lot of times when someone promises to give you a contribution
they go ahead and give you the cash or noncash asset at the same time. That obviously makes
the accounting easier. What happens when they make a promise to give you something now, but
you dont actually get the cash until next year? If you can determine that receiving the cash is
reasonably assured (hopefully you can get something in writing) and there are no conditions on

the promise, then under FASB No. 116 you record the contribution when the promise is
received versus waiting until the cash is received.
Lets take a look at a couple of examples, but before we do, please note that it is assumed that
all unconditional promises to give are temporarily restricted. That is important to remember.
The logic behind this is that it would not make sense to record a promise to give, which is
unenforceable by law, as revenue until you actually receive the cash. You are required to go
ahead and record the promise as a receivable with an offset to temporarily restricted net assets.
This balance sheet entry gets the receivable on the books but cleverly avoids the revenue
recognition issue. As always there is one exception. If the contributory explicitly states that the
unconditional promise is intended to be used in the current period, then you would go ahead
and record the receivable and credit other revenue (unrestricted net assets).
The promise to give is unconditional. The contributor says, I promise to give you $1 million
nine months from today.
When the promise is received:
Contributions receivable
Temporarily restricted net assets

1,000,000(debit)
1,000,000(credit)

When the cash is received, assuming any restrictions on use have been satisfied:
Temporarily restricted net assets
1,000,000(debit)
Net assets released
1,000,000(credit)
The promise to give is conditional. The contributor says, I promise to give you $1 million after
you construct an urgent care center.
When the promise is received:
No entry is made. You would have some note disclosure to potentially make.
After the urgent care center is constructed and you get the cash:
Cash
1,000,000(debit)
Temporarily restricted net assets
1,000,000(credit)
Temporarily restricted net assets
1,000,000(debit)
Net assets released used for purchase of PP&E
1,000,000(credit)
Conclusion
I hope this summary of FASB No. 116 and how to deal with contributions received will be
helpful. The concept of matching revenues with expenses and making sure you dont overstate
net income is simple; however, we accountants have a way of complicating things. FASB No. 116
is 69 pages long. So, as you might imagine, I did not cover everything. If you file this article away
though and pull it out the next time you have to record a contribution, I believe the above
information will be valuable.
For more information, contact us at healthcare@dixon-hughes.com.

To ensure compliance with requirements imposed by the IRS, we inform you that any tax advice contained in this
communication (including any attachments) is not intended or written to be used, and cannot be used, for the purpose of
avoiding penalties under the Internal Revenue Code.
2007 Dixon Hughes PLLC | www.dixon-hughes.com

Greg Taylor is a member in the firms Greenville, South Carolina office.

Greg graduated from Appalachian State University in 1992 with a B.S.
degree in Business Administration. He currently provides audit and
consulting services to several hospitals and related healthcare clients, as
well as many not-for-profit and retail entities. With 13 years of experience
in the healthcare industry, Greg has provided a variety of services to
healthcare clients including strategic planning, financial statement
forecasting, dashboard reporting and interim chief financial officer duties.
Greg is a member of the American Institute of Certified Public
Accountants, the South Carolina Association of Certified Public Accountants, the Healthcare
Financial Management Association and the Tennessee Hospital Association.