There are certain things every nonprofit board member should know about the financial statements of the organization. After all, many board members work in for-profit businesses. There are significant differences between for-profit and not-for-profit accounting.
Here are three things every nonprofit board member should know about their organizations’ financial statements.
1. Financial Statements Are the Responsibility of the Nonprofit’s Management and Board
While it’s the CPA who comes in and performs the audit, review or compilation of nonprofit organization’s financial statements — and often actually prepares the financial statements — the financial statements themselves are the responsibility of the board and management. The only thing that belongs to the CPA is the report on the financial statements.
In the nonpublic company sector, which includes nonprofits, it is very common for the outside CPA to assist in preparing the financial statements, including the footnotes. Management must, however, take responsibility for the presentation of the statements and footnotes in accordance with generally accepted accounting principles (GAAP). Otherwise, the CPA encounters a scope limitation and is required to disclose this in their report. In the real world this doesn’t mean management has to be an expert in GAAP. Let’s face it … that’s why you hire a CPA.
Someone in management needs to be able to review the financial statements, including the footnotes, and have the ability to say the information is correct, and that there isn’t anything misleading or omitted that a user of the financial statements might want to know.
2. There Is Flexibility In How You Present Your Financial Statements
There are certain things required by GAAP, but there is flexibility in how you present many of them. After all, they are your financial statements — not the CPA’s.
Subject to some limitations imposed by GAAP, you can present information in the style and format you want. From a practical standpoint, the CPA probably has a standard way they like to present things, but as long as it meets the minimum disclosure requirements, you have the final say.
Also, remember that you can always disclose more than the required minimum disclosures if you believe it presents a clearer picture of your organization and its accomplishments.
3. There Are Significant Differences Between Nonprofit and For-Profit Accounting
Nonprofit financial statements do not present or operate on the concept of net income or profitability as commercial entity financial statements do. This difference between nonprofit and for-profit accounting goes beyond the names of the financials, which might be called a “statement of activities” instead of an “income statement,” or a “statement of financial position” instead of a “balance sheet.”
One of the biggest differences between nonprofit and for-profit accounting is caused by receiving contributions. If a donor gives an organization a gift it might have to be classified as temporarily or permanently restricted if the donor placed a restriction as to time or purpose for the use of the gift.
If a contribution is received as a promise to give to the organization $100,000 a year for five years, for example, it becomes support or revenue in the year the pledge is received, even though it can’t be spent since it’s not in the form of cash. In subsequent years when it is received and spent it becomes a reduction in the net assets. So in this example in year one, you have an increase in net assets of $500,000 and reduction in net assets of $100,000 over the next five years as it’s spent.
What this creates is the appearance of a loss of $100,000 in the five years of spending if you try to compare it to the commercial world. The reality is, in the nonprofit world it simply signifies the use of support received in year one, and is used in the next five years to fulfill the organization’s mission.
This isn’t to say you don’t have to run a nonprofit like a business. Rather, it tells you that you have to evaluate the efficiency of the organization in a different manner than you do a commercial entity.
There are many more differences in nonprofit versus commercial reporting, including details regarding presentation of donor restrictions, board designation of assets, investment accounting and reporting, endowments, and presentation of functional versus natural classification of expenditures.
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