Module 4
External (GAAP)
Financial Reporting
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Describe alternative forms of financial
reporting
Identify financial statements required by
GAAP
Describe the differences between the cash
and accrual bases of accounting
Define exchange and nonexchange
transactions
Identify the sources of GAAP for NPOs
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FASB
AICPA
Identify other resources to assist in staying
current with GAAP
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Audited financial statements that comply
with GAAP
IRS annual reporting Form 990
Periodic Treasurer’s Reports to the Board
– on a cash or accrual basis
– comparisons of budget to actual
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Annual Reports that include outcomes
measures as well as some financial data
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 Statement
of Financial Position
 Statement
of Activities
 Statement
of Cash Flows
 Statement
of Functional Expenses - for
VHWOs
With Notes to the Financial Statements
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Reports on an aggregate view of the entity
as a whole, rather than on disaggregated
funds, as of a point in time
Net assets (assets less liabilities) must be
classified into classes:
 unrestricted
 temporarily restricted
 permanently restricted
Flexibility is allowed in displaying
information as long as net assets are
classified; such as showing disaggregated
fund-based data
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Reports on changes in all classes of net assets
for a period of time (revenues, gains, support,
expenses, and losses)
Net assets released from restrictions decrease
temporarily restricted net assets and increase
unrestricted net assets, as restrictions are met
All expenses decrease unrestricted net assets
and are reported by functional categories (i.e.,
program vs. support)
SFAS No. 117 allows considerable flexibility in
presenting information; either a single column
or three columns for each class of net asset
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Cash flows from Operations
includes unrestricted gifts
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Cash flows from Investing
includes temporarily and permanently restricted net
assets given for long-term purposes (and related
income)
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Cash flows from Financing
includes issuance and repayment of long-term debt
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Noncash Investing and Financing Activities
Includes gifts-in-kind contributions
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Voluntary health and welfare organizations (VHWOs)
must present this statement showing both functional
expenses and natural (object or line item) expenses
Natural
Expenses
Functional Expenses
Program
Support
Salaries
Adoption
Mgt and General
Supplies
Counseling
Fund-raising
Depreciation
Education
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Argument for Cash:
It (most often) matches the budget
Board members understand it
Inadequate cash flows put organizations at high risk
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Arguments for Accrual:
Monthly reports should lead into the audited annual
financial statement so there are no surprises caused
by auditor’s accrual adjustments, such as
depreciation
All information is captured (i.e., what is earned and
incurred)
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Revenues are increases in unrestricted net
assets that arise from bilateral exchange
transactions in which the other party
receives direct tangible benefits
commensurate with the resources provided.
Examples include:
membership dues
 program service fees
 sales of supplies and services
 investment income
 some grants
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Unrestricted net assets when no donor
restrictions exist or the restrictions have
expired
Temporarily restricted net assets when the
donor imposes restrictions as to purpose (how
the asset is used) or time (when the asset is
used)
Permanently restricted net assets when the
donor stipulates that the assets must be held
in perpetuity, but the organization can spend
the income
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Unconditional promises depend only on the
passage of time or demand by the promisee
for performance. Record these as support in
the period made
Conditional promises depend on the
occurrence of a specified future and
uncertain event to bind the promissor, such
as obtaining matching gifts by the recipient.
Do not record these as support until the
conditions are substantially met
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Audit and Accounting Guide Not-for-Profit
Organizations, updated each May
Not-for-Profit Organizations – Annual Audit
Risk Alert
See: www.aicpa.org
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Example: GAAP for a Health Care
Organizations
For-Profit:
Proprietary
Not-for-Profit:
Voluntary
FASB
Guidance
Governmental:
Public
GASB
Guidance
AICPA Audit and Accounting Guide
Health Care Organizations
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GAAP from FASB (note: see Codification)
•SFAS No. 93 — recognition of depreciation
•SFAS No. 116 — accounting for contributions
•SFAS No. 117 — financial statement display
•SFAS No. 124 —accounting for investments
•SFAS No. 136 —agent, trustee, intermediaries
•SFAS No. 133 derivatives and hedging activities, June 2000, see
related 137, 138.
•SFAS No. 132 - pension disclosures
•SFAS No. 121 —impairment of long-lived assets
•SFAS No. 157 Fair Value Measurements
•SFAS No. 158 Employers’ Disclosures about Pensions and Other
Postretirement Benefits-an amendment of FASB Statements No.
87, 88, and 106
•SFAS No. 159 The Fair Value Option for Financial Assets and
Financial Liabilities
•SFAS No. 164 Mergers and Acquisitions for Not-for-Profit
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GAAP from AICPA and GASB (see Codification)
•AICPA Statement of Position 98-2
•GASB Statement No. 39 Determining Whether
Certain Organizations are Component Units, June
2002.
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GAAP that Differs between GASB and FASB
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reporting entity
contributions
financial statement display
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cash flows
deposits and investments (i.e., see GASB Statement
No. 31, SFAS No. 115, and SFAS No. 124)
operating leases
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compensated absences
debt refunding; risks and uncertainties
pensions; other post retirement benefits (OPEB)
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Revises SOP 87-2 on joint costs making it more difficult to allocate
“educating the public” or “advocacy” costs to program expenses.
Provides that costs of all materials and activities that include a fundraising appeal should be reported as fund-raising costs unless a bona
fide program or management & general function has been conducted in
conjunction with the appeal for funds.
Costs that are clearly identifiable should be charged to program,
management and general, or fund-raising. The joint costs of a bona fide
program or management and general function should be allocated
between those cost objectives and fund-raising.
Criteria of (1) purpose, (2) audience (3) content must be met in order
to conclude that a bona fide program or management & general function
has been conducted in connection with fund-raising.
Goes beyond SOP 87-2 by covering total costs, not just joint costs, and
applying to state and local governmental entities, as well as to NPOs.
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Investments SFAS No. 124
Accounting for Certain Investments Held by Not-forProfit Organizations
• Mark equity and debt investments to market.
• Report realized and unrealized gains and losses
and investment income in the Statement of
Activities
• Report income and gains and losses as changes in
unrestricted net assets, unless their use is
restricted by the donor or legally restricted by state
law
• Similar to SFAS No. 115 for businesses and GASB
Statement No. 31 for governments, but simpler
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Financially Interrelated Entities
NPOs have varied relationships with other
NPOs, for-profit businesses, and
governments characterized by:
Ownership - financial equity interest in another
organization
Control - having the power to appoint the majority of
Board members
Economic interest - having the right to receive or use
resources, receive income or services, or obligated
to pay the debt of another organization.
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“Transfers of Assets to a Not-for-Profit Organization or
Charitable Trust That Raises or Hold Contributions for Others”
(June 1999)
An organization that receives financial assets from a donor and
agrees to transfer them to a specified “unaffiliated” beneficiary
should recognize the fair value of those assets as a liability, not
revenue.
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i.e., acting as an intermediary
e.g., most federal fund-raising foundations, such as United
Ways and community foundations.
An organization that receives “variance power” to redirect the
assets to another beneficiary, or if the recipient organization and
the specified beneficiary are “financially interrelated”
organizations recognizes the assets as contributions received.
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i.e., acting as a donee and donor
e.g., captive fund-raisers, such as institutionally-related
foundations
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If the designated beneficiary organization is
“financially interrelated” to the recipient NPO,
then it records an interest in net assets of the
intermediary
If not financially related, then no accounting
prior to the transfer.
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