GAAP and Not-for-Profits
- The common GAAP framework allows for an easier comparison of financial statements across the broad, diverse, not-for-profit sector. Without GAAP, it would be difficult for external users to benchmark a not-for-profit’s performance against other organizations. The use of GAAP also facilitates comparison with the for-profit sectors where relevant, especially in the health care industry.
- GAAP financial statements are commonly understood by lenders, donors, grantors, rating agencies, accrediting bodies, and regulators, and they are often subjected to audits or reviews by a third party.
- Through GAAP reporting, not-for-profits may realize greater flexibility in the types of resources available to them. They also may find a larger number of donors, grantors, and lenders that have confidence in the organization’s financial reporting, and may be willing to provide resources.
- Organizations may benefit from a lower cost of borrowing because lenders and other creditors have come to appreciate and rely upon the fundamental qualitative characteristics of GAAP.
- Although regulatory filings such as IRS Form 990 are required for most not-for-profits, an audit on GAAP-compliant financial statements is still desired by internal and external users.
Through GAAP reporting, not-for-profits may realize greater flexibility in the types of resources available to them and in the number of donors, grantors, and lenders willing to provide resources.
Why Should Not-For-Profits Adopt GAAP?
A not-for-profit may decide to use GAAP for several different reasons, including:
- GAAP may be required by various users of the financial statements. For example:
- State regulators may require GAAP financial statements if revenue is over a certain level (this varies by state).
- Watchdog agencies may require or recommend that not-for-profits prepare their financial statements using GAAP in order to be rated by the agency and/or to adhere to the accountability standards of the watchdog agency.
- Many accreditation agencies for higher education and health care organizations require GAAP financial statements.
- GAAP can help the organization develop significant public support. Donors and grantors generally have greater confidence that the organization is appropriately carrying out its stewardship responsibility if financial statements are prepared on a GAAP basis.
- When GAAP is used by a not-for-profit, members of the governing board may be able to better exercise their fiduciary responsibilities in ensuring the financial statements communicate how the organization was managed for the period to donors, grantors and other stakeholders.
- Donors, lenders, and other users of not-for-profit financial statements generally view GAAP-compliant financial statements as comparable, complete, and representationally faithful.
- The use of GAAP financial statements helps demonstrate how the resources entrusted to the organization have been used toward meeting its charitable, educational, religious, or other purposes.
- When GAAP financial statements are independently audited, users view them as more creditable and have greater assurance that the reported amounts are in compliance with high-quality financial reporting standards.