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Case Study Presentation

Create 5- or 6-slide Microsoft PowerPoint presentation with speaker notes illustrating your findings to Case 3 Charitable Contributions and Debt: A Comparison of St. Jude Childrens Research Hospital/ALSAC and Universal Health Services in Ch. 5 of Mastery of the Financial Accounting Research System (FARS) Through Cases.
Case 3Charitable Contributions and Debt: A Comparison of St. Jude Children’s Research Hospital/ALSAC and Universal Health Services
Hospitals are an industry in which both not-for-profits and investor-owned facilities operate. The sources of capital available to the not-for-profits include charitable contributions and debt offeringsunless they are governmental in which case higher taxes are also an alternative. Debt availability is always in part a function of performance and just as failures have arisen in both sectors about one-third of the investor-owned hospitals have been described as losing money. Of interest is how can one effectively evaluate such an industry with this type of diversity in organizational forms and capital availability? A necessary prerequisite to such an evaluation is to have a firm understanding of how charitable contributions are presented.
St. Jude Children’s Research Hospital/ALSAC has the mission of finding cures for children with catastrophic diseases through research and treatment. For the fiscal year 1999 this entity reported total assets of $221664232 and income of $177071890. A Web site at http://www.stjude.org as well as Guidestar’s listing references a Form 990 (Return of Organization Exempt from Income Tax) filing availability of audited financial statements upon request and information that the hospital has 2100 employees and 350 volunteers. Founded in 1962 the organization seeks funds from contributions and grants for unrestricted operating expenses specific projects buildings and endowments. More than 4000 patients are seen annually with a hospital maintaining 56 beds. The Form 990 Part III states that the hospital provided 15231 inpatient days of care during the fiscal year and patients made 40982 clinic visits. ALSAC is the American Lebanese Syrian Associated Charities Inc. the fund-raising arm of St. Jude Children’s Research Hospital. It reported 1999 total assets of $1007699320 and income of $274123399. This organization reports the number of employees as 565 and the number of volunteers as 800000. With its sole focus on the hospital ALSAC’s self-description explains that no child has ever been turned away due to an inability to pay for treatment and explains key accomplishments in the research area achieved by St. Jude’s research and treatment of children with catastrophic diseases. What is borne out by the example of St. Jude is the fact that a review of the Form 990 filed for the fiscal year ending 6/30/99 indicates in Part VI the names of related organizations: ALSAC and St. Jude Hospital Foundation both of which are tax exempt. To gain a sense of capital availability to a not-for-profit entity affiliated entities must be considered. In addition the role of volunteers is a source of human capital not effectively captured within the framework of financial statements for not-for-profits as reflected in the Form 990 for the fiscal year ending 6/30/99 for ALSAC which states in Part VI:
Unpaid volunteers have made significant contributions of their time principally in fund-raising activities. The value of these services is not recognized in the financial statements since it is not susceptible to an objective measurement or valuation and because the activities of these volunteers are not subject to the operating supervision and control present in an employer/employee relationship.
Hence as one evaluates capital sources and uses by not-for-profits care is needed to consider affiliated organizations’ role total contributions and the effect of volunteerism on the comparability between not-for-profit and investor-owned operations.
Universal Health Services Inc. filed its 10-K on March 28 2001 for the calendar year 2000 which includes comparative information for 1999. Analysts have described the company as the most aggressive company in the industry over the 19992001 time frame in making acquisitions particularly of not-for-profit operations and investor-owned operations experiencing losses. The company is praised for it high operating leverage the relatively small number of shareholders relative to the magnitude of total revenue and stock price as a multiple of earnings. The company operates 59 hospitals and as of 1999 had an average number of licensed beds of 4806 at acute care hospitals and 1976 at behavioral health centers with patient days of 963842 and 444632 respectively. Of interest is a commentary on the competition found in the company’s filing:
Competition
In all geographical areas in which the Company operates there are other hospitals which provide services comparable to those offered by the Company’s hospitals some of which are owned by governmental agencies and supported by tax revenues and others of which are owned by nonprofit corporations and may be supported to a large extent by endowments and charitable contributions. Such support is not available to the Company’s hospitals. Certain of the Company’s competitors have greater financial resources are better equipped and offer a broader range of services than the Company. Outpatient treatment and diagnostic facilities outpatient surgical centers and freestanding ambulatory surgical centers also impact the healthcare marketplace. In recent years competition among healthcare providers for patients has intensified as hospital occupancy rates in the United States have declined due to among other things regulatory and technological changes increasing use of managed care payment systems cost containment pressures a shift toward outpatient treatment and an increasing supply of physicians. The Company’s strategies are designed and management believes that its facilities are positioned to be competitive under these changing circumstances. (Source: 10-K filed 3/28/2001)
Financial information is provided in Tables 5.31 and 5.32 for both the not-for-profit and the investor-owned hospitals.
Table 5.3-1. Financial Comparisons of the Not-for-Profit Entities
Fiscal Year Ended 1999
St. Jude Children’s Research Hospital Form 990 *
American Lebanese Syrian Associated Charities Inc. (ALSAC) Form 990 *
Contributions gifts grants and similar amounts received: Direct public support
$91978426
$231793748
Indirect public support
2906934
Government contributions (grants)
31469447
Program service revenue including government fees and contracts (i.e. health insurance revenue)
46034710
Accounts receivable
24217029
4230764
Pledges receivable
23604748
Allowance for doubtful accounts
9363328
Program service expenses
99282906
Program service expenses: Research
87225830
Program service expenses: Education and training
5471186
Program service expenses: Medical Services
93735602
Reconciliation of revenue gains and other support to audited numbers: net unrealized gains on investments
4023815
65891269
Deferred grant revenue
1857628
(Statement 5)
Support from American Lebanese Syrian Associated Charities Inc.
91978426
91978426
(Statement 7)
(paid per Statements 4 6)
Excluded contributions
2746295
(Statement 1)
Excess or (deficit) for the year
10933191
120521982
Net assets or fund balances at end of year
199707440
994501910
Temporarily restricted
15715890
Permanently restricted
14000000
247147826
Total liabilities
21956792
7017192
Schedule of deferred debits & credits by contract (FAS 116 adjustment noted to result in this deferred revenue)
157628
*The 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 Excerpts *
Income Statements (in thousands)
Reported 1999 Calendar Year
Net revenues
$2042380
Operating charges
1913346
Components:
Salaries wages and benefits
793529
Provision for doubtful accounts
166139
Lease and rental expense
49029
Interest expense net
26872
Net income
77775
Total assets
1497973
Total liabilities
856362
Total retained earnings
482960
Capital stock
306
Paid-in capital in excess of par
158345
*The 10-K filing as of 3/28/2001 at EDGAR (http://www.sec.gov/edgar.shtml) provides financial statement information for 2000 and 1999.
Requirement A: Recording Revenue
Requirement B: Revenue Mix (Strategy-Related Considerations)
The 10-K filing of Universal Health Services Inc. describes the mix of revenue sources as depicted in Table 5.3-3.
Table 5.3-3. Patient Revenue Mix
PERCENTAGE OF NET PATIENT REVENUES
2000
1999
1998
1997
1996
Third Party Payors
Medicare.
32.3%
33.5%
34.3%
35.6%
35.6%
Medicaid.
11.5%
12.6%
11.3%
14.5%
15.3%
Managed Care (HMOs and PPOs)
34.5%
31.5%
27.2%
19.1%
N/A
Other Sources
21.7%
22.4%
27.2%
30.8%
49.1%
Total.
100%
100%
100%
100%
100%
N/A-Not available (Source: 10-K filed 3/28/2001)
Directed Self-Study
Access 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 to the alma mater of the Chairman of the Board of Directors and Chief Executive Officer. Describe the disclosure and explain why the event is an Other Related Party Transaction. [Download the 10-Q in text format and apply the Find capability in your word processor. Also access FARS and identify the guidance relevant to each event.]
Health Insurance Public Policy and Backdating
A key factor in the health care industry is health insurance. Public policy has debated universal health care changes to governmental programs such as Medicare adjustment of tax policy regarding employers’ and employees’ deduction for premiums and alternative approaches to this sector of the economy. State and local governments under a new accounting rule have recently estimated their total retiree health bill to be about $1.1 trillion. Over the past decade some governmental units used pension funds to help pay for double-digit growth in health care for retired public workers. Explain how accounting interacts with public policy. Use FARS as a resource according particular attention to FAS 158.
Health insurer UnitedHealth has been the focus of media coverage involving what is known as the options backdating scandal. UnitedHealth’s internal probe 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 restatement and the nature of the health care sector of the economy? Explain. The SEC’s Division of Corporation Finance shared a Sample Letter Sent in Response to Inquiries Related to Filing Restated Financial Statements for Errors in Accounting for Stock Option Grants dated January 2007 (http://www.sec.gov/divisions/corpfin/guidance/oilgasltr012007.htm.) How helpful do you find such guidance?
fund balance
refers to a common group of assets and related liabilities within a not-for-profit organization and to the net amount of those assets and liabilities. While some not-for-profit organizations may choose to classify assets and liabilities into fund groups information about those groupings is not a necessary part of general purpose external financial reporting (CON6 Footnote 45); fund balances may refer to such fund groups as operating plant endowment and other funds (FAS 117 Par. 98).
permanent restriction
A donor-imposed restriction that stipulates that resources be maintained permanently but permits the organization to use up or expend part or all of the income (or other economic benefits) derived from the donated assets (FAS 117 Par. 168). Information about permanent restrictions is useful in determining the extent to which an organization’s net assets are not a source of cash for payments to present or prospective lenders suppliers or employees and thus are not expected to be directly available for providing services or paying creditors (FAS 117 Par. 98).
pledges
receipts of promises to give
temporary restriction
A donor-imposed restriction that permits the donee organization to use up or expend the donated assets as specified and is satisfied either by the passage of time or by actions of the organization (FAS 117 Par. 168). Separate line items may be reported within temporarily restricted net assets or in notes to financial statements to distinguish between temporary 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 restrictions may require that resources be used in a later period or after a specified date (time restrictions) or that resources be used for a specified purpose (purpose restrictions) or both. For example gifts of cash and other assets with stipulations that they be invested to provide a source of income for a specified term and that the income be used for a specified purpose are both time and purpose restricted. Those gifts often are called term endowments (FAS 117 Par. 15).
Further Readings
Baber William R. Patricia L. Daniel and Andrea A. Roberts. 2002. Compensation to managers of charitable organizations: An empirical study of the role of accounting measures of program activities. Accounting Review (77 3 July) pp. 679693.
The Comprehensive Report of the Special Committee on Financial Reporting. American Institute of Certified Public Accountants. 1994. Improving Business ReportingA Customer Focus. New York: AICPA.
Council of Better Business Bureaus (CBBB). 2001. Web site for the Philanthropic Advisory Service reports. Available at: http://www.bbb.org/pas/reports .
Governmental Accounting Standards Board. 1990. Service Efforts and Accomplishments Reporting: Its Time Has ComeAn Overview . Washington DC: GASB.
Guidestar. 2001. Web site that reports Form 990 Return of Organization Exempt from Income Tax information for charities. Available at: 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. Accounting Review (80 3 July) pp. 847870.
Laswad Fawzi Richard Fisher and Peter Oyelere. 2005. Determinants of voluntary Internet financial reporting by local government authorities. Journal of Accounting and Public Policy (24 2 March/April) pp. 101121.
Parry Robert W. Florence Sharp Jannet Vreeland and Wanda A. Wallace. 1994. The role of service efforts and accomplishments reporting in total quality management: Implications for accountants. Accounting Horizons (8 2 June) pp. 2543.
Peebles Laura. 2001. The right philanthropic vehicle. Journal of Accountancy (July) pp. 2227.
Ripperger Matt. 2001. Analyst [A director with Warburg Dillon Read’s Healthcare Research Group] interview: Hospital management services. Wall Street Journal Transcript (February 7) Document # LAQ901.
Wallace Wanda A. 2006. Financial management in government entails evaluating nonprofits: Are you ready for the next natural disaster? Journal of Government Financial Management (55 1 Spring) pp. 4457.
Wallace Wanda A. 2003. Avoiding the downfall of windfalls. Journal of Government Financial Management (52 3 Fall) pp. 1830.
Wallace Wanda A. 2001. How accountable are charities for their performance? Accounting Today (June 18July 1) pp. 18 20.
Accounting deals with a system which is a human creation designed to satisfy human needs and which must therefore above all be useful. The accounting environment is prone to many influences of a nondeterministic nature influences related not only to long-term legal cultural and political traditions but also to short-term movements of mass psychology. The subject matter is of such diversity and changing complexity that attempts to make predictions in accounting are akin to the difficulties of predicting the conditions of turbulence inside a tornado or the problem of forecasting next month’s weather.
In principle it is possible for meteorologists to predict the weather at noon in Chicago on January 1 1981 just as it is possible in principle to predict an eclipse of the sun a thousand years hence. In practice weather predictions (unlike astronomical predictions) are unreliable over the space of a month let alone a millennium. Accountants like meteorologists are also faced with a complex world of many interacting bodies. Nevertheless they might be able to adopt the pure scientific method and perhaps enjoy as much success with it as meteorologists iflikemeteorologiststhey only had to deal with the behavior of inhuman molecules. But in contrast the accountant’s molecules think and feel they have traditions and cultures they are governed by laws act sometimes rationally and often irrationally and are susceptible to an enormous variety of psychological social economic cultural and political influences. Accountancy deals with problems involving equity and balance and the resolution of conflict between different groups of human beings with widely varying interest and objectives.
Edward Stamp
[Source: Why Can Accounting Not Become a Science Like Physics? ABACUS (Vol. 17 No. 1 1981) p. 21]

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