This essay reviews the accounting standards that are used by nonprofits (NPOs) to meet their financial reporting requirements. There are two bodies that issue standards for nonprofits: The Financial Accounting Standards Board (FASB) and the Office of Budget and Management (OMB). The American Institute of Certified Public Accountants (AICPA) also has oversight in auditing of NPOs. Nonprofits are similar to the government in that their mission is to provide services for the public good. Nonprofit organizations are not in business to make money, but rather to provide services with revenue from private donations or federal awards. Because nonprofits receive money through donations, gifts or grants, they are highly accountable to their constituents to show value from their programs and services. Nonprofits vary in size and may or may not have paid staff or access to professional managers or financial advisors. Because of the nature of revenue streams for nonprofits (grants, gifts and memberships) special accounting procedures and financial statements are required; especially if the NPO receives federal money. This essay describes the general requirements for NPO accounting and financial reporting as well as the unique requirements for NPO financial statements. Future trends related to the funding, growth and management of NPOs are reviewed.
NPOs are not in business to make a profit; they are funded through donations or government awards, and they are in existence to provide services for the common good. NPO stakeholders (particularly donors and volunteers) want certainty that resources are being used wisely to provide services to constituents. Operational costs must be reasonable and fiscal and ethical accountability are also an expectation. Donors and awarding agencies expect NPOs to spend funds and not save them for the future. Annual expenditures for NPOs should end up very close to revenues (Elmerraji, 2007).
NPOs have been existence in the US, in one form or another, for more than 200 years and they continue to serve as important social service providers within our economy today.
Growth of Organizations for the Public Good
There has always been a strong feeling in the United States that there is a private responsibility to support the public good. The first charitable entities in the US were charitable trusts and community trusts. The first foundations were formed in the late 19th century. By WWI, public-private partnerships had been formed which supported public endeavors through private support or fundraising. After WWI, New Deal programs and initiatives such as Social Security and unemployment insurance were being created to fill the growing social need. In the 1930s, taxes were increased for individuals and business and this proved an incentive for many wealthy individuals and businesses to give money to organizations. With the start of WWII, there was a drop in government support for social welfare programs and nonprofits began to fill the void.
The two decades after WWII saw a continued increase in government funding to nonprofits. The so-called "Great Society" programs came about in the 1960s including Medicare, Medicaid and training and employment programs. In the 1970s, the US government began to shift grant money toward nonprofits as a means to support an even greater number of social programs. By the 1980s, the US government was actively encouraging the growth of nonprofits as government support shifted from education and income assistance to healthcare, housing and pension programs. Nonprofits began to primarily focus on the provision of social services to the middle class while for-profit organizations also began to provide services to the same population. There has been a steady increase in demand for social welfare programs since the 1980s when government support increased. The increased demand for services increased competition between nonprofit and for-profit organizations and nonprofits began to look to private funding sources to remain competitive (Bourgeois, 2003).
The Future of Nonprofit Organizations
From 1997 to 2007, there was an 88% increase in the number of foundations that were formed (Husock, 2007, p. 20). Philanthropy (money available) was expected to reach $6 trillion by 2050, with much of the funding coming from baby boomer wealth. Wealthy retirees pouring money into philanthropic endeavors had been largely responsible for the "augmentation of government services" by nonprofits and helped to increase the overall number of nonprofits by 67% from 1999-2007 (Husock, 2007). In 2007, private charitable giving reached an all-time high. The recession that began that year, however, caused a dramatic pull back of both individual and corporate philanthropic gifts. Private giving went from $344.5-billion in 2007 to $293.8-billion in 2009, with modest gains between 2010 and 2012. Living donors saw a decrease of 11% from the 2007 high. Retirees conserved their savings, which had been hit hard by the stock market crash and string of corporate failures, and professionals expressed job insecurities and lower earnings. In 2013, charitable giving was not expected to rise to its pre-recession level until 2018 (GivingUSA, 2013).
The need for financial accountability and reporting is ever increasing for nonprofits as the sources of funding increase. Nonprofits must be accountable for financial and management reporting of government grants and contracts, as well as to the public for in-kind donations and gifts. Nonprofit entities often have numerous stakeholders that carry varied expectations regarding the mission and vision of the organization.
Nonprofit stakeholders can include any of the following groups (Balser & McClusky, 2005):
- Funders / Donors
- Government Officials
- Executive Director/ Staff
- Board of Directors
The management of stakeholder relationships is critical to organizational effectiveness in nonprofits where balancing "social" expectations can be as critical to the health and longevity of the entity as is financial management. This essay discusses specific financial reporting requirements that need to be met for stakeholders (namely governmental and accounting stakeholders). The federal requirements for the managing, administering and financial reporting of awards will be outlined. The future role of NPOs in providing social services, the need for internal audits and professional management and oversight is discussed.
NPO Financial Reporting
NPO financial statements are easily interpreted by individuals who are familiar with for-profit financial statements. There are, however, a few significant differences between nonprofit and for-profit accounting. Regardless of the size of an NPO, it is advisable to have access to a financial advisor who is familiar with NPO accounting principles; advisors may be volunteers, staff, financial advisor or accountant.
It is imperative to keep in mind that economic data for nonprofit organizations is interpreted differently from financial Statements that are for profit. According to "What a Difference Nonprofits Make: A Guide to Accounting Procedures," 1990:
"Meaningful evaluations and comparisons of nonprofit performance almost always prove difficult and complex. While the profitability of two businesses can easily be calculated, it is much harder to compare the effectiveness of two counseling centers to see which is doing a better job of helping the mentally ill. Without the standard of profitability, it is also difficult to compare the job performance of nonprofit staff and managers" (Alliance for Nonprofit Management, 2004).
NPOs often use "fund accounting" procedures to group money (and sometimes the associated financial data) into individual funds. For example, an NPO may have an established general fund or one or more special funds. Money in a general fund may be used for maintenance, day-to-day operations, wages and building maintenance. A special fund is set up with restrictions and associated internal controls, and is designated for separate activities (ex: an acquisition fund). Fund accounting provides a way for organizations to have a clear idea of what resources are available for specific tasks or programs. In some cases, funds must be treated, legally, as separate accounting entities and may be required by law to have separate financial statements for each fund. Fund accounting is used in both governmental and NPO accounting and as such, it is critical to understand when looking at an NPO financial statement.
Financial Accounting Standards Board (FASB) Nonprofit Requirements
The FASB has issued two sets of guidelines for NPOs with regard to accounting standards. FASB-116 outlines how nonprofit organizations should handle contributions made to an organization. Contributions to an NPO may include monetary gifts, services and historical artifacts. Due to the nature and diversity of what is defined as a "contribution," FASB-116 provides guidance for reporting contributions.
FASB 116 -- Accounting for Contributions Received and Contributions Made provides the following guidelines as they apply to NPOs:
- Unconditional pledges must be recorded in accounting records. Contributions must be recognized as revenue in the period that they are received and at fair market value.
- NPOs must account for contributions of most goods such as property and equipment. Exemptions can be made for gifts of art and items in museum collections as outlined in the guidelines.
- NPOs must distinguish between the three types of assets that are outlined in FASB-117 below (unrestricted, temporarily restricted and...
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