Accounting-Case 3: Charitable Contributions and Debt

esources: Case 3: Charitable Contributions and Debt: A Comparison of St. Jude Children’s Research Hospital/ALSAC and Universal Health Services located in Ch. 5 of Mastery of the Financial Accounting Research System (FARS) Through CasesHow would your answers to Requirements A and B differ if the government owned and operated the hospital?How would your answers to Requirements A and B differ if the government owned andoperated the hospital?Case 3Charitable Contributions and Debt: AComparison of St. Jude Children’s ResearchHospital/ALSAC and Universal Health ServicesCase Topics Outline1. St. Jude Children’s Research Hospital/ALSAC1. Primary Objective2. Sources of Capital3. Reporting PracticesB. Universal Health Services1.Investor-Owned Hospital2. Debt Including LeasesB. ComparisonHospitals are an industry in which both not-for-profits and investor-ownedfacilities operate. The sources of capital available to the not-for-profits includecharitable contributions and debt offerings—unless they are governmental, inwhich case, higher taxes are also an alternative. Debt availability is always, inpart, a function of performance, and just as failures have arisen in bothsectors, about one-third of the investor-owned hospitals have been describedas losing money. Of interest is how can one effectively evaluate such anindustry, with this type of diversity in organizational forms and capitalavailability? A necessary prerequisite to such an evaluation is to have a firmunderstanding of how charitable contributions are presented.St. Jude Children’s Research Hospital/ALSAC has the mission of findingcures for children with catastrophic diseases through research and treatment.For the fiscal year 1999, this entity reported total assets of $221,664,232 andincome of $177,071,890. A Web site at http://www.stjude.org, as well asGuidestar’s listing, references a Form 990 (Return of Organization Exemptfrom Income Tax) filing, availability of audited financial statements uponrequest, and information that the hospital has 2,100 employees and 350volunteers. Founded in 1962, the organization seeks funds from contributionsand grants for unrestricted operating expenses, specific projects, buildings,and endowments. More than 4,000 patients are seen annually, with a hospitalmaintaining 56 beds. The Form 990, Part III states that the hospital provided15,231 inpatient days of care during the fiscal year and patients made 40,982clinic visits. ALSAC is the American Lebanese Syrian Associated Charities,Inc., the fund-raising arm of St. Jude Children’s Research Hospital. It reported1999 total assets of $1,007,699,320 and income of $274,123,399. Thisorganization reports the number of employees as 565 and the number ofvolunteers as 800,000. With its sole focus on the hospital, ALSAC’s selfdescription explains that no child has ever been turned away due to aninability to pay for treatment and explains key accomplishments in theresearch area achieved by St. Jude’s research and treatment of children withcatastrophic diseases. What is borne out by the example of St. Jude is thefact that a review of the Form 990 filed for the fiscal year ending 6/30/99indicates in Part VI the names of related organizations: ALSAC and St. JudeHospital Foundation, both of which are tax exempt. To gain a sense of capitalavailability to a not-for-profit entity, affiliated entities must be considered. Inaddition, the role of volunteers is a source of human capital not effectivelycaptured within the framework of financial statements for not-for-profits, asreflected in the Form 990 for the fiscal year ending 6/30/99 for ALSAC, whichstates in Part VI:Unpaid volunteers have made significant contributions of their time, principallyin fund-raising activities. The value of these services is not recognized in thefinancial statements since it is not susceptible to an objective measurement orvaluation and because the activities of these volunteers are not subject to theoperating supervision and control present in an employer/employeerelationship.Hence, as one evaluates capital sources and uses by not-for-profits, care isneeded to consider affiliated organizations’ role, total contributions, and theeffect of volunteerism on the comparability between not-for-profit and investorowned operations.Universal Health Services, Inc. filed its 10-K on March 28, 2001, for thecalendar year 2000, which includes comparative information for 1999.Analysts have described the company as the most aggressive company in theindustry over the 1999–2001 time frame in making acquisitions, particularly ofnot-for-profit operations and investor-owned operations experiencing losses.The company is praised for it high operating leverage, the relatively smallnumber of shareholders relative to the magnitude of total revenue, and stockprice as a multiple of earnings. The company operates 59 hospitals and, as of1999, had an average number of licensed beds of 4,806 at acute carehospitals and 1,976 at behavioral health centers, with patient days of 963,842and 444,632, respectively. Of interest is a commentary on the competitionfound in the company’s filing:CompetitionIn all geographical areas in which the Company operates, there are otherhospitals which provide services comparable to those offered by theCompany’s hospitals, some of which are owned by governmental agenciesand supported by tax revenues, and others of which are owned by nonprofitcorporations and may be supported to a large extent by endowments andcharitable contributions. Such support is not available to the Company’shospitals. Certain of the Company’s competitors have greater financialresources, are better equipped and offer a broader range of services than theCompany. Outpatient treatment and diagnostic facilities, outpatient surgicalcenters and freestanding ambulatory surgical centers also impact thehealthcare marketplace. In recent years, competition among healthcareproviders for patients has intensified as hospital occupancy rates in the UnitedStates have declined due to, among other things, regulatory and technologicalchanges, increasing use of managed care payment systems, costcontainment pressures, a shift toward outpatient treatment and an increasingsupply of physicians. The Company’s strategies are designed, andmanagement believes that its facilities are positioned, to be competitive underthese changing circumstances. (Source: 10-K filed 3/28/2001)Financial information is provided in Tables 5.3‐1 and 5.3‐2 for both the notfor-profit and the investor-owned hospitals.Table 5.3-1. Financial Comparisons of the Not-for-Profit EntitiesSt. Jude Children’sResearch HospitalForm 990 *$91,978,426Fiscal Year Ended 1999Contributions, gifts, grants and similaramounts received: Direct public supportIndirect public supportGovernment contributions (grants)31,469,447American Lebanese SyrianAssociated Charities, Inc.(ALSAC) Form 990 *$231,793,7482,906,934St. Jude Children’sResearch HospitalForm 990 *46,034,710Fiscal Year Ended 1999Program service revenue, includinggovernment fees and contracts (i.e.,health insurance revenue)Accounts receivable24,217,029Pledges receivableAllowance for doubtful accounts9,363,328Program service expensesProgram service expenses: Research87,225,830Program service expenses: Education and 5,471,186trainingProgram service expenses: Medical93,735,602ServicesReconciliation of revenue, gains, and−4,023,815other support to audited numbers: netunrealized gains on investmentsDeferred grant revenue1,857,628(Statement 5)Support from American Lebanese Syrian 91,978,426Associated Charities, Inc.(Statement 7)Excluded contributionsExcess or (deficit) for the year−10,933,191Net assets or fund balances at end of year 199,707,440Temporarily restrictedPermanently restricted14,000,000Total liabilities21,956,792Schedule of deferred debits & credits by 157,628contract (FAS 116 adjustment noted toresult in this deferred revenue)*American Lebanese SyrianAssociated Charities, Inc.(ALSAC) Form 990 *4,230,76423,604,74899,282,90665,891,26991,978,426(paid per Statements 4, 6)2,746,295(Statement 1)120,521,982994,501,91015,715,890247,147,8267,017,192The GuideStar.org Web site (http://www.guidestar.org) provides access to Forms 990 in.PDF format.Table 5.3-2. Universal Health Services, Inc.’s Financial ExcerptsIncome Statements (in thousands)Net revenuesOperating chargesComponents:Salaries, wages, and benefitsReported 1999 Calendar Year$2,042,3801,913,346793,529*Income Statements (in thousands)Provision for doubtful accountsLease and rental expenseInterest expense, netNet incomeTotal assetsTotal liabilitiesTotal retained earningsCapital stockPaid-in capital in excess of parReported 1999 Calendar Year166,13949,02926,87277,7751,497,973856,362482,960306158,345*The 10-K filing as of 3/28/2001 at EDGAR (http://www.sec.gov/edgar.shtml) provides financial statementinformation for 2000 and 1999.Requirement A: Recording Revenue1. What is meant by the reference in Table 5.3-1 to an FAS 116adjustment?2. How are contributions recorded? Is there a distinction between pledgesreceivable and accounts receivable?3. Are there circumstances when financial statements can quantifyvolunteers’ services?4. Can financial statement users of not-for-profit hospitals’ financialstatements expect to be fully informed regarding affiliated parties, suchas the linkages between St. Jude Children’s Research Hospital, ALSAC,and the foundation cited? Explain.Requirement B: Revenue Mix (Strategy-Related Considerations)The 10-K filing of Universal Health Services, Inc. describes the mix of revenuesources, as depicted in Table 5.3-3.1. How does this revenue mix compare with the revenue blend of the notfor-profit entity, St. Jude Children’s Research Hospital (ALSAC)? Accessthe latest SEC filing and compare the reported revenue mix; has itchanged?2. What does that imply as to the strategies of investor-owned hospitals inmanaging risk and ensuring adequate capital relative to not-for-profitentities? An opportunity exists to explore the greater social and politicalquestions that are frequently debated about the compatibility of profitoriented entities and quality of health care, relative to not-for-profitentities. As background, identify what the latest SEC filings reportconcerning charity care.Table 5.3-3. Patient Revenue MixPERCENTAGE OF NET PATIENT REVENUES20001999199819971996Third Party PayorsMedicare………………………………….Medicaid………………………………….Managed Care (HMOs and PPOs)…Other Sources……………………………Total……………………………………….32.3%11.5%34.5%21.7%100%33.5%12.6%31.5%22.4%100%34.3%11.3%27.2%27.2%100%35.6%14.5%19.1%30.8%100%35.6%15.3%N/A49.1%100%N/A-Not available (Source: 10-K filed 3/28/2001)Directed Self-StudyAccess the 10-Q (from http://sec.gov) for the quarterly period ended June 30,2006 and explain how Hurricane Katrina affected Universal Health Services.The same 10-Q reports on a funding commitment the company has made tothe alma mater of the Chairman of the Board of Directors and Chief ExecutiveOfficer. Describe the disclosure and explain why the event is an “OtherRelated Party Transaction.” [Download the 10-Q in text format and applythe Find capability in your word processor. Also access FARS and identify theguidance relevant to each event.]Health Insurance, Public Policy, and BackdatingA key factor in the health care industry is health insurance. Public policy hasdebated universal health care, changes to governmental programs such asMedicare, adjustment of tax policy regarding employers’ and employees’deduction for premiums, and alternative approaches to this sector of theeconomy. State and local governments, under a new accounting rule, haverecently estimated their total retiree health bill to be about $1.1 trillion. Overthe past decade, some governmental units used pension funds to help pay fordouble-digit growth in health care for retired public workers. Explain howaccounting interacts with public policy. Use FARS as a resource, accordingparticular attention to FAS 158.Health insurer UnitedHealth has been the focus of media coverage involvingwhat is known as the “options backdating scandal”. UnitedHealth’s internalprobe estimates its past decade exposure at half a billion dollars(“UnitedHealth Faces Formal Probe,” Wall Street Journal, December 27,2006, p. B8). Is there a relationship between the magnitude of the restatementand the nature of the health care sector of the economy? Explain. The SEC’sDivision of Corporation Finance shared a “Sample Letter Sent in Response toInquiries Related to Filing Restated Financial Statements for Errors inAccounting for Stock Option Grants” dated January 2007(http://www.sec.gov/divisions/corpfin/guidance/oilgasltr012007.htm.) Howhelpful do you find such guidance?fund balance“refers … to a common group of assets and related liabilities within anot-for-profit organization and to the net amount of those assets andliabilities…. While some not-for-profit organizations may choose toclassify assets and liabilities into fund groups, information about thosegroupings is not a necessary part of general purpose external financialreporting” (CON6, Footnote 45); fund balances may refer to such fundgroups as operating, plant, endowment, and other funds (FAS 117, Par.98).permanent restriction“A donor-imposed restriction that stipulates that resources bemaintained permanently but permits the organization to use up orexpend part or all of the income (or other economic benefits) derivedfrom the donated assets” (FAS 117, Par. 168). Information aboutpermanent restrictions is useful in determining the extent to which anorganization’s net assets are not a source of cash for payments topresent or prospective lenders, suppliers, or employees and thus arenot expected to be directly available for providing services or payingcreditors (FAS 117, Par. 98).pledgesreceipts of promises to givetemporary restriction“A donor-imposed restriction that permits the donee organization to useup or expend the donated assets as specified and is satisfied either bythe passage of time or by actions of the organization” (FAS 117, Par.168). Separate line items may be reported within temporarily restrictednet assets or in notes to financial statements to distinguish betweentemporary restrictions for (a) support of particular operating activities,(b) investment for a specified term, (c) use in a specified future period,or (d) acquisition of long-lived assets. Donors’ temporary restrictionsmay require that resources be used in a later period or after a specifieddate (time restrictions), or that resources be used for a specifiedpurpose (purpose restrictions), or both. For example, gifts of cash andother assets with stipulations that they be invested to provide a sourceof income for a specified term and that the income be used for aspecified purpose are both time and purpose restricted. Those giftsoften are called term endowments (FAS 117, Par. 15).Further ReadingsBaber, William R., Patricia L. Daniel, and Andrea A. Roberts. 2002.“Compensation to managers of charitable organizations: An empirical study ofthe role of accounting measures of program activities.” AccountingReview (77, 3, July), pp. 679–693.The Comprehensive Report of the Special Committee on Financial Reporting.American Institute of Certified Public Accountants. 1994. Improving BusinessReporting—A Customer Focus. New York: AICPA.Council of Better Business Bureaus (CBBB). 2001. Web site for thePhilanthropic Advisory Service reports. Availableat:http://www.bbb.org/pas/reports .Governmental Accounting Standards Board. 1990. Service Efforts andAccomplishments Reporting: Its Time Has Come—An Overview . Washington,DC: GASB.Guidestar. 2001. Web site that reports Form 990, Return of OrganizationExempt from Income Tax, information for charities. Availableat: http://www.guidestar.org .Houle, C. O. 1989. Governing Boards: Their Nature and Nurture .(Washington, DC: Jossey-Bass and National Center for Nonprofit Boards).Joos, Peter, and George A. Plesko. 2005. “Valuing loss firms.” AccountingReview (80, 3, July), pp. 847–870.Laswad, Fawzi, Richard Fisher, and Peter Oyelere. 2005. “Determinants ofvoluntary Internet financial reporting by local government authorities.” Journalof Accounting and Public Policy (24, 2, March/April), pp. 101–121.Parry, Robert W., Florence Sharp, Jannet Vreeland, and Wanda A. Wallace.1994. “The role of service efforts and accomplishments reporting in totalquality management: Implications for accountants.” Accounting Horizons (8, 2,June), pp. 25–43.Peebles, Laura. 2001. “The right philanthropic vehicle.” Journal ofAccountancy (July), pp. 22–27.Ripperger, Matt. 2001. “Analyst [A director with Warburg Dillon Read’sHealthcare Research Group] interview: Hospital management services.” WallStreet Journal Transcript (February 7), Document # LAQ901.Wallace, Wanda A. 2006. “Financial management in government entailsevaluating nonprofits: Are you ready for the next natural disaster?” Journal ofGovernment Financial Management (55, 1, Spring), pp. 44–57.Wallace, Wanda A. 2003. “Avoiding the downfall of windfalls.” Journal ofGovernment Financial Management (52, 3, Fall), pp. 18–30.Wallace, Wanda A. 2001. “How accountable are charities for theirperformance?” Accounting Today (June 18–July 1), pp. 18, 20.Accounting deals with a system which is a human creation, designedto satisfy human needs, and which must therefore, above all, be useful.The accounting environment is prone to many influences of anondeterministic nature, influences related not only to long-term legal,cultural and political traditions, but also to short-term movements ofmass psychology…. The subject matter is of such diversity andchanging complexity that attempts to make predictions in accountingare akin to the difficulties of predicting the conditions of turbulenceinside a tornado or the problem of “forecasting” next month’s weather.In principle it is possible for meteorologists to predict the weather atnoon in Chicago on January 1, 1981, just as it is possible in principle topredict an eclipse of the sun a thousand years hence. In practice,weather predictions (unlike astronomical predictions) are unreliable overthe space of a month let alone a millennium. Accountants, likemeteorologists, are also faced with a complex world of many interactingbodies. Nevertheless, they might be able to adopt the pure scientificmethod, and perhaps enjoy as much success with it as meteorologists,if—like—meteorologists—they only had to deal with the behavior ofinhuman molecules. But in contrast, the accountant’s “molecules” thinkand feel, they have traditions and cultures, they are governed by laws,act sometimes rationally and often irrationally, and are susceptible to anenormous variety of psychological, social, economic, cultural, andpolitical influences…. Accountancy … deals with problems involvingequity and balance and the resolution of conflict between differentgroups of human beings with widely varying interest and objectives.—Edward Stamp[Source: “Why Can Accounting Not Become a Science LikePhysics?” ABACUS (Vol. 17, No. 1, 1981), p. 21]87454361