Compare and contrast for-profit and not-for-profit financial reporting goals
For-profit companies, as evidenced by the name, have one primary goal — to maximize profits for their owners. Conversely, nonprofits are typically motivated by a charitable purpose. Read on to see how their corresponding financial statements reflect this difference.
Reporting revenues and expenses
For-profits generate an income statement (also known as a profit and loss statement), detailing gains, revenues, losses, and expenses to determine financial performance. They mainly give an account of profitability and increasing assets, which correlate with future dividends and return on investment to owners and shareholders.
On the other hand, not-for-profit entities only seek sufficient revenue to cover the present and future costs of fulfilling their mission. Most often they rely on grants and donations along with fees for service income. They prepare a statement of activities, which lists all revenue minus expenses, and categorizes the impact on each net asset class.
At present, many nonprofits turn out a statement of functional expenses. However, a new accounting standard comes into play this year — Accounting Standards Update (ASU) No. 2016-14, Not-for-Profit Entities (Topic 958): Presentation of Financial Statements of Not-for-Profit Entities. Organizations will now be expected to arrange expenses by nature (meaning categories such as wages, salaries, employee benefits, rent, and utilities) and function (chiefly program services and supporting activities). This information will then have to be presented in a grid format, displaying the amount of each natural category spent on each function.
Balance sheet considerations
For-profit companies detail the owner’s or shareholders’ equity on their balance sheet. This is based on the company’s prior profits, assets, and liabilities. The equity determines the value of a company’s common and preferred stock.
Nonprofits have no owners, so they prepare a statement of financial position, also covering prior earnings, assets, and liabilities. In the past, the subsequent net assets were categorized as 1) unrestricted, 2) temporarily restricted, or 3) permanently restricted, based on the presence of donor restrictions. For most nonprofits, the new accounting standard beginning in 2018 decreases these classes to two: 1) net assets without donor restrictions and 2) net assets with donor restrictions.
Another significant distinction: Nonprofits tend to concentrate on transparency more than for-profit companies do. Because of this, their financial statements and footnotes contain many disclosures, including information about the nature and amount of donor-imposed restrictions on net assets. Beginning in 2018, ASU No. 2016-14 calls for more significant disclosures on the sum, intention, and type of board designations of net assets. Additional disclosures will be required to lay out the availability and liquidity of assets to provide for operations in the year to come.
All entities, for-profit or otherwise, have a shared need to generate timely financial statements that stakeholders can trust. For assistance ensuring an accurate reporting of your organization’s financial results, please contact us or call 818-334-8628.