How Nonprofits Differ from
For-Profits when it Comes to
Their Financial Statements
By Dawn Bryant, Nonprofit Audit Director, Viola, Chrabascz, Reynolds & Co. LLP
Are nonprofit financial statements
really that different from those of forprofit entities? Yes, they are! Understanding the unique accounting and
reporting requirements of a nonprofit
organization is vital to managing and
understanding the financial statements
of that organization.
Board members and non-accounting
management staff are typically focused on day-to-day operations based
on cash inflows and outflows. They are
often surprised by generally accepted
accounting principles (GAAP) results
when compared to cash basis results.
Budgets may be maintained on the
cash basis. However, it is extremely
important to understand any differences between budgeted and GAAP
results. An organization’s tax returns
are derived from the financial information – all of which is easily accessible
to the public. For example, common
discrepancies between audited and
internal financials occur when accrual
accounting transactions are not recorded during the year but only as yearend adjustments. Accrual accounting
entries should be made regularly to
record activity in the period in which
they are acknowledged/invoiced and
obligated/incurred instead of when
payments are received or disbursed.
Unlike for-profit entities, nonprofit
organizations have no owners, are mission driven rather than profit driven
and receive contributions (support).
Contributions are often the reason
why budgeted and GAAP results differ. Understanding that accounting
for when contributions are received,
CONNECTICUT ASSOCIATION OF NONPROFITS
paid and expended may not always
take place within the same fiscal year
is important to reconciling differences
between budgeted and GAAP results.
A statement of activities reports all
revenue and support transactions received by the organization. Accounting and reporting are based on the underlying substance of the transaction,
not the name. Nonprofit accounting
staff must understand the reasons why
“money” (revenue and support) was
received in order to determine when
and how to record it on the financials.
Revenue is considered an exchange
transaction. Exchange transactions
are transfers of equivalent economic
value, reciprocal transfers. Revenue is
recorded on the statement of activities
Understanding the
unique accounting
and reporting
requirements
of a nonprofit
organization is
vital to managing
and understanding
the financial
statements of that
organization.
when earned and recorded as deferred
revenue (a liability) on the statement of
financial position until earned. For example, if a nonprofit conducts a training event, it may expect to see monies
collected in advance of the event on
the current budget to actual/profit and
loss statement. However, these monies
would be deferred until earned – when
the event occurs - even if in a different
fiscal year.
Support is considered a non-exchange transaction. Non-exchange
transactions are voluntary nonreciprocal transfers. Donors are supporting the
mission of the nonprofit organization
and expect to receive nothing of direct value in exchange. Non-exchange
transactions are recorded on the statement of activities when the nonprofit
organization has the unconditional
right to receive funds. For example, if a
nonprofit conducts a capital campaign,
it may expect to see monies recorded
when collected on the current budget
to actual/profit and loss statement.
However, all unconditional pledges
would be recorded on the profit and
loss statement in the year the pledge
was made. There will be discrepancies
between the year the support is recorded (when the unconditional pledge
was made) and the collection as well as
expenditure of the monies, which may
occur over the next several years. This
can cause an operating surplus (when
recorded) one year and deficits in the
next year (when expensed).
Unconditional support is recorded
in the period received as unrestricted,
Continued on next page
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Nonprofit Advantage | March 2013 | Page 19
temporarily restricted or permanently
restricted based on donor restrictions,
if any. Donor-imposed restrictions limit
the use of a contribution.
Support received with conditions is
recorded as refundable advances (liabilities) on the statement of financial position
until conditions are met. Conditions are
donor-imposed stipulations specifying
a future and uncertain event (e.g. challenge or matching grants). Conditional
support which has not been met should
be disclosed in the footnotes of the financial statements.
Many nonprofits have transactions that
have elements of both revenue (exchange
transaction) and support (non-exchange
transaction). Typical examples are fundraising galas and dinners, silent auctions
and membership dues.
In addition to support and revenue,
other transactions that nonprofits may
encounter are agency transactions, contributed services, gifts in kind and transfers to recipient entities.
Although nonprofit organizations are
mission driven and not profit-driven,
Continued on next page
Page 20 | Nonprofit Advantage | March 2013
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Without sufficient revenue and support the mission cannot be accomplished.
Setting aside surpluses during good economic times can help offset years in
which a deficit is budgeted because the need for services has increased.
they should have surpluses if possible. Without sufficient revenue and
support the mission cannot be accomplished. Setting aside surpluses during
good economic times can help offset
years in which a deficit is budgeted
because the need for services has increased. When accumulating surpluses, boards should consider designating
unrestricted funds for emergency reserves or other long-term purposes.
The net assets of an organization
show all accumulated surpluses (or
deficits) since the organization came
into existence. This balance does not
necessarily represent cash available for
operations. Net assets should be accounted for and separated by self-imposed (board designated) and donorimposed (temporary and permanent)
restrictions.
When faced with tough econom-
CONNECTICUT ASSOCIATION OF NONPROFITS
ic times, the feasibility of programs
should also be considered. When considering the efficiency and effectiveness of programs, total costs must be
evaluated as well as non-financial information (number of people served,
number of volunteer hours, etc.).
The total costs of an organization
are both direct and indirect. Direct
costs are costs that can be attributed to
a specific program or specific supporting activity. Indirect costs are costs
that are attributed to more than one
program and/or supporting activity.
Indirect costs should be allocated consistently from year to year. The allocation method should reflect the organization’s activities.
Actual to budgeted costs should be
reviewed monthly by those responsible for making financial decisions.
Unfavorable variances should also be
evaluated. A decision to reduce costs
or eliminate programs must be quick.
Although deficits may be necessary
during tough economic times, if they
are continued they can impact the organization negatively.
Those responsible for the governance
of a nonprofit organization should understand the unique accounting and
reporting requirements in order to
manage the organization beyond the
day-to-day cash operations to accomplish the organization’s mission as efficiently and effectively as possible.
__________________________________
If you want to learn first hand about
these issues, join us on April 10th at our
Nonprofit Financial Summit at the Thomaston Opera House. Dawn Bryant will be
presenting on this topic.
Nonprofit Advantage | March 2013 | Page 21