Not-For-Profit Accounting & Reporting: From Start to Finish

The accounting and reporting requirements for not-for-profits are uniquely designed to provide transparency about an organization’s financial position and how it uses its resources. This uniqueness, however, sometimes leads to confusion among users and even accountants not familiar with the appropriate application of the requirements. This course examines the key not-for-profit accounting and reporting requirements and succinctly explains their application.

Objectives:

• Understand the critical elements that make up not-for-profit accounting and reporting
• Confidently work with or in the not-for-profit environment
• Recognize the nuances involved in not-for-profit accounting and reporting

Prerequisite: Experience in the not-for-profit environment.

Chapter 1 - The Nonprofit Environment and GAAP Learning Objectives

After completing this chapter you should be able to

• Understand the unique aspects of the nonprofit environment.
• Recognize the various types of nonprofits.
• Know where to look for authoritative guidance on generally accepted accounting principles (GAAP).

There are over one million organizations in the United States that make up the nonprofit sector, and this number is growing every year. As a point of reference, the number of 501(c)(3) organizations increased from 259,523 in 1976 to 1,010,365 in 2004, an increase of 289%! This course will cover the major accounting and financial reporting requirements that most nonprofits must follow. Specifically, this course is designed for organizations that are subject to the accounting and financial reporting guidance contained in the AICPA Audit and Accounting Guide Not-for-Profit Organizations.

Because of the special environmental factors and the need to meet the financial reporting objectives stated earlier, several unique accounting and financial reporting practices have evolved for nonprofit organizations. For the most part, accounting methods used by nonprofit organizations are the same as those used by businesses. Debits and credits, journals, and ledgers are still used, and many transactions are recorded in the same manner as a business.

However, there are a few major accounting and financial reporting differences and unique transactions for nonprofit organizations that need to be understood. They include

• Contributions – Nonprofit organizations often receive substantial amounts of contributions. Recording and reporting contributions provides a unique challenge for nonprofit organizations. In addition, many contributions contain restrictions and other conditions that must be reported and disclosed. Chapter 3 discusses reporting issues related to contributions.
• Net Assets – What do we call the difference between assets and liabilities? For business, it is often referred as "stockholder's equity." For a nonprofit organization, it is called "net assets." In addition, net assets are further divided into three classes to reflect external donor restrictions: unrestricted, temporarily restricted, and permanently restricted. Chapter 2 discusses the three classes of net assets.
• Financial Statements – Because the financial reporting objectives are different for nonprofit organizations, the financial statements are somewhat different from those of a business. The three general purpose financial statements for a nonprofit organization are the statement of financial position, the statement of activities, and the statement of cash flows. A fourth statement of functional expenses is required for certain nonprofit organizations. These statements are discussed in detail in Chapter 2.

FASB No. 116 and Nonprofit Organizations

Because FASB has issued several accounting statements specifically for nonprofit organizations, it is important to be clear about which organizations must follow these statements. FASB No. 116 and the AICPA Audit and Accounting Guide Not-for-Profit Organizations (the AICPA Guide) provide additional guidance on which organizations are subject to the nonprofit pronouncements.

In addition to the three characteristics listed earlier that are typically present in nonprofits, FASB No. 116 also discusses several organizations that fall outside the definition of a nonprofit organization. Organizations excluded are "…investor-owned enterprises and entities that provide dividends, lower costs, or other economic benefits directly and proportionately to their owners, members, or participants, such as mutual insurance companies, credit unions, farm and rural electric cooperatives, and employee benefit plans."

The AICPA Guide provides the following list of nongovernmental organizations that should apply the AICPA Guide:

• Cemetery organizations
• Civic and community organizations
• Colleges and universities
• Elementary and secondary schools
• Federated fund-raising organizations
• Fraternal organizations
• Labor unions
• Libraries
• Museums
• Other cultural organizations
• Performing arts organizations
• Political parties
• Political action committees
• Private and community foundations
• Professional associations
• Public broadcasting stations
• Religious organizations
• Research and scientific organizations
• Social and country clubs
• Trade associations
• Voluntary health and welfare organizations
• Zoological and botanical societies

The list is not intended to be all-inclusive. Other organizations, if they meet the definition of a nonprofit organization under FASB No. 116, should also follow the AICPA Guide. Notice that the above list does not include providers of health care services such as nonprofit hospitals and clinics. There is a separate AICPA Audit and Accounting Guide Health Care Organizations for these types of organizations.

The AICPA Guide applies only to nongovernmental organizations. The Governmental Accounting Standards Board (GASB) sets financial reporting standards for governments. It is easy to tell that a city or county is a government, but what about a library or museum? Entities that meet at least one of the following criteria are considered governmental and would follow GASB standards:

• Officers of the entity are popularly elected.
• A controlling majority of the members of the entity's governing board is appointed (or approved) by officials of at least one state or local government.
• A government is able to unilaterally dissolve the entity, with the entity's net assets reverting to a government.
• The entity has the power to enact and enforce a tax levy.
• The entity has the ability to directly issue federally tax-exempt debt.

If the only criterion met is the ability to directly issue federally tax-exempt debt, the presumption that an entity is governmental may be rebutted based on compelling, relevant evidence.

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