IS THIS REALLY AN ASSET? Mercy Hospital is located near Springfield, Missouri. A

Question

IS THIS REALLY AN ASSET?

Mercy Hospital is located near Springfield, Missouri. A religious organization created the not-for-profit hospital more than 90 years ago to meet the needs of area residents who could not otherwise afford adequate health care. Although the hospital is open to the public, its primary mission has always been to provide medical services for the poor.

On December 23, 2017, a gentleman told the hospital's chief administrative officer the following story: “My mother has been in your hospital since October 30. The doctors just told me that she will soon be well and can go home. I cannot tell you how relieved I am. The doctors, the nurses, and your entire staff have been wonderful. My mother could not have gotten better care. She owes her life to your hospital.

“I am from Idaho. Now that my mother is on the road to recovery, I must return immediately to my business. I am in the process of finding a buyer for an enormous tract of land. When this acreage is sold, I will receive $30 million in cash. Because of the wonderful service that Mercy Hospital has provided my mother, I want to donate $10 million of this money.” The gentleman proceeded to write this promise on a piece of his personal stationery that he dated and signed.

Obviously, the hospital's officials were overwhelmed by this generosity. This $10 million gift was 50 times larger than any other gift ever received. However, the controller was concerned about preparing financial statements for that year. “I have a lot of problems recording this type of donation as an asset. At present, we are having serious cash flow problems. If we show a $10 million donation in this manner, our normal donors are going to think we have become rich and don't need their support.”

What problems are involved in accounting for the $10 million pledge? How should Mercy Hospital report the amount?

Explanation / Answer

The basic rule of recording any Revenue or Asset is that the Inflow should be certain.

In the given case, the person has promised to pay the amount of donation and he made his promise with his signature on his "Personal Stationery" which is not giving any certainty. If he denies for any reason then the hospital can not claim the amount from him because his oath was on his "Personal Stationery".

Therefore the inflow of this donation is uncertain and hence the hospital shall not book this amount as Revenue or Asset.

Rather, It should show this promise under Notes to Accounts section with the clarity of uncertainty.

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