Children and Family Service Center case study.

Tomlinson, Vickie ; Ward, Terry J. ; Smith, G. Robert, Jr. 等

CASE DESCRIPTION

Students often fail to understand that much of the FASB's work does address not-for-profit entities. This case attempts to demonstrate to students the differences between for-profit and notforprofit organizations and how SFACs impact the theory underlying subsequent FASB standards on reporting. Thus, this case attempts to help students better understand the basic principles and concepts that differ between for-profit and not-for-profit organizations. This case specifically addresses SFAC # 4 and SFASs 116 and 117.

This case was designed to be used in a graduate theory or financial reporting class that has a nonprofit component. The case allows students to see through basic research how nonprofits fundamentally differ from for profit entities conceptually and theoretically.

An instructor could also use this case in an undergraduate nonprofit class as a project to introduce students to parts of the FASB's Conceptual Framework that relate to nonprofits, thus helping students to understand the theory behind reporting in a nonprofit environment. Thus, this case can be used in either undergraduate or graduate classes depending on which of the requirements the instructor wishes the students to complete.

CASE SYNOPSIS

In this case, you are asked to take the role of the Director of Fiscal Operations of a not-forprofit organization, Children and Family Service Center. The Trustees have hired you because of concerns that the accounting records are not adequate. You are give ten areas of concern and asked to answer various questions related to these concerns. Thus, you attempt to determine the appropriate treatment for each item. This case will help you to better understand the basic principles and concepts that differ between for-profit and not-for-profit organizations.

INTRODUCTION

Kate Jones looked at her calendar. The day was March 1, 2002. She had been with Children and Family Services Center (CFSC) for only a few short weeks and had spent most of her time in meetings, reading files, and becoming generally acquainted with the organization. The Chairman of the Board of Trustees hired her as Director of Fiscal Operations because of concerns expressed by the Trustees over the accounting records. The former Director of Fiscal Operations left CFSC after serving for two years. However, he lacked experience in working with not-for-profit organizations. The Trustees discovered after his departure that the organization's financial reporting had not incorporated Statements of Accounting Standards (SFASs) 116 and 117. (See Exhibit 1 for the December 31, 2001, Balance Sheet.) They were also concerned the financial reports did not present all the information they would need to judiciously manage the affairs of the organization.

The Children and Family Services Center began operations during the early 1930s. At that time, the organization was known as The Children's Center. Its operations consisted primarily in the care of children who, for various reasons brought about by the country's economic depression and World War II, no longer had a family able to take care of them. During the 1960s, CFSC became incorporated and gained not-for-profit (503(c)) recognition by the Internal Revenue Service. As society changed, so did the organization. It expanded its services to include foster care, therapeutic foster care, group home residential treatment, child and family counseling, emergency shelters, and diagnostic treatment. CFSC also expanded geographically to satellite locations within the State. Formerly wholly dependent upon charitable gifts, it expanded its financial resources by contracting with Federal and State agencies. The contracts provided "per diem" fees for certain contractual services the governmental agencies needed in particular geographic locations. Each contract was designated for a distinct program.

As Kate read through the files, she came across several documents that made her believe the Trustees' concerns were justified. She was particularly concerned with ten items that may need adjusting entries to incorporate SFASs 116 and 117. Enumerated below are these items that concerned Kate:

1. CFSC had two savings accounts in two different small, rural banks. The names on these accounts were W. M. Kaiser Educational Fund, with a balance of $5,236.00, and Amanda Wellbanks Memorial Educational Fund, with a balance of $6,550.00. These accounts were begun in the late 1950s. Kate could not find any documentation as to how or why these accounts were originally set up. She contacted the banks, but only one still had documentation on microfilm. Evidently, the Kaiser account was set up to provide a source of educational funds for children in care who had no other financial resources. Unfortunately, neither bank could determine the original deposit amount.

2. One of the files contained documentation regarding a $5,000 certificate of deposit and bank statements on a checking account that had a balance at December 31, 2001, of $7,500.00. It appeared to have originally been a restricted gift. However, also in the file was an unsigned "Authorization for Termination of Accounts." (See Exhibit 2.) The Institute for Family Services is no longer operating and its phone number is disconnected. Kate wondered if this authorization had ever been executed.

3. A copy of a will declaring the Children's Center to be the recipient of an estate to be used for college scholarships. See Exhibit 3. Kate knew the children currently in care and believed that it is highly unlikely that any of the children served by CFSC would continue their education beyond high school. The amount of the funds received from this estate was $50,000.

4. Two years ago, the Board of Trustees authorized a fund-raising campaign to raise money to construct a diagnostic treatment center in Bristol, Tennessee. During 2000, $250,000 was raised; during 2001, $550,000 was raised. Construction began during 2001 and completion was expected in mid-2002. Estimated construction cost was $600,000, less than the amount raised. An architect donated his services. Kate estimated the value of the architect's services during 2001 at $20,000, and this amount had not been reflected on the financial reports. Total cost incurred through December 31, 2001, was $100,000.

5. As part of her duties, Kate read all of the minutes of the Board of Trustees' meetings for the past five years. She discovered that the Trustees had determined that all charitable gifts from bequests should be placed in a Board-restricted permanent endowment fund. The interest and dividends generated from this fund would be used for operations. The corpus amount and any gains in market value would be permanently maintained in the fund. She knew the Trustees wanted this information reflected in the financial reports. The current investment account was considered by the Board to be a permanent endowment fund.

6. Kate discovered a deed restriction on a piece of property that was given to CFSC several years ago. (See Exhibit 4.) While researching the property deeds, she discovered this property had a fair market value of approximately $20,000 at the date the property was given. She could not determine whether this gift had been reflected in the financial statements.

7. CFSC was given 1,000 shares of Enron stock during 1997. The donor requested the gift to be part of a permanent endowment with any earnings from interest or dividends used for ongoing operations. On the date the stock was assigned, its market value was $25 per share. Unfortunately, the stock is currently worthless.

8. The Chairman of the Board of Trustees provided Kate with a certified letter, dated October 31, 2001, from a businessman who pledged to give CFSC $30,000 for a permanent endowment. The donation was dependent on whether or not CFSC could find donors who would be willing to match the gift, or CFSC could "match" any shortage. The letter stated the "deadline" for raising a matching $30,000 was December 31, 2001. Kate determined $25,000 had been raised from outside donors.

9. As of December 31, 2001, gifts designated to refurnish a residential group home totaled $15,000. Pledges totaled $5,000, with expectation that 90% would be collected. The furniture was purchased in November 2001.

10. During January 2001, CFSC received a $10,000 gift. The donor conditioned the gift on the possibility CFSC would begin a program for unwed teenage mothers by January 2002. The Board of Trustees decided not to pursue development of this program.

Required

1. Explain what makes a not-for-profit entity distinct from a for-profit entity? You may wish to include in your discussion how Statement of Financial Accounting Concepts (SFAC) # 4 distinguishes the two types of entities.

2. According to SFAS # 117, what is the primary purpose of not-for-profit financial statements? Based on SFAC # 4, what are the objectives of not-for-profit financial reporting? Compare these objectives to the objectives of financial reporting for business enterprises described in SFAC # 1. What are the similarities and dissimilarities?

3. SFAS # 117 requires that the net assets of nonprofit organizations be classified in one of three ways. Identify these three classifications and briefly distinguish between them.

4. Based on SFAC # 6 and SFAS # 116, explain the difference between a donor-imposed gift restriction and a conditional promise to give. How is a conditional promise to give reported on the financial statements?

5. Following the enumerated items in this case, prepare the journal entries necessary to reclassify net assets at December 31, 2001 into the various classes required by SFAS # 117. Explain the reason for each reclassification and the reason for each non-reclassification.

6. SFAS # 117 further requires certain financial statements be prepared for nonprofit entities. Identify these financial statements and briefly describe what is reported in each. Based on the data provided in the case and the journal entries prepared in question five, prepare an adjusted Statement of Financial Position.

ACKNOWLEDGMENT

This research was partially supported by a Middle Tennessee State University Summer Research Grant and by the Business and Economic Research Center. We wish to thank participants of the National American Accounting Association meeting who commented on an earlier draft of this manuscript.

Exhibit 2

AUTHORIZATION FOR TERMINATION OF ACCOUNTS

We, Wayne Thompson, James Phillips, William Ingram, and Allen Morris, are the Trustees of the Institute for Family Services. We originally invested funds in Northern Bank of Tennessee, now First American Bank, and for the past several years, the interest from said investment has been delivered to Children and Family Services Center in Nashville, Tennessee. The accounts that are presently established are C.D. No. 61644, issued August 12, 1992 to mature August 12, 2002, and account number 17-9014-5, which is an interest bearing checking account. It is now the desire of the undersigned that said accounts be closed and the principal and all accrued interest from said accounts be delivered to Children and Family Services Center in Nashville, Tennessee, to be used as Children and Family Services Center sees fit in its operation.

This 20th day of September 2001.

Wayne Thompson

James Phillips

William Ingram

Allen Morris

Exhibit 3

Last Will and Testament

Terrill V. Greene

Know All Men By These Presents: That I, Terrill V. Greene, being of sound mind . . . .

Fourth: I direct that all the rest, residue and remainder of my estate be converted to cash and shall go to The Children's Center in Nashville, Tennessee with the stipulation that said funds shall be used for college scholarships by the children in said home and that The Children's Center in Nashville, Tennessee shall have the sole discretion to determine the recipients and the amounts of said scholarships.

Exhibit 4

Warranty Deed

As a gift and for no consideration, William Travis and wife, Madeline Travis, (the "Grantors") have bargained and sold, and by these presents do transfer and convey unto the said Children and Family Services Center, Inc. (the "Grantee") Grantee's successors and assigns, a certain tract or parcel of land in the 7th District of Davidson County, State of Tennessee, described in Exhibit A which is attached hereto and incorporated herein by reference (the "Property").

This conveyance of the Property is made expressly subject to the following:

1. This Property shall become a part of the Children and Family Services Center, Inc. and shall not be sold or conveyed to any other party by the Grantee.

2. The Property shall be forever maintained in its present state of pastureland and wild beauty. Hunting and fishing shall be restricted to the exclusive use of the residents of Children and Family Services Center, Inc, the employees and members of their families.

3. In order to preserve the natural state of the tracts conveyed hereby, it is agreed that no residential buildings shall be built upon said tracts.

Vickie Tomlinson, Tennessee Children's Home, Inc., Retired

Terry J. Ward, Middle Tennessee State University

G. Robert Smith, Jr.,Middle Tennessee State University

Exhibit 1
CHILDREN AND FAMILY SERVICES CENTER
Balance Sheet
December 31, 2001

Assets
 Cash and cash equivalents $75,250
 Receivable from state and federal contracts 507,851
 Other receivables 97,743
 Prepaid expenses 27,502
 Investments 10,305,350
 Notes receivable 413,672
 Land, buildings, and equipment, net 5,545,076
 Total assets $16,972,444
Liabilities and Net Assets
Liabilities
 Accounts payable $204,000
 Accrued expenses 140,324
 Notes payable 735,000
 Total liabilities $1,079,324
Net Assets 15,893,120
 Total liabilities and net assets $16,972,444