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NFPs utilize a customized financial statement presentation framework based on the financial reporting model used by business entities, tailored to accommodate some of the transactions and characteristics unique to not-for-profit organizations. For example:
  • Many NFPs have revenues that arise from contributions
  • NFPs are not “owned” in the traditional sense and thus do not report shareholders’ equity
  • With the exception of NFP HCOs, NFPs are not required to report an earnings measure
The model provides flexibility with regard to presentation, recognizing that the information needs of users of financial statements of NFPs primarily supported by donations may differ from the needs of users of statements of NFPs whose revenues arise from sales of goods or services. This flexibility allows NFPs that operate in specific industries (for example, health care) to provide statements that are generally comparable with those of their business entity counterparts, while staying within the broad parameters established for NFP reporting.

1.5.1 Sources of GAAP for the NFP reporting framework

FASB Statement No. 117, Financial Statements of Not-for-Profit Organizations, established the comprehensive financial statement presentation model for NFPs that was later updated by ASU 2016-14, Presentation of Financial Statements of Not-for-Profit Entities. This guidance is detailed in the following sections of the FASB codification:
  • ASC 958-205, Not-for-Profit Entities—Presentation of Financial Statements
  • ASC 958-210, Not-for-Profit Entities – Balance Sheet
  • ASC 958-220, Not-for-Profit Entities – Income Statement – Reporting Comprehensive Income
  • ASC 958-230, Not-for-Profit Entities – Statement of Cash Flows
With the exception of ASC 220, the codification’s general presentation topics (ASC 205, ASC 210, and ASC 230) also apply to NFPs.
NFP health care organizations (HCOs) within the scope of ASC 954 apply a modified version of this framework. According to ASC 954-205-05-1, financial reporting by those HCOs is generally consistent with financial reporting by investor-owned HCOs.

ASC 954-205-05-1

The financial reporting for not-for-profit, business-oriented entities and investor-owned health care entities is consistent except for transactions that clearly are not applicable. For example, not-for-profit, business-oriented entities would have nothing to report for shareholders' equity. On the other hand, investor-owned health care entities typically would not have anything to report for contributions.

Consequently, the following sections of ASC 954 tailor the NFP reporting model to more closely correspond with business entity reporting.
  • ASC 954-205, Health Care Entities—Presentation of Financial Statements
  • ASC 954-210, Health Care Entities – Balance Sheet
  • ASC 954-220, Health Care Entities – Income Statement – Reporting Comprehensive Income

1.5.2 The three basic NFP financial statements

ASC 958-205-05-5 establishes the base external reporting model and requires three financial statements: a statement of financial position (balance sheet), a statement of activities (the NFP equivalent of an income statement), and a statement of cash flows.

ASC 958-205-05-5

General-purpose external financial statements provided by an NFP include a statement of financial position, a statement of activities, and a statement of cash flows. Individual financial statements provide different information, and the information each statement provides generally complements information in other financial statements.

ASC 954 modifies the base NFP reporting model to establish a framework regarded as the NFP equivalent of reporting by commercial enterprises. Its use is required for NFP health care organizations (HCOs), but other NFPs can voluntarily apply it if desired. Its principal difference from the base model is a requirement to report a defined performance indicator that is the NFP equivalent of net income of a commercial enterprise (or income from continuing operations, if discontinued operations are present). Under this framework, the statement of activities for an NFP HCO is divided into two statements: a statement of operations and a statement of changes in net assets, as described in ASC 954-205-45-1.

ASC 954-205-45-1

The basic financial statements of health care entities consist of a balance sheet, a statement of operations, a statement of changes in equity (or net assets), a statement of cash flows, and notes to the financial statements.

ASC 958-205-55-2 (the base model for NFPs) and ASC 954-205-45-2 (for HCOs) describe the titling of NFP financial statements. Some flexibility in the titles is permitted, as long as they are appropriately descriptive.

Excerpt from ASC 958-205-55-2

The terms statement of financial position and statement of activities indicate the content and purpose of the respective statements and serve as possible titles for those statements. Other appropriately descriptive titles may also be used. For example, a statement reporting financial position could be called a balance sheet. Current practice and the statement's purpose suggest, however, that a statement of cash flows only be titled statement of cash flows.

ASC 954-205-45-2

The terms balance sheet and statement of operations indicate the content and purpose of the respective statements and serve as possible titles for those statements. Other appropriately descriptive titles may also be used. For example, a statement reporting financial position could be called a statement of financial position as well as a balance sheet. Current practice and purpose suggest, however, that a statement of cash flows only be titled Statement of Cash Flows.

The NFP reporting model permits, but does not require, an additional statement that details expenses by their functional and natural classifications in a matrix format. This voluntary statement is discussed in NP 3.5.2.

1.5.2.1 General format considerations for NFP statements

According to ASC 958-205-45-5, the financial statements of NFPs must include all information required by generally accepted accounting principles or required by applicable specialized accounting and reporting principles and practices unless NFPs are specifically exempt from providing that information.
Because the NFP reporting model is grounded in the financial reporting model used by business entities, the FASB has endeavored to minimize differences in reporting between NFPs and business enterprises, except when those characteristics warrant. ASC 958-205-45-1 identifies these guiding principles.

Excerpt from ASC 958-205-45-1

This Subtopic specifies certain basic information to be reported in financial statements of not-for-profit entities (NFPs). The requirements generally are no more stringent than requirements for business entities. The degree of aggregation and order of presentation of items of assets and liabilities in statements of financial position or of items of revenues and expenses in statements of activities of NFPs, although not specified, generally should be similar to those required or permitted for business entities. Particular formats for a statement of financial position, a statement of activities, or a statement of cash flows, are neither prescribed nor prohibited in part because similar prescriptions and proscriptions do not exist for business entities.

NFPs have a fiduciary responsibility to use contributions in accordance with donor instructions, if provided. As a result, NFP balance sheets and statements of activities classify and report activity using two broad classifications. Resources and activities associated with donor-restricted giving are reported in net assets with donor restrictions (see NP 2.5.2), and all other resources and activity is reported within net assets without donor restrictions (see NP 2.5.1).
Apart from mandating the separate reporting of activities associated with donor-restricted contributions and requiring certain basic totals and subtotals, the format for NFP financial statements is not prescribed. To accommodate reporting activities by net asset class, NFPs can choose to use single-column, multi-column, single-page, or multi-page formats. This flexibility allows organizations to provide information in a way that is most relevant and understandable to their donors, creditors, and other external financial statement users. Along with this flexibility comes a requirement to ensure that the captions and labels used are appropriately descriptive. ASC 958-205-55 provides examples of financial statements that illustrate the basic requirements using a variety of formats.
The presentation and disclosure requirements for expenses are more extensive for NFPs than they are for business entities. Because most NFPs have no single indicator of performance comparable to a business entity’s net income, the FASB determined that other information related to performance (such as more detailed information on expenses incurred in carrying out service efforts) were needed. NP 3.5.1 provides information on these requirements.
Chapter 3 in AAG-NFP and chapter 3 in AAG-HCO provide commentary and additional helpful guidance related to applying the model’s requirements.

1.5.3 Comparative financial statements

Consistent with the baseline reporting requirements for business entities, ASC 958-205-45-7 encourages but does not require presentation of comparative financial statements. However, contractual agreements, such as municipal bond continuing disclosure covenants, may require that comparative information be provided.
When statements report classes of activities using multi-column formats, NFPs will sometimes present comparative information for prior years only in total rather than by net asset class (referred to as summarized comparative reporting). ASC 958-205-45-8 provides explicit instructions for those situations.

ASC 958-205-45-8

NFPs sometimes present comparative information for a prior year or years only in total rather than by net asset class. Such summarized information may not include sufficient detail to constitute a presentation in conformity with GAAP. If the prior year’s financial information is summarized and does not include the minimum information required by this Topic (for example, if the statement of activities does not present revenues, expenses, gains, and losses by net asset class), the nature of the prior-year information shall be described by the use of appropriate titles on the face of the financial statement and in a note to financial statements. The use of appropriate titles includes a phrase such as with summarized financial information for the year ended June 30, 19PY, following the title of the statement or column headings that indicate the summarized nature of the information. Labeling the prior-year summarized financial information for comparative purposes only without further disclosure in the notes to financial statements would not constitute the use of an appropriate title.

ASC 958-205-45-8 refers to a required note disclosure describing the nature of the summarized prior period information. AAG-NFP 3.60 provides an example of such a note.

Excerpt from AAG-NFP 3.60

The financial statements include certain prior year comparative information in total but not by net asset class. Such information does not include sufficient detail to constitute a presentation in conformity with generally accepted accounting principles. Accordingly, such information should be read in conjunction with the Organization’s financial statements for the year ended June 30, 20PY, from which the summarized information was derived.

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