Do you speak nonprofit GAAP

Joan M. Renner, CPA, CGMA, Director 501(c)(fit!)

I like to think I’m pretty good at languages. I tried very hard to learn a little Portuguese for our trip to Lisbon, and then studied all over again for our trip to Brazil, where they speak the same language very differently. Honestly, the one country where I had the most trouble understanding people was Scotland. Our Scottish friends had just as much trouble understanding my Virginia accent. We were all speaking English, but it felt like a very different language.

Nonprofit accounting is like that. There are major differences between generally accepted accounting principles (GAAP) required for businesses and GAAP for nonprofits. It’s like nonprofit accountants are speaking a very different language.

Here’s how it affects you. If your fiscal year ends on June 30, you’re starting to think about how your year will look financially. Year-end accounting adjustments can change your bottom line in a big way. What area of your accounting causes the most confusion at the end of the year? Odds are, it’s the decision of when to recognize income.

The accounting rules for nonprofit income are not complex: you recognize income when it’s promised…unconditionally. If the income is restricted for time or purpose, it’s still income when promised.

Yet nonprofit income recognition is the most challenging area of nonprofit GAAP because it takes judgment to apply the rules properly in real life.
Let’s say it’s June and your fiscal year ends on June 30. On June 20, you receive a letter awarding you a $100,000 grant. That will really help this year’s bottom line, right? Well, maybe, maybe not. The proper accounting treatment depends on your facts and circumstances.

  • If the grant has no strings attached, you record it as a pledge receivable and recognize grant income immediately on the date promised. Yay!
  • If the grant is to pay for after-school child development services for low-income children at an agreed-upon rate, then you recognize it as income when you provide the services. It’s conditional on your performance.
  • If the grant is to fund your ongoing scholarship program, it’s income when promised, but restricted to the scholarship program.

As you can see, there are many ways to recognize a $100,000 grant, and many ways to interpret the applicable circumstances. Nonprofit accountants can even disagree on the proper treatment of the same transaction because judgement is involved.

What can we learn?

Avoid year-end surprises. Discuss the accounting treatment of your major grants and contributions with your outside accountant throughout the year.

Learn more about the special areas of nonprofit GAAP at The Power of Financial Reporting session of our live two-day seminar, 501(c)(fit!) – Financial Intensive Training for the Nonprofit Executive coming up soon.

Learn more about financial accounting at the Financial Statement Concepts session of our live two-day seminar, 501(c)(fit!) – Financial Intensive Training for the Nonprofit Executive coming up soon.

Learn more about year-end adjustments at the session, Controllership and the layer cake of finance at our live two-day seminar, 501(c)(fit!) – Financial Intensive Training for the Nonprofit Executive coming up soon.

Nonprofit GAAP is your language–and very little of it is taught in business school. Join us soon and build your professional power at 501(c)(fit!).

Read more FIT! TIPS.

Join our 501(c)(fit!) community so you won’t miss another FIT! TIP.

©2017 501(c)(fit!) All Rights Reserved