Not for Profit Entities

This lecture covers free practice CPA questions on the FAR section covering non governmental not for profit accounting including net assets.


Not-for-profit organizations in the private sector are required to follow FASB standards. The FASB requires three statements: (1) Statement of Financial Position, (2) Statement of Activities, and (3) Statement of Cash Flows. A Statement of Functional Expenses is required for voluntary health and welfare organizations and encouraged for other not-for-profit organizations.

Accrual accounting is required, and depreciation is recorded on fixed assets. Residual equity accounts are called “net assets” and are classified as (1) unrestricted, (2) temporarily restricted, or (3) permanently restricted. Contributions are recorded as revenue in the appropriate net asset class when unconditional. This means that unconditional pledges, even multiyear pledges, are recorded as revenue when pledged. Temporarily restricted net assets are restricted as to (1) purpose, (2) time period, or (3) plant acquisition. All expenses are recorded and reported as unrestricted expenses. As temporarily restricted resources are released from restrictions, reclassification entries are made, increasing unrestricted net assets.

Private not-for-profits must follow all applicable FASB standards in recording transactions.2 For example, FASB standards regarding contingencies, capital leases, pensions, foreign exchange, and compensated absences all apply to not-for-profits engaged in those types of transactions. In addition, the FASB issues some standards that apply only to not-for-profit organizations. Typically these are in response to transactions or practices unique to not-for-profit organizations. Examples include contributions, donor-imposed restrictions, and gifts that are to be directed to another beneficiary.

Like the GASB, the Financial Accounting Standards Board (FASB) publishes a codification (organized version) of its accounting standards. Like the GASB, the FASB Codification includes statements, interpretations, and technical bulletins issued by the Board. The first seven sections cover general principles, financial statements, and the elements of the financial statements (assets, liabilities . . . expenses, etc.). The eighth section summarizes professional standards for specific transactions (such as leases), and the ninth summarizes professional standards for individual industries. Within the industry segment, Section 958 provides reporting standards specific to not-for-profit organizations.

The FASB’s direct involvement in standard setting for private not-for-profits effectively began in 1993 with the issuance of two standards: FASB Statement 116, Accounting for Contributions Received and Contributions Made, and Statement 117, Financial Statements of Not-for-Profit Organizations. Prior to this, the financial reporting practices of not-for-profits had been established primarily through audit and accounting guides issued by the American Institute of Certified Public Accountants (AICPA). Under the old AICPA guides, different types of not-for-profit organizations (e.g., colleges, hospitals, or charities) followed very different accounting practices. Because all not-for-profits must now follow FASB standards, not-for-profit financial statements are similar across industries.