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Case 3 Charitable Contributions and Debt: A Comparison of St. Jude Children's Research
Learning Team B-Case Study

July 23, 2012

Requirement A: Recording Revenue

FAS 116 describes the specifics on when revenue can be recognized by either a related entity or by contributions with restrictions. Most not-for-profits record restricted funds only when the restrictions or conditions were met and revenue could be recorded. However this changed with FAS 116 as the contribution is recorded immediately as restricted revenue and this in turn has an effect on permanently restricted or temporarily restricted net assets. Since St. Jude Children's Research Hospital is a not-for-profit agency, they are required by FAS 116, para. 14, to distinguish between contributions with restrictions, with temporary restrictions, and those with donor-imposed restrictions. Additionally, any contributions without donor-imposed restrictions are to reported as support that increases unrestricted net assets.

Therefore, this adjustment would likely pertain to any number of facts governed with these guidelines. Contributions are recorded under separate accounts, they are:

  • gifts, grants and similar amounts received via direct public support,

  • Indirect public support

  • Government contributions and grants

Under FAS 116 when contributions are recorded are related to the type of contribution. According to FAS 116 glossary, (1993) a contribution is the transfer of an asset or cancellation of a liability without consideration. That is without the requirement of something in return and is termed a nonreciprocal contribution.

Conversely, a reciprocal transaction implies there is an exchange usually with goods or services of a comparable value. St. Jude Children's Research Hospital does list a distinction between pledges receivable and accounts receivable via accounts listed on their financial statements. Accounts receivable generally pertains to a service or good that has been provided and is awaiting compensation. Whereas a pledge is a promise to give without receiving anything of value in return. FAS 116 established new requirements for recognizing donated services to be either 1) a service creates or enhances non-financial assets, like volunteers who perform basic maintenance or cleanup at a building and 2) the services being donated are of special skills that would have been purchased if not for them being donated, such as lawyers or craftsmen.

St. Jude Children's Research Hospital is a not-for-profit entity and does not count volunteer services within the framework of their financial statements. Volunteer services are not calculated on St. Jude's financial statements because there is no way St Jude's can objectively measure or place a value on the services provided by St Jude's volunteer's. However, there are circumstances when St. Jude's Hospital could include volunteer services on their financial statements. If a volunteer stuffs envelopes with information about the hospital, this volunteer is performing volunteer services and there services could not be included on St. Jude's financial statements. But, if a volunteer performs specialized services such as; volunteering CPA services, this volunteer's services could be calculated and included on St. Jude's financial statements.

The reason this volunteer's services can be included on the financial statements is because their services as a CPA require specialized skills. If this individual did not donate their services as a CPA, than St. Jude's would actually have to hire someone to perform those services. As statement users evaluate capital sources and uses by not-for-profits care is needed to consider affiliated organizations’ role, total contributions, and the effect of volunteerism. The comparability between not-for-profits and investor-owned operations can be found in the financial statements and on Form 990. Each informs the financial statement users and investors of information about the financial position and the linkages between the not-for-profit and their affiliate.

Consolidated financial statement information is also made available between the two and is part of the Annual Reports submitted by both the not-for-profit and its affiliate. The Financial Accounting Policy Committee (FAPC) of the Association for Investment Management and Research (AIMR) has commented on the Securities and Exchange Commission’s Proposed Rule: Disclosure in Management’s Discussion and Analysis About Off-balance Sheet Arrangements, Contractual Obligation and Contingent Liabilities and Commitments. Adams and McEnally (2002) stated, “Investors and other users of financial statements require complete, transparent, consistent, and comparable information about a company's commitments and other obligations in order to properly evaluate the firm's risks and future earning power. Such evaluations are critical to developing well-informed investment decisions. It is particularly important that users be able to evaluate the aggregate effect of the potential risk exposure on the company's operations” (Comments of Financial Accounting Policy Committee of the Association for Investment Management and Research, para. 3).

Any information that would affect the financial position of a not-for-profit and its affiliates is to be included in the financial reports & statements. As stated under General Comments, “The FAPC strongly supports the Commission’s proposal to...Require disclosure of off-balance sheet transactions, arrangements, obligations (including contingent obligations), and other relationships of an issuer with unconsolidated entities or other persons that have, or may have a material effect on financial condition, revenues or expenses, results of operations, liquidity, capital expenditures or capital resources” (Comments of Financial Accounting Policy Committee of the Association for Investment Management and Research, para. 2). Therefore, any information that would affect investors and their decisions should be made public to aid in those decisions. Financial Statement users of not-for-profit hospitals financial statements can expect to be fully informed regarding affiliated parties, such as the linkages between St. Jude Children’s Research Hospital, ALSAC, and the foundation cited.

Requirement B:Revenue Mix (Strategy-Related Considerations)
If the government were to be owned and operated by the hospital and the revenue and contributions would not need to be recorded. The government is not required to report revenue nor contributions unless they receive it within 60 days prior to the end of the fiscal year. FAS 116 adjustments unfortunately would not relate to this situation with the exception that the collection is efficiently proven. If the government were to be owned and operated by the hospital as previously mentioned, it would have to be proven 60 days before the end of the fiscal year. In this scenario, the contributions would have to be recorded in the accounts that would be used.

If the government has control over St. Jude Children´s Research Hospital, it would seek revenue from capital contributors such as federal taxes, state taxes, and property taxes compared to using charitable contributors. Another considerable difference is that the government ran hospitals are organized and administrated differently compared to non-profit organizations. The organizations use a board or electives within the government that own the hospitals and provide supervision and/or provide the officials. In conclusion, the case involving St. Jude´s Hospital, the case accepts multiple types of charity care including Medicaid, and extends to Medicare, etc. St. Jude is a non-profit hospital, although they ensure that all the finances are reported accurately. The 10K filings that were linked are associated with that of the hospital and contain enough information about the company and there condition of how the company is doing.

Finally, the result is that non-profit organizations can lose money just as much, of not more than an average hospital can. Government Accounting Standards Board (GASB) Statement no. 33 discusses financial reporting for nonexchange transactions such as donations or private contributions. In such cases, funds received come with either time use restrictions or purpose use restrictions. Recognition should be done in accordance with accrual or modified accrual standards. Similar to not-for-profit organizations, government owned and operated hospitals would not normally quantify volunteer services in the financial statements unless those volunteer services produced some cost for the hospital. For government entities that have mixed revenues, GASB Statements no. 29 directs government health and welfare to use their discretion in applying either government accounting standards or the American Institute of Certified Public Accountants (AICPA) not-for-profit model to record and account for mixed revenues.
Adams, J. & McEnally, R. (2002). Comments of Financial Accounting Policy Commitee of the Association for Investment Management and Research
Retrieved from http://www.sec.gov/rules/proposed/s74202/jadams1.htm
FAS 116, FASB (1993) Retrieved from http://www.fasb.org/cs/BlobServer?blobkey=id&blobwhere=1175820922799&blobheader=application%2Fpdf&blobcol=urldata&blobtable=MungoBlobs
FASB Summary of Statement No. 116, Retrieved from: http://www.fasb.org/st/summary/stsum116.shtml on July 20, 2012
Government Accounting Standards Board. (n.d.). Retrieved from http://www.gasb.org/cs/ContentServer?c=Pronouncement_C&pagename=GASB%2FPronouncement_C%2FGASBSummaryPage&cid=1176156695084
Government Accounting Standards Board. (n.d.). Retrieved from http://www.gasb.org/st/summary/gstsm33.html

Wallace, W.A. (2008). Mastery of the financial accounting research system (FARS) through cases (2nd ed.). Hoboken, NJ: Wiley.

Statement of Financial Accounting Standards No. 116 (2010) Retrieved 26 May, 2010 from http://www.fasb.org/ Wallace, W.A. (2008) Mastery of the Financial Accounting

Research System (FARS) Hoboken, NJ: John Wiley & Sons.Retrieved 26 May, 2010

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