Not-for-Profit and Governmental Accounting Principles

Not-for-profit (NFP) organizations and governmental entities operate in environments distinct from for-profit businesses, driven by service, public accountability, and stewardship of resources rather than profit maximization. Their accounting and financial reporting requirements are designed to provide transparency to stakeholders, demonstrate compliance with restrictions and regulations, and highlight the effective use of resources.

Characteristics of Not-for-Profit Organizations

Not-for-profits typically include charities, foundations, educational institutions, healthcare organizations, religious entities, and cultural organizations. Key characteristics include:

• No ownership interests or profit distribution

• Revenue primarily from contributions, grants, or membership dues

• Restrictions and donor-imposed requirements on funds

Financial Reporting for Not-for-Profits

NFPs present a set of financial statements emphasizing resource stewardship and accountability:

• Statement of Financial Position (Balance Sheet): Reports assets, liabilities, and net assets classified by restrictions (with donor restrictions or without donor restrictions).

• Statement of Activities: Presents revenues, expenses, and changes in net assets by restriction class.

• Statement of Cash Flows: Shows cash inflows and outflows by operating, investing, and financing activities.

• Statement of Functional Expenses: (Required for certain NFPs, such as health and welfare organizations) Discloses expenses by both function (program, management, fundraising) and nature (salaries, supplies, occupancy).

Net Assets Classification:

• Without donor restrictions: Resources available for general use.

• With donor restrictions: Resources restricted by donors for specific purposes or time periods.

Revenue Recognition and Contributions

• Exchange transactions: Recognized as revenue when earned (e.g., tuition, membership fees).

• Contributions and grants: Recognized as revenue when received or unconditionally promised. Contributions may be restricted for specific purposes or periods.

Conditional contributions are not recognized as revenue until conditions are substantially met.

Governmental Accounting Principles

Governmental entities include cities, counties, school districts, and other public sector organizations. Key differences from for-profit and NFP accounting include:

• Fund accounting: Resources are segregated into funds according to legal or administrative requirements. Each fund is a separate accounting entity.

• Modified accrual basis: Used for governmental funds, recognizes revenues when measurable and available and expenditures when incurred.

• Full accrual basis: Used for government-wide financial statements and proprietary/fiduciary funds, recognizing revenues when earned and expenses when incurred.

Governmental Financial Statements

• Government-wide statements:

  • Statement of Net Position (similar to a balance sheet)

  • Statement of Activities (shows expenses and revenues by program)

• Fund statements:

  • Governmental Funds: Balance Sheet and Statement of Revenues, Expenditures, and Changes in Fund Balances

  • Proprietary Funds: Statement of Net Position, Statement of Revenues, Expenses, and Changes in Net Position, and Statement of Cash Flows

  • Fiduciary Funds: Statement of Fiduciary Net Position and Changes in Fiduciary Net Position

Budgetary and Legal Compliance

• Budgets are integral to governmental accounting and must be legally adopted and monitored.

• Governmental financial reports often include comparisons of actual results to budgeted amounts.

Unique Considerations and Disclosures

• Restrictions: Both NFP and governmental entities must clearly disclose restrictions on funds or assets.

• Endowments and Permanently Restricted Funds: Required disclosures for donor-imposed restrictions on the principal and use of income.

• Grant compliance: Required reporting on the use of restricted grants and government funding.

• Transparency: Required note disclosures about related party transactions, commitments, contingencies, and compliance with legal requirements.

Relevant Standards

• US NFPs: FASB ASC 958—Not-for-Profit Entities

• US Governmental Entities: GASB (Governmental Accounting Standards Board) Statements, including GASB 34 and 54

Summary Table: Not-for-Profit and Governmental Accounting

Aspect	Not-for-Profit	Governmental
Statement of position	Net assets by restriction	Fund and government-wide statements
Revenue recognition	Exchange and non-exchange (contribution) basis	Modified or full accrual, fund-specific
Fund accounting	Not required	Required
Net asset classification	With/without donor restrictions	Fund balances by constraint
Budgetary reporting	Not required	Required
Unique disclosures	Donor/grantor restrictions, endowments	Legal compliance, budget variances

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