Accounting Standards: Accounting for Nonprofit Organizations
Accounting for nonprofit organizations is no small feat. In this post, I’ll attempt to provide an overview of accounting for nonprofit organizations (from here on out, I’ll refer to them as “NPO”). Each of these topics could fill a whole dissertation, so in this attempt, I’ll do my best to make it as palatable as possible to consume and easy to understand.
First, let’s talk about a few primary sources of revenue. Most NPO’s rely on either a donation-based or membership-based type funding. Donation-based funding would refer to a mission-driven NPO focused on a social cause, environmental protection, educational, health, and more. Donations raised for these types of NPO’s go directly toward their different program areas.
Membership-based funding would refer to an NPO that is reliant upon its membership base for participation and financial support through dues or membership fees. Typically members will receive other benefits and privileges based on the type of the NPO.
Another primary source of revenue is grant funding. There are many (MANY) different aspects of grant funding. Some of those critical aspects are the following:
Sources of grants - Government, Foundation, Corporate, Institutional
Types of grants - Program/Project Grants, General Operating Grants, Capital Grants, Research Grants
Grant application process - Proposal Writing, Reporting Requirements
Restrictions and compliance
It's important to note that grants often come with specific conditions on fund usage. NPO’s must strictly adhere to these conditions to ensure compliance with the funder's requirements. Should the NPO fail to comply it would lead to serious consequences, including de-obligating funds to the funder. Which means the NPO would have to return the grant funds (Yes, this has happened before!). More significantly, it could result in the termination of funding, ineligibility for future grants, legal and financial penalties, audits, increased scrutiny, and reputational damage.
One of the most significant grants that an NPO received while I was working with them was so complex we had to hire an additional grants analyst to properly track, comply, and adhere to the funder’s requests. The funder, a large government-funded entity, has its own dedicated set of compliance as well as a full-time audit team. (As if the IRS standards, FASB, and GAAP weren’t enough for us, ha!) Let’s just say, we were all pretty stressed out making sure we didn’t have to de-obligate any funds back.
Given the diverse sources of funding NPOs rely on, revenue recognition can be particularly complex. In this context, FASB provides the guidance on when and how to recognize revenue from contributions, grants, and other sources. Understanding and adhering to these principles is essential for accurately reporting revenue and complying with regulatory requirements. This adherence ensures transparency in how contributions are utilized and reported.
Effective presentation of financial statements is crucial for providing stakeholders a clear understanding of an organization's financial position. FASB ASC 958-205 outlines the specific requirements for nonprofit financial statement presentation. This standard addresses the format and content of financial statements, ensuring consistency and comparability across organizations.
For the NPO's accountability structure, there are readily accessible resources like Charity Navigator. These platforms provide the NPO's 990 (Federal Informational Return), along with other pertinent data such as a breakdown of the percentage of their expenses by program area (Administrative, Fundraising, and Programming). This accessibility empowers stakeholders to stay informed about the NPO's financial status.
If you are a part of an NPO looking for grant funding - check out these sources below:
Candid Learning | Trainings in nonprofit fundraising, proposal writing, grants
The Foundation Center's Guide to Proposal Writing (Fundraising Guides) (affiliate link)
Sources:
Revenue Recognition (FASB ASC 958-605)
Accounting for Contributions (FASB ASC 958-605)
Financial Statement Presentation (FASB ASC 958-205)
Disclaimer: This blog post is not a comprehensive guide to the FASB or FASB ASC as it relates to GAAP. Please consult your tax advisor or CPA for specific advice and guidance tailored to your business.
