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0 Intended Learning Outcomes and Topics

Module 6: Non-Profit Organizations

At the end of the module, the students should be able to:

1. differentiate a Non-Profit Organization from a Stock Corporation

2. discuss the presentation of the NPO Financial Statements
3. state the accounting procedures peculiar to specific types of NPOs.

6.1 Introduction to Non-Profit Organizations

From hospitals, colleges, and universities, churches to youth organizations to the local chambers of
commerce, nonprofit organizations make our communities more livable places.

Non-Profit Organizations (NPO) or Not for Profit Organizations (NFPO)or Not for Profit Entities

 Non-stock corporations that are organized for the benefit of the public as a whole, rather than for
the benefit of an individual proprietor, or a group of partners or stockholders.
 a non-profit organization generally obtains revenues to cover its expenses.
 serve in a variety of sectors, such as religious, education, health, social services, cooperatives,
commerce, amateur sports clubs, and the arts. (They do not include governmental units.)
 Classified as Health Care Organizations (HCO), Private, Non-Profit Colleges and Universities
(PNPCU), Voluntary-health and Welfare organizations (VHWO), and Other Non-Profit
Organizations (ONPO)

Let us now compare an NPO with an ordinary Corporation:

Non-Profit Organization For-Profit Corporation

Ownership none stockholders

Governance Board of Directors/Trustees Board of Directors

provide services needed by

Primary mission earn profits for stockholders

ensures that revenues are provides services or sells

Secondary mission
greater than the expenses so goods
that the services provided can
be maintained or expanded

exempt from corporate tax if

Tax Status approved by BIR subject to corporate tax
Tax Exemption RMO 38-2019

Basis of
Accrual Basis Accrual Basis

Statement of Financial
Statement of Financial Position
Statement of Activities
Statement of Financial
Statement of Functional Performance
Main Financial
Expenses (by function and by
Statements Statement of Changes in
Shareholders' equity
Statement of Cash Flows
Statement of Cash Flows
Notes to Financial Statements
Notes to Financial Statements

Equity is reported
Net Assets Stockholder's Equity

Paid -In Capital

Sub-parts of the with donor restrictions
Equity Retained Earnings less
without donor restrictions
Treasury Stock

donor contribution,
sale of merchandise, fees
membership contributions,
from services, investment
Source of Revenues program fees, fundraising
income and gain from
events, grants, and investment

Classification of Program, management, administrative and

Expenses general and fundraising selling expenses

borrow from lenders

Sources of Funds
other than revenues borrow from lenders debt financing and
and sale of assets
equity financing
BIR ( Tax Exemption RMO
Annual Reporting BIR and SEC
38-2019 )

6.2 Accounting for NPOs

Accounting Principles for NPOs

 Although IFRSs/PFRS are designed to apply to business entities, they can also be applied to non-
profit organizations.
 The notable differences are in the terminologies used in the financial statements, which are
modified to suit the NPO's purpose and presentation and disclosure of equity.
 Since the PFRS does not provide specific guidance on the accounting for NPOs, many NPOs
resort to exemptions provided under PAS 8 Accounting Policies, Changes in Accounting
Estimates and Errors or when the PFRS is silent they may refer to the general guidelines under
the Conceptual Framework.

 The basis is also the U. S. Generally Accepted Accounting Principles (US GAAP). The U.S.
GAAP is established by the Financial Accounting Standards Board (FASB) which contains the
original and revised statements of accounting standards as well as a recent codification of
accounting standards.

Accounting for other Assets held by NPOs

 use the accrual basis of accounting, in addition to that provided under IAS 1.
 Apply IFRS 9 Financial instruments (or PFRS for SMEs as appropriate) for financial assets
and financial liabilities.
 Depreciate assets in accordance with IAS 16.
 Recognize impairment loss in accordance with IAS 36.
 Account for leases (other than qualifying as contributions) in accordance with PFRS 16.

6.2.1 Accounting for Contributions

Accounting for Contributions


 refer to resources (cash or in-kind) received in non-reciprocal transactions.

Classification of Contributions:

1. Contributions without donor restrictions- are available for immediate use and for any purpose.
2. Contributions with donor restrictions

o Temporarily restricted contributions- are restricted by the donor in such a way that the
availability of the contributions for the NPOs use is dependent upon the:
 performance of a specific task
 happening of a future event or
 passage of time
o Permanently restricted contributions -restricted by the donor in such a way that the NPO will
not be able to use the principal contribution by itself, only the fruit or the income.

Recognition and Measurement

 Cash and other non-cash assets received are recognized as revenues in the period received
and as assets; decrease of liabilities or decrease of expenses depending on the form of the
benefits received.
 Contributions are measured at fair value at the date of the contribution and are reported as:

1. Unrestricted support - are revenues from unrestricted contributions that increase the unrestricted
net assets
2. Restricted support - are revenues from temporarily restricted or permanently restricted
contributions that increase the temporarily restricted net assets and permanently restricted net assets


 the promise of contributions to be received in the future

Classifications of Pledges

 Unconditional promise - promise to give cash or non-cash assets in a future period (receivable)
o classified as a temporarily restricted contribution.
o recognize when the unconditional promise to give is received from the donor
o when the promised contribution becomes doubtful of collection, an allowance for
uncollectibility is recognized.
 Conditional promise to give -promise to give cash or non-cash assets which depend on the
occurrence of a specified future and uncertain event.
o recognize only when the attached conditions are substantially met
o becomes unconditional if the fulfillment of the conditions are certain
o transfer of assets from a conditional promise to give shall be accounted for as a liability.

Contribution of Services

 A specialized skill which is provided by individuals of different professions like accountants,

doctors, engineers, architects, teachers, lawyers, and craftsmen like carpenter, plumber, etc.
 recognize if the services received:
o create or enhance a non-financial asset
o require specialized skills and are provided by skilled individuals, wherein you have to pay for
those services, if not donate.
Works of arts and similar items

 are not recognized as a contribution if the donated items are added to a collection:
o for public exhibitions, education, research, for the furtherance of public service and not for
financial gain;
o protected, cared for, and preserved;
o proceeds from the sale are to be used to acquire other items in the collection.
o does not meet the criteria of an asset which is a probable economic benefit and it will be
difficult to measure its value reliably.
 if it meets the recognition criteria for an asset, recognize as an asset and revenue,
and measure at fair value

Fund Accounting for Funds Held by NPOs

 Endowment fund- fund used according to donors' instructions.

 Two types of Endowment Fund:
o Term endowment fund -fund under the donors' restrictions, the NPO can use a portion of the
principal each period. This is classified as temporarily restricted.
o Regular endowment fund - under the donors' restrictions, the NPO cannot spend any of the
principal. This is classified as permanently restricted.
 Agency fund- fund held by the NPO acting as a custodian. Agency funds are recognized as
liabilities example TIP receives funds from DEPED for the SHS Vouchers.
 Plant fund- un-expended fund for the acquisition/renewal/replacement of plant assets; for the
retirement of indebtedness and investment in plant assets.
 Board Designated fund - also called "quasi-endowment", funds which are restricted at the sole
discretion of the NPOs Board. These are classified as unrestricted funds.

6.2.2 Accounting for NPO Expenses

Accounting for NPO Expenses

Just like ordinary corporations , NPOs also incur expenses, but they are classified differently
because of certain restrictions.

Expenses for NPOs

 are decreases in unrestricted net assets

 should be presented in the statement of activities (SFAS 117)according to their function.

Functional Classification of Expenses

 Program services activities that result in goods or services being distributed to beneficiaries,
customers, or members that fulfill the purposes or mission for which the organization exists.
Those services are the major purpose/output of the organization and often relate to several major
o Examples are: Work to help elderly, child care services, feeding program

 Supporting services - activities other than program services.

o Generally includes management and general, fundraising, and membership development

Statement of Functional Expenses -described as a matrix since it reports expenses by their:

 function
o individual programs, management and general and fundraising
 nature or type of expense
o salaries, benefits, supplies, professional fees, depreciation, interest, and other operating cost
and expenses

6.2.3 Financial Statements of NPOs

Financial Statements of Non-Profit Organizations

Statement of Activities

 shows the information on revenues, expenses, and changes in net assets for the period.
 takes the place of the income statement and the statement of changes in equity for a business
 reports revenue and expense amounts according to the two classifications of net
assets: (SFAS 117 superseded by ASU 2016-14)

o Without donor restrictions - unrestricted support
o With donor restrictions - temporary and permanent restricted support

 The Statement of Activities should report the changes in net assets for each of the above-
mentioned categories However, NPOs may opt to present a separate statement of changes in
net assets (or the statement of changes in reserves) as a replacement of the statement of
changes in equity.
 the term "profit or net income" is replaced by the term "changes in net assets".
 PFRS based financial statements may present changes in net assets either on the statement of
activities or in the notes.
 For NPOs with revenue transactions arising other than charitable contributions, they shall adopt
PFRS 15 Revenue from contracts with Customers.
 Click the link to view the Components of the Statement of Activities. Statement of Activities for NPOs

Statement of Activities

We know very well that an ordinary corporation presents its revenues and expenses in the Income
Statement or the Statement of Comprehensive income . For an NPO, since its' primary purpose is to
provide programs that meet certain societal needs, in lieu, it issues a Statement of Activities.

Components of the Statement of Activities

 Revenues, Gains, Other Support, and Releases from donor restrictions which include the
following items :

o Contributions
o Membership dues
o Program fees
o Fundraising events
o Grants
o Investment income
o Gain on sale of investments
o Reclassifications or transfer when net assets are released from restrictions (a negative amount
in the With Donor Restrictions column and a positive amount in the Without Donor Restrictions

Under the accrual method of accounting, revenues are reported in the accounting period in which
they are earned.

 Expenses and Losses- under this caption expenses are reported according to the
their functions (activities, services)

o Program services - are the amounts directly incurred by the nonprofit in carrying out its
programs. For instance, if a nonprofit has three main programs, then each of the three
programs will be listed along with each program's expenses.

o Supporting service – are all activities other than program services. Generally it includes sub-
groups such as Management and general, fund raising and membership development

In order to accurately report the amount in each of these subgroups, it may be necessary to allocate
some management and general salaries to fundraising based on the time spent by employees
performing fundraising activities.
Statement of Financial Position

 reports the pertinent data about the NPOs Assets, Liabilities, and Net Assets as well as their
interrelationship to each other at a cumulative point in time.
 assists donors, creditors, members of the organization itself, and others to determine the entity’s
ability to continue to provide services.
 it allows for the assessment of the NFPO’s liquidity, solvency, and financial flexibility needed
to obtain external financing and satisfy its day-to-day debts.
 Since a nonprofit organization does not have owners, the third section of the statement of financial
position is known as Net Assets (instead of owner's equity or stockholders' equity).
 Click the link to view the Classes of Net Assets Statement of Financial Position for NPOs

Classes of Net Assets

1. Net Assets with donor restrictions

o Contributions and other inflows of assets whose use by the organization is limited by donor-
imposed restrictions
o Re-classifications from or to other net asset classifications as a result of donor imposed terms.

2. Net Assets without donor restrictions

o That part of the net assets of an NFPO’s net assets that are neither permanently nor
temporarily restricted by requests of the donor.

The FSAB Accounting Standards Update (ASU) 2016-14 provides a Change in reporting of
net assets (superseded SFAS 117). The statement requires that on the Statement of Financial
Position, net assets are presented as either net assets with donor restrictions or net assets without
donor restrictions. The terms unrestricted, temporarily restricted and permanently restricted are no
longer used.
Some not-for-profit entities use a fund structure to account for each type of net asset class
because of the accounting discipline that fund accounting provides. These entities would have funds
such as the general fund, specific-purpose fund, building fund, endowment fund, and so on.
Revenue is recorded in only one net asset class when the contribution is made. Then, as
restrictions are eliminated or met, the resources are released and transferred from the restricted net
asset class to the unrestricted net asset class.
Re-classifications from or to other net asset classifications as a result of donor-imposed terms,
expiration as a passage of time, or satisfaction and removal by actions of the organization is reflected
in the Statement of Financial Position.
Statement of Cash Flows for NPOs

 provides data regarding the cash receipts and cash payments of the organization during the
 Restricted assets acquired during the period for long term purposes because of donor
restrictions are classified as a financing activity.
 Either the direct or indirect method may be used to compute cash flows from operating
activities. Activities in the restricted funds are noted separately from those in the unrestricted
funds. (SAU 2016-14).

Notes to the Financial Statements

Additional Disclosures

 Information useful in assessing liquidity and a description of how the organization manages its
liquid assets to meet general expenditures over the next year
 Quantitative measures of the amount of financial resources available to meet the cash needs for
general expenditures over the next year and the effect (if any) of limits imposed by grantors,
donors, laws, contractual arrangements, or the governing board on the availability of financial
 Methods used to allocate costs among program and supporting activities
 Disclosures related to “underwater endowments” (i.e., endowments whose market value has
declined below the original value).

Click the link below to view the sample financial statements ( proceed to exhibits )
6.2.4 Illustrative Transactions for NPOs

Illustrative Transactions for NPOs

Unconditional and Conditional Contributions

Conditional and Unconditional Promises
Fund Accounting
4.Entity A receives the following donations:
•Cash of P 2M to be used at the discretion of Entity A’s management
•Cash of P 3M restricted for the acquisition of equipment.
•Trust fund of P 5M which Entity A shall never use; only the income therefrom.
Entity A acquires an equipment for P 3M and receives cash dividends of P 200,000 from the
investment at the end of the period.
Requirement :

a)Journalize the transactions under fund accounting

b) Compute for the ending balances of each fund

Donated Services
11.A short-circuit destroyed the off-set printing machine of Heavenly Org., a not-for-profit entity.
Mr. Peter a professional offset mechanic, repaired the machine for free.
The fair value of the services is estimated at P 40,000.
6.3 Types of NPOs

Classification of Non-Profit Organizations

1. Health Care Organizations .

2. Private, Non-Profit, Colleges and Universities, individual Practice Associations
3. Voluntary-health and Welfare organizations
4. Other Non-Profit Organizations

6.3.1 Accounting for Health Care Organizations (HCOs)

Accounting for Health Care Organizations (HCOs)

Health Care Organizations (HCO)

 include hospitals, clinics, medical group practices, individual practice associations, individual
practitioners, emergency care facilities ,laboratories, surgery centers, ambulatory care
organizations, continuing care retirement communities, HMO, Home health agencies, nursing
homes and rehabilitation centers. (AICPA Audit and Accounting Guide for Health Care

Financial Statements of the HCO:

 Statement of Financial Position

 Statement of Operations ( in lieu of a statement of activities)
 Statement of changes in net assets
 Statement of Cash Flows
 Notes including disclosure of performance indicator
Classification and Presentation of revenues in the Statement of Operations

 Net patient revenue - gross patient revenue less deductions allowed by the hospital
 Premium Revenue -results from capitation agreements
 Other Revenues - revenues not classified as net patient or premium revenue

Gross Patient Revenue P 600,000
Less: Contractual Adjustments
Billed Charity
20,000 60,000
Net Patient Service Revenue P 540,000

If there are uncollectible accounts (bad debts expense) they are recognized as expenses rather
than direct adjustment to revenue.

Contractual Adjustments

 may arise from the reimbursement agreement

 portion of a hospitals revenue which is collectible from third party payors such as PHIC and Health
Insurance Providers like Maxicare, Fortune care etc.
 the difference between what the hospital considers a fair price for a service rendered versus an
agreed upon amount for the insurance with the insurance company such as PhilHealth (PHIC) or
Health Maintenance Organization (HMO).
 written off as a direct reduction to patient service

Total Hospital Bill P 20,000
Less: PhilHealth
Medicines P 10,000
Room and
Professional Fees 5,000 17,000
Contractual Adjustment P 3,000
Employee Discounts

 These are special discounts available only to the NPO employees (and their immediate family
members) in the form of reduction in the price of patient services.
 accounted for as direct reduction to patient service revenue

Charity Care

 pertains to free services rendered to patients

 not recognized but rather disclosed only

Revenues from Capitation Agreements

 agreements with third parties based on the number of employees instead of services rendered.
 to be shown separately from operations under the caption "premium revenue" which is a line item
under net patient revenue.

Example: If the capitation agreement between the NPO hospital and a Co. is for 100 employees at P
500 per employee / per month. Even if only 20 employees availed of the services for that month. The
hospital will still bill the Co. for the 100 employees.

Other Revenues

 consists of revenues other than patient service revenues and premium revenues.
 Examples are revenues from:
o hospital pharmacy
o parking deck
o flower and gift shop
o educational programs
o donated materials and services

Presentation of Contributions in the Statement of Operations

 HCOs (unlike other NPOs) do not present restricted contributions on the Statement of
Operations as part of revenues.
 the revenues discussed above pertains only to unrestricted revenues and may include revenues
from unrestricted contributions.
 Revenues from unrestricted contributions may be separately indicated as such or included in
the "other revenues" classification"
 Revenues from restricted contributions are presented separately at the bottom part of the
statement of operations, after the unrestricted revenues and expenses.

Disclosure of Performance Indicator

 The statement of Operations shall provide a performance indicator such as operating income
revenue over expenses
 the policy used in determining the performance indicator shall be disclosed in the notes
 unrealized gains and losses on investment in securities are not part of the performance
indicators but reported on the statement of operations after the performance indicator.

6.3.2 Accounting for Private, Non-Profit Colleges and Universities (PNPCU)

Private , Non-Profit , Colleges and Universities (PNPCU)

 Usually use Fund Accounting to comply with the requirements imposed by the governing board,
by donors, and by external entities.

Fund groups are as follows:

 Current funds
 Endowment and similar funds
 Loan funds
 Annuity and life income funds
 Plant funds
 Agency funds

Source of funds

 Current funds revenues (restricted and unrestricted)

o Tuition and Fees
o Grants and Contracts
o Endowment Income
o Sales and Services of Educational Activities /Hospitals

 Other Sources, including expired term endowments and expired life income agreements, if not
material; otherwise a separate category
 Independent Operations

Revenues from exchange transactions are normally recorded at gross amounts.

Expenditures and transfers are identified by function
HCOs presents separately the revenues and expenses of the unrestricted, temporarily restricted, and
permanently restricted net asset categories.

"Scholarships and Fellowships"- accounting procedure that is unique to private, non-profit,

colleges and universities :

 scholarships and fellowships granted freely such as academic scholarships are treated
as direct reduction of revenues from tuition and fees,
 scholarships and fellowships granted as compensation for services rendered by the grantee
are treated as expenses . Examples are : scholarships provided to student assistants and
scholarship to faculty members or their dependents

Refunds of tuition fees are treated as a direct reduction of revenues from the tuition fees , this
includes refunds from class cancellations and refund from withdrawal of enrollment

Let us now illustrate:

Financial Statements of the HCO

 Statement of Financial Position

 Statement of Activities
 Statement of Cash Flows

The HCO uses the accrual basis of accounting

6.3.3 Voluntary Health and Welfare Organizations(VHWO)

Voluntary Health and Welfare Organizations (VHWO)


 Salvation Army

 Boy Scouts
 Girl Scouts
 Boys Clubs
 Red Cross
 Goodwill Industries
 United Way

Voluntary Health and Welfare Organizations (VHWO)

 non-profit entities that derive their revenues primarily from donations from the general public to be
used for purposes connected with health, welfare, or community services. These organizations
solicit funds from the community at large and typically provide their services for no fee, or they
may charge a nominal fee to those with the ability to pay.

Examples are:

 Women's and children's health and welfare societies

 human rights advocates
 environmental protection organizations

The difference between the VHWO from a HCO is the source of revenue rather than the type of
services provided. A VHWO derives its revenues from donations from the general public while the
HCO derives its revenues from patients.
Before ASU 2016-14, VHWO is the only NPO required to prepare the Statement of Functional
expenses (SFAS 117) that reports both functional (program and supporting expenses) and natural
classifications (salaries expense, depreciation expense etc). The Statement is useful in
associating expenses with service efforts and accomplishments of the organization.

Financial Statements of VHWO

 Statement of Financial Position

 Statement of Activities
 Statement of Cash Flows
 Statement of Functional Expenses

Fund Accounting is usually used by VHWOs because donors and/or external authorities may restrict
or prohibit the use of some assets for operations.
Unrestricted funds may be used as needed by the organization’s governing board. Restricted funds
are limited in use by the governing board due to external restrictions.

Fund groups often used by VHWO:

 Current unrestricted funds

 Current restricted fund
 Land, building, and equipment fund (plant fund)
 Endowment funds
 Custodian funds
 Loan and annuity funds

Public Support and Revenue are usually received from the following sources:

 Direct mail campaigns

 Door-to-door solicitation
 Radio and television solicitation
 Street sales and solicitation
 Contributions from uncontrolled organizations
 Special events

6.3.4 Other Non-Profit Organizations(ONPO)

Other Non-Profit Organizations (ONPOs)

Other Non-Profit Organizations(ONPO)

 are NPOs not classified as Health Care Organizations(HCO) , Private Non-Profit Colleges and
Universities(PNPOCU), or Voluntary Health and Welfare Organizations(VHWO).

Examples of Other Non-Profit Organizations (ONPO) or Other Not-for-Profit Organizations

(ONFPO) (which are used interchangeably):

 Cemetery organizations
 Civic organizations
 Fraternal organizations
 Labor unions
 Libraries
 Museums and Other cultural institutions
 Performing arts organizations
 Political parties
 Private and community foundations
 Private elementary and secondary schools
 Professional associations
 Public broadcasting stations
 Religious organizations
 Research and scientific organizations
 Social and country clubs
 Trade associations
 Zoological and botanical societies
 The general accounting requirements for NPOs apply to ONPO.

The accrual basis of accounting is used for financial reporting purposes.

Financial Statements of ONPOs

 Statement of Financial Position,

 Statement of Activities,
 Statement ofCash Flows

If a large number of different types of programs are part of its operations, it may be desirable to
prepare a statement of functional expenses as well.

Accounting for Other Assets held by NPOs

 Entity shall use the accrual basis of accounting

 account for marketable securities at Fair Value with changes in FV recognized in the statement of
activities -similar to FVPL (FVOCI is not applicable to NPOs) (Apply PFRS 9 Financial
 account for certain investments held by NPOs (under SFAS 124)
 equity or debt instruments are measured at FV
 changes in FVs are recognized in the statement of activities
 marketable securities can be classified as current and non-current assets.
 use the equity method for investments which result to significant control
 depreciate its depreciable assets in accordance with PAS 16 -PPE
 recognize impairment loss in accordance with PAS 36 -Impairment of Assets when the carrying
amount exceeds it recoverable amount.
 Account for leases (other than those classifying as contributions) in accordance with PFRS 16

6.3.5 Tax Exemptions of NPOs

Entitlement to Tax Exemption of NPOs

 Revenue Memorandum Order (RMO) No. 38-2019 contains the new guidelines for the processing
and issuance of Certificates of Tax Exemption (CTE).The RMO is a reiteration of Revenue
Memorandum Circular (RMC) No. 64-2016, which provides parameters on which entities fall
within the ambit of the so-called “Section 30 Corporations,” i.e., Tax-exempt Corporations.

 Section 30 Corporations include:

(1) labor, agriculture or horticultural organizations not organized principally for profit;
(2) mutual savings banks not having capital stock represented by shares, and cooperative banks
without capital stock organized and operated for mutual purposes and without profit;
(3) beneficiary society orders or associations, operating for the exclusive benefit of the members; (4)
cemetery company, owned and operated exclusively for the benefit of its members;
(5) non-stock corporations or associations operated exclusively for religious, charitable, scientific,
athletic, or cultural purposes, or for the rehabilitation of veterans;
(6) business leagues, chambers of commerce, boards of trade not organized for profit;
(7) civic leagues or those organized exclusively for the promotion of social welfare;
(8) non-stock and nonprofit educational institutions;
(9) government educational institutions;
(10) farmers’ or other mutual typhoon or fire insurance companies, mutual ditch or irrigation
companies, mutual or cooperative telephone companies, or like organizations of a purely local
(11) as well as farmers’, fruit growers’ associations operated as a sales agent for the purpose of
marketing the products of its members.

 The RMO shall apply to all tax-exempt corporations listed above except for non-stock and
nonprofit educational institutions which are covered separately by RMO 44-2016

RMO 44-2016

REVENUE MEMORANDUM ORDER NO. 44-2016 issued on July 26, 2016 amends Revenue
Memorandum Order No. 20-2013, as amended re: "Prescribing the Policies and Guidelines in the
Issuance of Tax Exemption Rulings to Qualified Non-Stock, Non-Profit Corporations and
Associations under Section 30 of the National Internal Revenue Code of 1997, as Amended".

 Two requisites, namely:

(a) the school must be non-stock and non-profit; and

(b) the income is actually, directly and exclusively used for educational purposes. There are no other
conditions and limitations.

 They shall file their respective applications for Tax Exemption with the office of the Assistant
Commissioner, Legal Service, Attention: Law Division, together with the following documents:

o Original copy of the application letter for issuance of Tax Exemption Ruling;
o Certified true copy of the Certificate of Good Standing issued by the Securities and Exchange
o Original copy of the Certification under Oath of the Treasurer as to the amount of the income,
compensation, salaries or any emoluments paid to its trustees, officers and other executive
o Certified true copy of the Financial Statements of the corporation for the last three (3) years;
o Certified true copy of government recognition/permit/accreditation to operate as an educational
institution issued by the Commission on Higher Education (CHED), Department of Education
(DepEd), or Technical Education and Skills Development Authority (TESDA);

If the government recognition/ permit/accreditation to operate was issued five (5) years prior to the
application for tax exemption, an original copy of a current Certificate of Operation/Good Standing, or
other equivalent document issued by the appropriate government agency (i.e., CHED, DepEd, or
TESDA) shall be submitted as proof.

o Original copy of the Certificate of utilization of annual revenues and assets by the Treasurer or
his equivalent of the non-stock and non-profit educational institution.

 In the course of review of the application for tax exemption, the BIR may require additional
information or documents as the circumstances may warrant.
 Tax Exemption Rulings or Certificates of Tax Exemption of non-stock, non-profit educational
institutions shall remain valid and effective, unless recalled for valid grounds.
 They are not required to renew or revalidate the Tax Exemption Rulings previously issued
to them, but it shall be subject to revocation if there are material changes in the character,
purpose or method of operation of the corporation which are inconsistent with the basis for its
Income Tax exemption.
 If the Tax Exemption Rulings or Certificates of Exemption was issued prior to June 30, 2012
they are required to apply for new Tax Exemption Rulings,

 Mere registration with the SEC as a non-stock, nonprofit corporation does not automatically entitle
an entity to the tax exemption. It is a corporation’s activities (nature) that determines
its taxability or exemption from taxes.

Two determinative tests to qualify for income tax exemption:

o The organizational test requires that the corporation’s constitutive documents (i.e., SEC
registration, Articles of Incorporation (AOI), and By-Laws) show that its primary
purpose(s) falls under Section 30 of the Tax Code.
o The operational test, on the other hand, requires that the regular activities of the corporation
be exclusively devoted to the furtherance of such primary purpose.

 The earnings of a Sec. 30 corporations that chiefly come from donations, grants, or
contributions should not be for the benefit of its trustees, organizers, officers, members, or
any specific person.

 Sec. 30 corporations are allowed to engage in activities conducted for profit without losing
their tax exemption.
 The tax exemption covers only the income received by corporations to continue its purpose
for which they were established;
 Income of whatever kind and character conducted for profit regardless of the disposition is
subject to tax such as:
o interest income from bank deposits,
o gains from investments,
o rental income from real or personal properties

 Section 30 corporations are required to file quarterly and annual income tax returns to report
such other income.
 The exemption shall only be limited to income tax. It therefore excludes:

o withholding tax

o value-added tax, or percentage tax

 Corporations are required to secure a Certificate of Tax Exemption (CTE) or ruling which shall
be valid for three years from the date of its effectivity, unless sooner revoked or canceled.
However, it may be renewed or revalidated for another three years. The request is filed with the
Revenue District Office (RDO) where the corporation is registered, and the CTE is subsequently
issued by the Revenue Region.

The two mandatory requirements for the CTE are the:

o Income Tax Returns or Annual Information Returns and

o Financial Statements of the corporation for the last three years,

 If a new company will not be able to provide such documentary requirements. Section 30
Corporation does not lose its character as such, and its consequent exemption from taxation
merely because it cannot submit certain documentary requirements.

 The RMO is to ensure that only qualified taxpayers are rightfully availing of the exemption, and
safeguard against tax evasion and abuse of exemptions.
6.4 Miscellaneous Topic: Insurance
PFRS 17 Insurance Contracts

Insurance contract

 is “a contract under which one party (the issuer) accepts significant insurance risk from another party (the
policyholder) by agreeing to compensate the policyholder if a specified uncertain future event (the insured
event) adversely affects the policyholder.”

Insurer (issuer of the insurance contract)

 is the party that has an obligation under an insurance contract to compensate a policyholder if an insured
event occurs (e.g., insurance company).

Parties to the Insurance contract

 Policyholder
o “a party that has a right to compensation under an insurance contract if an insured event occurs.”
 Insured event
o an uncertain future event that is covered by an insurance contract and creates insurance risk.”

Essential elements in the definition of an insurance contract

 Transfer of significant insurance risk

o there is a transfer of significant insurance risk from the insured (policyholder) to the insurer (insurance
 Payment from the insured (premium)
o generally, the insured pays to a common fund from which losses are paid. However, not all insurance
contracts have explicit premiums (e.g., insurance cover bundled with some credit card contracts).
 Indemnification against loss
o the insurer agrees to indemnify the insured or other beneficiaries against loss or liability from specified
events and circumstances (i.e., insured event) that may occur or be discovered during a specified

Significant insurance risk (Uncertain future event)

Risk (uncertainty)

 is an essential element of an insurance contract.

 the possibility of loss or injury when an uncertain future event occurs.
o speculative - results to a gain or loss
o pure risk - results only to loss
 At least one of the following is uncertain at the inception of an insurance contract:
o the occurrence of the insured event
o timing of the event
o amount of payment when the insured event occurs

Insurance risk (pure risk)

 risk, other than financial risk, transferred from the holder of a contract to the issuer.
 must be pre-existing at the time the contract was executed.
 is significant if the insured event could cause an insurer to pay significant additional benefits (excess of the
amount payable if no insured event occurred)

Indemnification against loss

 generally in the form of cash

 indemnification in kind such as:
o replacing the insured property
o providing services such as medical, repair, or other services

Note: The following are not insurance risk:

 financial risk - the risk of possible future change in one or more of the specified interest rate, financial
instrument price, commodity price, forex rate, index rates, credit rating or other variables not specific to the
party of the contract.
 lapse or persistency risk -risk that the policyholder will cancel the contract earlier
 expense risk - the risk of unexpected increases in the administrative cost in servicing the contract, rather
than the cost associated with the future event.

Examples of insurance contracts

 Insurance against theft or damage.

 Insurance against product liability, professional liability, civil liability, or legal expenses.
 Life insurance and prepaid funeral plans.
 Life-contingent annuities and pensions.
 Disability and medical cover.
 Surety bonds, fidelity bonds, performance bonds, and bid bonds.
 Product warranties issued by another party for goods sold by a manufacturer, dealer or retailer. Product
warranties issued directly by a manufacturer, dealer or retailer are outside the scope of PFRS 17.
 Title insurance (discovery of defects in the title to lands or buildings that were not apparent when the
contract was issued)
 Travel insurance (losses when traveling)
 Insurance swaps and other contracts that require payment depending on changes in physical variables that
are specific to a party to the contract. (PFRS 17.B26)

The following are examples of items that are not insurance contracts:

 Contracts that do not transfer significant insurance risk to the issuer.

 Self-insurance.
 Gambling contracts
 Derivatives that expose a party to financial risk but not insurance risk, including weather derivatives.
 Credit-related guarantees (e.g., letter of credit, credit derivative default contract or credit insurance
contract) that require payments even if the holder has not incurred a loss on the failure of the debtor to
make payments when due. (PFRS 17.B27)

Types of insurance contracts

a.Direct insurance contract

 an insurance contract where the insurer directly accepts risk from the insured and assumes the sole
obligation to compensate the insured in case of a loss event.

b.Reinsurance contract

 an insurance contract issued by one insurer (the reinsurer) to compensate another insurer (the cedant) for
losses on one or more contracts issued by the cedant.
o Reinsurer – the party that has an obligation under a reinsurance contract to compensate a cedant if an
insured event occurs.
o Cedant – the policyholder under a reinsurance contract.

Separating components from an insurance contract

 An insurance contract may contain one or more non-insurance components

o investment component
o service component

Level of aggregation of insurance contracts

 Insurance contracts are combined into portfolios.

 A portfolio consists of insurance contracts with similar risks and managed together (e.g., contracts within a
product line).

Accounting Models
A. General model
B. Premium allocation approach
C.Modifications to the General model for:

 Onerous contracts,
 Reinsurance contracts held, and
 Investment contracts with discretionary participation features

General model

 A group of insurance contracts is recognized from the earliest of the following:

o the beginning of the coverage period of the group of contracts;
o the date when the first payment from a policyholder in the group becomes due; and

The initial measurement of insurance contracts - refers to the total of:

a.Fulfillment Cash Flows (FCF), and
b. Contractual Service Margin (CSM)

 Fulfillment Cash Flows (FCF)

o Estimates of future cash flows, which include all future cash flows within the boundary of each contract
in the group. Estimates may be determined at a higher level of aggregation and then allocated to
individual groups of contracts.
o Adjustment for the time value of money and financial risks (if financial risks are not included in the
estimates of future cash flows).
o Risk adjustment for non-financial risk.

 Contractual Service Margin (CSM)

o The contractual service margin is the unearned profit in a group of insurance contracts that the entity
recognizes as it provides services in the future.

Subsequent Measurement

 The carrying amount of a group of insurance contracts at the end of each reporting period is the sum of:

1) the liability for remaining coverage

2) the liability for incurred claims


 An insurance contract is derecognized when:

o it is extinguished, i.e., when the obligation in the insurance contract expires or is discharged or
canceled; or
o the contract is modified and the modification meets any of the conditions for derecognition.

Statement of Financial Position

 The carrying amounts of the following groups are presented separately in the statement of financial
o insurance contracts issued that are assets;
o insurance contracts issued that are liabilities;
o reinsurance contracts held that are assets; and
o reinsurance contracts held that are liabilities.
Statement(s) of Financial Performance

 The amounts recognized in the statement(s) of profit or loss and other comprehensive income are
disaggregated into to the following:
o insurance service result, comprising of:
 insurance revenue and
 insurance service expenses; and
o insurance finance income or expenses.