GAAP for nonprofits has set new fund classifications under FASB, altering the presentation of financial reporting.
What is GAAP for Nonprofits?
GAAP stands for Generally Accepted Accounting Principles. It provides accounting definitions for entities such as nonprofit organizations. Most importantly, it ensures that organizations present their financial statements in a transparent way to the public. GAAP is comprised of three individual groups:
- The Financial Accounting Standards Board (FASB)
- The American Institute of Certified Public Accountants (AICPA)
- The Securities and Exchange Commission (SEC)
GAAP rules have declared the FASB pronouncements as the highest tier of financial reporting. Only specific pronouncements apply to nonprofit organizations.
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Managing revenue using GAAP for nonprofits
Nonprofit organizations that receive revenue through public and private sources of funding use the system of fund accounting rather than traditional business methods of accounting. Fund accounting refers to the management and allocation of revenue received by nonprofits and the restrictions, or designations that are placed on those sources of revenue.
The basic idea behind fund accounting is to monitor and document the use of assets that are donated by outside parties. In many cases, donations made to nonprofits must be used to pay for a specific project or purpose. Accountants involved in fund accounting keep track of the restrictions that are placed on each revenue source to ensure the funds are used properly and assist in preparing for the annual audit.
New FASB rules for nonprofit financial statements
The new FASB rules for nonprofit financial statement presentation define two classes of funds or net assets:
- Net Assets Without Donor Restrictions – Revenue that is received with no strings attached and can be used at the discretion of the organization’s management.
- Net Assets With Donor Restrictions – Revenue that is received that is designated for a specific purpose and can only be used for that purpose.
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Donor designations combine two net asset classes
The new Donor designations combine the two restricted net asset classes represented in the previous financial statement presentations – Temporarily Restricted and Permanently Restricted.
Fund accounting benefits nonprofits by providing the following:
- Transparency – By keeping each fund separate under specific categories, the inflow of revenue and resources can be categorized appropriately. Using fund accounting methods will also show how the funds designated for a specific project are used.
- Compliance – Nonprofits enjoy special privileges in the form of tax breaks and other government concessions, but they can only continue to benefit as long as they remain compliant. They must abide by the rules stipulated in forming their organizations; otherwise, such privileges will be removed.
- Sustainability – Applying fund accounting principles provides systematic method that shows whether a nonprofit can fulfill their mission with the resources available. By identifying the revenue coming in and immediately investing it towards the fund it was earmarked for, it’s easier to track whether or not, they can maintain a sustainable business.
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The emphasis of fund accounting is accountability for the use of donated funds.
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