Academic journal article Journal of Accountancy

Which GAAP Should NPOs Apply?

Academic journal article Journal of Accountancy

Which GAAP Should NPOs Apply?

Article excerpt

CPAs who work for or with not-for-profit organizations (NPOs) must address a serious question: Is the organization using the appropriate subset of generally accepted accounting principles? Some NPOs are under Financial Accounting Standards Board jurisdiction; others follow the Governmental Accounting Standards Board. Determining whether an NPO is subject to the government or the nongovernment GAAP hierarchy is the first and most important step in preparing or auditing its financial statements.

Misclassified NPOs will issue financial statements that do not comply with GAAP. Auditors who fail to recognize that an NPO applied the wrong GAAP hierarchy might improperly render an unqualified opinion on its financial statements, violating numerous auditing and professional ethics standards and possibly subjecting the auditor to professional or legal sanctions and financial liability.

NPOs and their auditors must ask if the entity should implement FASB Statement no. 116, Accounting for Contributions Received and Contributions Made, and Statement no. 117, Financial Statements of Not-for-Profit Organizations. The answer to this question also dictates whether the NPO should implement American Institute of CPAs NPO guidance, such as Statement of Position 94-2, The Application of the Requirements of Accounting Research Bulletins, Opinions of the Accounting Principles Board, and Statements and Interpretations of the Financial Accounting Standards Board to Not-for-Profit Organizations.

If the entity is a government NPO, it is prohibited by GASB Statement no. 29, The Use of Not-for-Profit Accounting and Financial Reporting Principles by Governmental Entities (effective for periods beginning after December 15, 1994), from following this guidance. Statement no. 29 requires government NPOs to use one of two reporting models, discussed below. This interim guidance was issued to keep government NPOs from applying Statement nos. 116 and 117. Other GASB projects are likely to require them to change to a different model in the near future.


The issue of which GAAP applies to entities such as health care organizations, museums, not-for-profit housing services, foundations and not-for-profit radio and television stations results from the provisions of Rule 203 of the AICPA Code of Professional Conduct and Statement on Auditing Standards no. 69, The Meaning of "Present Fairly in Conformity with Generally Accepted Accounting Principles" in the Independent Auditor's Report. These standards recognize the GASB as the primary standards setting body to establish GAAP for state and local governments. Likewise, the FASB is designated as the primary authority for all nongovernment entities.

Each body's standards has the lowest level of authority in determining GAAP for entities under the other's jurisdiction (except for specific standards recognized by the other body). Thus, GASB pronouncements are considered "other accounting literature" in the nongovernment GAAP hierarchy and FASB pronouncements are ranked similarly in the government GAAP hierarchy.

Determining which NPOs are Government NPOs is critical. The only available

professional guidance is a GASB staff paper, Applicability of GASB



Before SAS no. 69 was issued, neither the FASB nor the GASB had issued comprehensive guidance on accounting and reporting for NPOs. The pertinent AICPA industry audit guide, Audits of Voluntary Health and Welfare Organizations, and SOP 78-10, Accounting Principles and Reporting Practices for Certain Nonprofit Organizations, (which together are the basis of the government NPO model) were the primary sources of comprehensive guidance for NPOs - government or nongovernment.

Under the government GAAP hierarchy, the above guidance had to be modified for government NPOs to conform to specific GASB standards, such as Statement no. …

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