Not-For-Profit External Financial Reporting - Part 1
In this first article of a five part series, the discussion will involve the general concept of not-for-profit (AKA nonprofit) accounting and what must be reported when providing information externally. The succeeding parts of the series will break down each financial statement that is required to be reported, giving further insight into each.
When must a not-for-profit organization externally report their financials?
Many not-for-profit organizations must externally report their financial information as part of an audit or review requirement. If an organization is required to have either an audit or a review, then the financial statements must be prepared according to Generally Accepted Accounting Policies (GAAP). The audit or review may be required by government entities, major funders, creditors, or members of the organization. Audited or reviewed financial statements help the not-for-profit with their own decision making efforts and monitoring of the organization. One of the benefits of nonprofit organizations externally reporting their financials is that they can be compared to similar nonprofit organizations in order to benchmark their performance.
What reports are required to be created and provided externally?
The emphasis of external financial reporting is to focus on the basic financial information for the organization as a whole. The financial reports that every audited or reviewed nonprofit must provide externally include: Statement of Financial Position, Statement of Activities, Statement of Cash Flows, and Statement of Functional Expenses (required for Voluntary Health and Welfare Organization's only). Although some of the statement names may look confusing, the first two correspond to financial statements with which most are familiar.
Statement of Financial Position = Balance Sheet
Statement of Activities = Income Statement
With a basic understanding of what the balance sheet and income statement entails, preparing the not-for-profit versions can be quite simple. The Statement of Financial Position will report the organizations assets, liabilities, and net assets, while the Statement of Activities will report the income, expenses and change in net assets.
Who sets the standards for reporting financials and what are they?
The major body that creates rules and regulations for financial reporting is the Financial Accounting Standards Board (FASB). They have compiled rules and regulations into what is now called the Accounting Standards Codification. The Codification defines, explains, and gives examples for specific rules that organizations must follow and specifically sets aside a section of the codification dedicated solely to not-for-profit organization reporting. The sections in which to find rules relating to external reporting for not-for-profit organizations include ASC 958-205 through 958-280.
This is just a brief overview of not-for-profit external reporting. Upcoming issues will further expound upon what was introduced here. If you have any questions about this information, give us a call.