By: Jodi Kimmerle
While many aspects of NPO and for-profit entity financial statements are similar, there are significant differences. These differences arise principally due to the varying sources of revenue along with the requirements of reporting expenses and presentation of separate classes of net assets.
To begin, there are some differences in terminology when referring to key financial documents. The chart below outlines these:
More Details about Differences:
Besides having a different name than the balance sheet, the statement of financial position for an NPO contains categories of assets that are not applicable to for-profit entities, such as promises to give. Promises to give consist of resources that have been promised to the NPO (preferably in writing) but for which the NPO will not receive the resources until a later date. For instance, an individual promises to give an NPO $50,000 a year from now. That promise is recorded as a receivable and contribution revenue and discounted for time value of money as appropriate. The other area that is different for an NPO on the statement of financial position is the category of net assets. This category can consist of three different sections; unrestricted, temporarily restricted and permanently restricted net assets. Temporarily restricted net assets consist of contributions given to the NPO for which the donor has placed either a time restriction (resources cannot be spent until a future reporting period) or a purpose restriction (resources can only be spent on the purpose designated by the donor). Permanently restricted net assets consist of contributions given to the NPO for which the donor has stated that the principal can never be spent. The earnings on assets held as permanently restricted net assets are usually temporarily restricted for a purpose provided by the donor and can be spent when earned.
One of the differences found between a statement of operations and a statement of activities is that a statement of activities shows activity by each class of net assets. In other words, there is a column for unrestricted, temporarily restricted, permanently restricted net assets (as applicable) and then a total column. The activity in the temporarily restricted and permanently restricted net asset columns consist of the contributions discussed previously. In addition, the temporarily restricted net assets column also shows releases from restrictions. Once temporarily restricted contribution have been either spent on the specified purpose or the time restriction has lapsed these resources get reclassified in to the unrestricted net assets column. Another difference lies in the recording of donated goods and services. NPOs can record non-cash contributions of goods and services at their fair market value as of the date of donation. In order to be recorded in the financial statements the donated services need to either create or enhance nonfinancial assets or require specialized skills performed by people with those skills and would have been purchased if not donated.
Another item unique to an NPO statement of activities is the functional expense breakdown. This breakdown includes all expenses incurred during the year and whether those expenses were incurred for program services, administrative costs or for fundraising activities. All expenses are included on the statement of activities as a reduction of unrestricted net assets. This breakdown is sometimes presented as a basic financial statement, a schedule that is included as supplementary information to the basic financial statements, or at a minimum summarized in a footnote. The breakdown totals are required to be shown somewhere in the financial statement packet.
With even a limited knowledge of the differences between NPO and for-profit financial statements, a reader of NPO financial statements will be able to make better decisions about the health of an organization and be able to make educated decisions about which NPO they would like to support through personal contributions, board service, and/or volunteerism.