Nonprofit Advantage | March 2013 | Page 19CONNECTICUT ASSOCIATION OF NONPROFITS

Are nonprofit financial statements really that different from those of for-profit entities? Yes, they are! Under-standing 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 fo-cused 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 differ-ences between budgeted and GAAP results. An organization’s tax returns are derived from the financial informa-tion – 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 record-ed during the year but only as year-end 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 mis-sion driven rather than profit driven and receive contributions (support). Contributions are often the reason why budgeted and GAAP results dif-fer. Understanding that accounting for when contributions are received,

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 re-ceived by the organization. Account-ing and reporting are based on the un-derlying 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

when earned and recorded as deferred revenue (a liability) on the statement of financial position until earned. For ex-ample, if a nonprofit conducts a train-ing 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-ex-change transaction. Non-exchange transactions are voluntary nonrecipro-cal transfers. Donors are supporting the mission of the nonprofit organization and expect to receive nothing of di-rect value in exchange. Non-exchange transactions are recorded on the state-ment 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 record-ed (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,

HowNonprofitsDifferfromFor-ProfitswhenitComestoTheir Financial Statements

By Dawn Bryant, Nonprofit Audit Director, Viola, Chrabascz, Reynolds & Co. LLP

Understanding the unique accounting

and reporting requirements of a nonprofit

organization is vital to managing

and understanding the financial

statements of that organization.

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Page 20 | Nonprofit Advantage | March 2013 CONNECTICUT ASSOCIATION OF NONPROFITS

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 (liabili-ties) on the statement of financial position until conditions are met. Conditions are donor-imposed stipulations specifying a future and uncertain event (e.g. chal-lenge or matching grants). Conditional support which has not been met should be disclosed in the footnotes of the finan-cial statements.

Many nonprofits have transactions that have elements of both revenue (exchange transaction) and support (non-exchange transaction). Typical examples are fund-raising galas and dinners, silent auctions and membership dues.

In addition to support and revenue, other transactions that nonprofits may encounter are agency transactions, con-tributed services, gifts in kind and trans-fers to recipient entities. Althoughnonprofitorganizationsare

mission driven and not profit-driven,

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Nonprofit Advantage | March 2013 | Page 21CONNECTICUT ASSOCIATION OF NONPROFITS

they should have surpluses if pos-sible. Without sufficient revenue and support the mission cannot be accom-plished. Setting aside surpluses during good economic times can help offset years in which a deficit is budgeted because the need for services has in-creased. When accumulating surplus-es, boards should consider designating unrestricted funds for emergency re-serves 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 ac-counted for and separated by self-im-posed (board designated) and donor-imposed (temporary and permanent) restrictions.

When faced with tough econom-

ic times, the feasibility of programs should also be considered. When con-sidering the efficiency and effective-ness of programs, total costs must be evaluatedaswellasnon-financialin-formation (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 support-ing activity. Indirect costs are costs that are attributed to more than one program and/or supporting activity. Indirect costs should be allocated con-sistently from year to year. The alloca-tion method should reflect the organi-zation’s activities.

Actual to budgeted costs should be reviewed monthly by those respon-sible 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 or-ganization negatively.

Those responsible for the governance of a nonprofit organization should un-derstand the unique accounting and reporting requirements in order to manage the organization beyond the day-to-day cash operations to accom-plish the organization’s mission as ef-ficiently and effectively as possible.

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If you want to learn first hand about these issues, join us on April 10th at our Nonprofit Financial Summit at the Thom-aston Opera House. Dawn Bryant will be presenting on this topic.

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.