Financial reporting for non-profit entities falls under the guidance of Financial Accounting Standards Board (FASB) Statement 117, Financial Statements of Not-for-Profit Organizations. There are three main financial statements that not-for-profit (NFP) organizations must prepare in accordance with generally accepted accounting principles. A fourth report is required for voluntary health and welfare groups.
1: Statement of Financial Position
This report is equivalent to a Balance Sheet in the for-profit world. It shows a snapshot of the assets, liabilities, and net assets of an NFP as of a particular date. FASB 117 dictates that the assets and liabilities must be classified as either current or noncurrent. Donor-imposed restrictions provide direction on how net assets should be categorized: unrestricted, temporarily restricted, or permanently restricted. These categories are also a requirement of FASB 117.
2: Statement of Activities
Known as the Income Statement to profit-seeking organizations, this report shows the revenue, expenses, and changes in net assets of an NFP over the course of one year (nonprofitaccountingbasics.org). Like the net asset categories above, the revenue received with donor restrictions must be shown as either temporarily or permanently restricted on the Statement of Activities. However, all expenses are recorded as unrestricted.
3: Statement of Cash Flows
This report reconciles accrual-based accounting to the changes in cash. The statement is broken down into three sections: investing activities, financing activities, and operating activities. Investing activities are those that either use cash to make a purchase of an asset or receive cash from the sale of an asset. Financing activities include changes in cash from the settling of liabilities or the incurrence of liabilities. Operating activities are anything that does not fall into the first two categories, as well as any non-cash items (i.e. depreciation).
4: Statement of Functional Expenses
Even though this report is not required for all NFP organizations, FASB 117 does require the reporting of expenses by functional classification, either through the Statement of Activities or in the footnotes to the financial statements. Only voluntary health and welfare organizations must prepare a formal statement. Natural expenses, like rent, are divided between three functions: program services, management and general, and fundraising. This is particularly important if an NFP has to file Form 990 to the IRS, which we will discuss next.
The issuance of the above statements depends on the size and requirements of an NFP. These financial reports must be completed on an annual basis, but they can also be useful to management and the Board of Directors throughout the year. An audit of the financial statements is sometimes required by contributors or lenders, and the state may require audited financial statements if contributions over a specified amount are received (nonprofitaccountingbasics.org).
Certain non-profits that have tax-exempt status and over $25,000 in income are required to file IRS Form 990. This information return is filed annually and is due by the 15th day of the 5th month after the fiscal period for the NFP ends. The return, once filed, is open to the public for viewing. It shows donors, investors, and lenders the financial health of a non-profit. For more information on the Form 990, visit www.irs.gov .