Financial Reporting by Nonprofits: A Comparative Analysis of Current Practice and SFAS No. 117
Robbins, Walter, Polinski, Paul, The National Public Accountant
Over the years, nonprofit organizations have emerged as a major economic force in the U.S. economy. In 1970, there were 10,547 national nonprofit institutions, excluding governmental units. By 1989, this number had jumped to 20,076, a 90% increase.(1)
Nonprofit organizations have come into existence primarily to provide services that society, or some segment thereof, feels are needed but cannot be effectively provided by for-profit entities. The nonprofit sector includes education, religious, health, civic, and other organizations; these organizations spend considerable sums of money and employ a substantial workforce. At present, slightly more than 25% of all workers in the United States are employed by private and public nonprofit organizations. Clearly, the presence of these organizations is pervasive throughout society.
During the last two decades, concern has been expressed regarding deficiencies in the accounting and financial reporting of private, nonprofit organizations. A particular concern has been the diversity that exists among nonprofit organizations in their financial reporting practices. This diversity has resulted primarily from the absence of a uniform set of accounting principles.
In an attempt to narrow the diversity of accounting and financial reporting practices available to nonprofit organizations, the Financial Accounting Standards Board (FASB) issued Statement of Financial Accounting Standards (SFAS) No. 117, Financial Statements of Not-for-Profit Organizations, in June 1993. This document represents the first major authoritative step to improve the usefulness of nonprofit organization financial reporting through the establishment of uniform accounting standards regarding financial statement form and content. Because of the possible significant impact SFAS No. 117 may have on the financial reporting of nonprofit organizations, this article examines the reasons for current accounting practice diversity and compares the key reporting practice recommendations of Statement No. 117 with those practices recommended in current authoritative literature. To provide an indication of the effort necessary for nonprofit organizations to bring their accounting and financial reporting practices into compliance with the new requirements, we also report on a study that examines the current financial reporting practices of a sample of nonprofit organizations within the context of the new requirements.
Evaluation of Diverse Accounting Practices
During the early evolution of non-profit organizations, the American Institute of Accountants (now the American Institute of Certified Public Accountants) encouraged professional groups in the major nonprofit sectors to develop industry accounting manuals to address each group's specific problems and needs. Manuals were subsequently published for nonprofit colleges and universities, hospitals, and community service organizations. This action resulted in the establishment of fragmented accounting standards that treated similar economic transactions differently across the various nonprofit sectors.
By the late 1960s and early 1970s, the accounting profession began to take a more active role in developing accounting standards for nonprofit organizations. In 1972, the AICPA published an audit guide for hospitals; in 1973, it released an audit guide for colleges and universities; and in 1974, it released an audit guide for voluntary health and welfare organizations. These guides were based primarily on the industry manuals, which included industry peculiarities.
The activities of the mid-1970s represented the beginning of the accounting profession's commitment to improving the accounting and financial reporting practices of nonprofit organizations. During subsequent years, new and revised audit guides were issued, and the FASB integrated a nonprofit section component into its conceptual framework project. Although the progress made by the accounting profession was commendable, diversity of accounting practices continued to exist. …