The Financial Accounting Standards Board (FASB) establishes generally accepted accounting principles (GAAP) for all nongovernmental entities, including nonprofits.

Nonprofit organizations are defined by FASB as entities that have these characteristics:

  • Receive contributions of significant resources from providers who do not expect a commensurate or proportionate monetary return
  • Operate for purposes other than to make a profit
  • Have an absence of ownership interests (like those of business entities)

Nonprofit organizations include –

  • Civic and community organizations
  • Cultural organizations
  • Performing arts organizations
  • Private and community foundations
  • Public broadcasting stations
  • Religious organizations
  • Research and scientific organizations
  • Voluntary health and welfare organizations

Nonprofits report in accordance with GAAP to ensure consistency and comparability between their financial statements and those of other nonprofits. The financial statements of two nonprofit organizations may not be identical, but will have similar elements.

The financial statements of most nonprofits include the following elements:

  • A statement of financial position, which shows the balances of the nonprofit’s asset, liability, and equity accounts as of the last day of the fiscal year
  • A statement of activities, which shows the accumulation of the activity that occurred in the nonprofit’s revenue and expense accounts during the year
  • A cash flow statement, which summarizes the sources and uses of the nonprofit’s cash during the year
  • Notes to the financial statements. This is additional information regarding the numbers in the financial statements and other matters that the nonprofit is required by GAAP to disclose, such as additional information about any debt the nonprofit has issued

Financial Accounting Standards Board Accounting Standards Update (ASU) No. 2016-14 enacted significant changes to the financial reporting model for nonprofits; including the requirement for all nonprofits to report their expenses by both natural and functional expense classifications.

Prior to the implementation of ASU No. 2016-14, only voluntary health and welfare organizations were required by GAAP to present the allocation of their expenses by natural classifications among the functions of the nonprofit. Now all nonprofits are now required to present this disaggregated expense information in their financial statements.

Examples of natural expense classifications include salaries and wages, employee benefits, professional services, supplies, interest expense, rent, utilities and depreciation. Examples of functional classifications include program services and supporting services. This information may be presented on the face of the statement of activities; as a schedule in the notes to the financial statements; or in a separate financial statement.

ASU No. 2016-14 is effective for financial periods with fiscal years beginning after December 15, 2017; and for interim periods within fiscal years beginning after December 15, 2018.

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