CPAs serving NFP entities should not delay the necessary planning and preparation if they hope to help these organizations traverse this rugged terrain. Nonprofit organizations, like for-profit entities, must adhere to Generally Accepted Accounting Principles (GAAP) when preparing their financial statements. For nonprofit organizations, ASC 842 became effective for fiscal years beginning after December 15, 2019, and for interim periods within fiscal years beginning after December 15, 2020. It’s essential to note that the effective dates might differ for certain nonprofit organizations based on their specific circumstances. To help you comply with nonprofit accounting standards and GAAP and overcome some of the challenges, here are some best practices to keep in mind. Proper grant management can help you avoid overreporting income and ensure your funders and donors see an honest picture of your nonprofit’s financial health.

Does revenue recognition apply to nonprofit organizations?

In addition, he recently started a blog where he discusses various topics relating to nonprofit accounting, financial management and good governance practices. Consider, for example, a nonprofit university that receives a government grant to be applied to the tuition account of a specific student. Such payment would not constitute a contribution, despite the fact that the resource provider (a government agency) receives nothing of value in exchange for the payment.

Accounting for the ERC can be complicated.

In not-for-profit (NFP) accounting, financial statements are structured to provide a transparent view of how funds are obtained and utilized, focusing on stewardship and accountability. The presentation of these financial statements reflects the unique nature of NFP operations, unearned revenue with specific requirements for the classification of net assets, and the display of financial positions and activities. Yes, using nonprofit-specific accounting software can greatly help to ensure compliance with GAAP and other nonprofit accounting standards.

New FASB rules for nonprofit financial statements

Larger or more complex nonprofits typically prefer accrual accounting to meet Generally Accepted Accounting Principles (GAAP) requirements and satisfy grantor and auditor expectations. GAAP rules have declared the FASB pronouncements as the highest tier of financial reporting. When nonprofits follow accounting standards, they prioritize accountability in their financial practices, enabling them to address the potential concerns of donors and stakeholders. Whether you’re stepping into a financial role at a nonprofit or serving on a board, understanding accounting standards is key to ensuring compliance, transparency, and financial sustainability. In addition to GAAP, nonprofits must also comply with FASB 117, the Financial Accounting Standards Board’s Statement of Financial Accounting Standards No. 117 (FASB 117). FASB aims to develop and issue accounting standards through an inclusive and transparent process intended to promote useful information and decision-making by the NPO board, donors, grant funders, and other stakeholders.

• Over the last 30 years, BPM has worked with more than 500 nonprofits, ranging from small family foundations to multi-million-dollar organizations.
• For instance, in 2025, the FASB plans to explore topics such as the alignment of non-GAAP financial metrics and the proper accounting for research and development spending.
• The Financial Accounting Foundation oversees the FASB and ensures that these standards are adhered to across different entity types.
• Make sure to follow the presentation and disclosure principles under the accounting guidance followed for recognizing the ERC.
• The FASB’s guidance on lease accounting, including ASC 842, is generally applicable to all entities that follow GAAP accounting standards.
• It was given authority to regulate financial reporting and initially played a role in shaping accounting standards.

The final step in the evaluation process is to determine whether or not donor-restrictions exist. Donor-restrictions should not be confused with conditions as mentioned above and instead are grants where a restriction exists that limits the use of the assets received. These restrictions may permanently limit the use of the asset received, stipulate the assets be used at a particular point in time, or be specific for a particular purpose or program. Any amounts not used in the year they are received are recognized as with donor restrictions at yearend and disclosed in your financial statements. It’s crucial to distinguish between non-reciprocal contributions (donations, grants) and exchange transactions where both parties receive commensurate value.

While it might seem complex, once you understand the fundamentals, it becomes much more manageable. These materials were downloaded from PwC's Viewpoint (viewpoint.pwc.com) under license. Take our 2-minute survey to find out if outsourced accounting and bookkeeping is a good fit for your organization. In the United States, https://www.bookstime.com/ these Generally Accepted Accounting Principles (or GAAP) are set by the Financial Accounting Standards Board (FASB).

It was given authority to regulate financial reporting and initially played a role in shaping accounting standards. The FASB continues to update and refine accounting standards to address emerging financial reporting issues. To ensure that your organization is properly complying with accounting standards, it’s important to work with experienced compliance experts, such as The Charity CFO.

Defining Restricted and Unrestricted Funds in Nonprofits

• This most often happens with major gifts and grant funding because donors and grantmakers want to ensure their significant contributions will be used to further aspects of your mission that align with their values.
• DTLs make your enterprise tax payments more flexible, allowing some leeway in your financial planning.
• So, the first step in analyzing your organization’s revenue is to identify when your customers enter contracts with you.
• Please do not copy, reproduce, modify, distribute or disburse without express consent from Sage.These articles and related content is provided as a general guidance for informational purposes only.
• Such payment would not constitute a contribution, despite the fact that the resource provider (a government agency) receives nothing of value in exchange for the payment.

Although this date may seem distant, the new standard will require a considerable transition effort in advance. This type of software is designed to handle the unique accounting needs of nonprofits, automating many essential tasks and reducing the risk of errors. It becomes much easier to produce accurate financial statements that meet compliance requirements. Nonprofit organizations must prepare specific financial statements to give an overview of their financial health and activities. While the SEC continues to oversee financial reporting for publicly traded companies, it defers standard-setting to FASB. Meanwhile, AICPA continues to provide guidance and best practices, shaping financial reporting across industries, including nonprofits.

Performance Cookies

ASC 606 and exchange revenue are entirely different from contributed or non-exchange revenue. Although we’ll cover contributed or non-exchange GAAP for Nonprofits revenue in a future article, it’s essential to note these differences. Nonprofit entities deal with two primary types of revenue, so confusing exchange and non-exchange revenue is easy to do.