GAAP frequently comes up in the nonprofit accounting world. Because it’s such a complicated topic, there are a number of misconceptions surrounding GAAP for nonprofits. Many organizations know the term but would like to do more research. Try to stay up to date with GAAP, as GAAP can get updated from year to year.
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What Is GAAP for Nonprofits?
Generally Accepted Accounting Principles, or GAAP, are guidelines that make the financial reporting process transparent and are meant to standardize information. GAAP lets external parties—for instance, banks that your organization has reached out to for a loan—easily understand financial statements. It also lets third parties safely assume consistency across many different nonprofits and their bookkeeping, which enables quick and accurate comparisons.
Unless required in your organization’s bylaws, you may not be legally required to prepare financial statements that comply with GAAP. However, the downside to disregarding GAAP guidelines is it can cause unnecessary challenges. For instance, if you’re trying to have your financial statements audited by a CPA, you’ll need GAAP-compliant financial statements. There is more flexibility in financial reporting when you’re reporting to internal users, like your board members or employees.
Remember, it’s vitally important to understand who is using your financial statements and what their purpose is in using them. This will help in your selection of financial reporting methodology. Just remember that if you are choosing to prepare internal-only documents that diverge from GAAP compliance, this may cause unnecessary confusion when preparing documents meant for external use.
Who Decides What GAAP Is?
FASB, or the Financial Accounting Standards Board (FASB), is a nonprofit organization that establishes GAAP procedures. The Securities and Exchange Commission (SEC) recognizes the FASB as the designated accounting standard setter.
According to FASB’s website, “The FASB Concepts Statements are intended to serve the public interest by setting the objectives, qualitative characteristics, and other concepts that guide the selection of economic phenomena to be recognized and measured for financial reporting and their display in financial statements or related means of communicating information to those who are interested.”
Most organizations in the U.S. consider FASB standards as authoritative, and as mentioned earlier, many third-party organizations may require an organization to submit financial statements that comply with GAAP. This is why following GAAP is so important in many cases.
Are There Resources Available for Nonprofit GAAP Guidelines?
Bonus: Accounting Software as an Effective Support System
The beauty of technology is accounting and bookkeeping software can give your nonprofit tools to understand your financial information better. Accounting software lets you simplify your financials, and even add tags to provide context for your data. Third parties like CPAs use tags to better understand data from weeks or months earlier. After all, someone reviewing financial statements can frequently encounter statements either too summarized or too complicated.
Using modern nonprofit accounting software lets you see that information in minutes rather than cobbling it together from spreadsheets over the course of hours. So if you want tools to simplify your financial information, and make those documents GAAP compliant, having the right kind of accounting software is very important.
Note: This material is for educational purposes only. We always recommend talking to your CPA for all GAAP-related questions.