Comparative analysis of accounting standards for governmental and
not-for-profit organizations
Introduction:
Accounting standards play a very important role in maintaining transparency and ensuring
consistency in financial reporting. However, accounting standards for for-profit organizations are
different than those for governmental and not-for-profit organizations owing to the difference in
their nature and objectives. While for-profit organizations are primarily concerned with
generating profit, governmental and not-for-profit organizations have other objectives like
delivery of public services or social causes. This leads to some fundamental differences in the
way their accounting and financial reporting is done.
In this paper, we will analyze and compare the key accounting standards used for governmental
and not-for-profit organizations. We will look at the standards issued by the Governmental
Accounting Standards Board (GASB) for governmental entities and Financial Accounting
Standards Board (FASB) standards adapted for not-for-profit organizations. The comparison will
highlight the similarities and differences in areas like basis of accounting, revenue and expense
recognition, financial statement format and required disclosures. This will help understand how
accounting helps meet the distinct information needs of these organizations and their
stakeholders.
Accounting Standards for Governmental Entities:
Governmental entities in the United States are required to follow accounting standards issued
by the Governmental Accounting Standards Board or GASB. GASB was established in 1984 as
an independent, private-sector organization to set generally accepted accounting principles or
GAAP for state and local governments across the United States. Some of the key standards
issued by GASB include:
- GASB Statement No. 34: It establishes the basic financial statements and note disclosures
required for governmental entities. The basic financial statements include government-wide and
fund financial statements along with required supplementary information (RSI), including MD&A.
- GASB Statement No. 35: It provides guidance for presentation of financial statements of state
and local governments. It establishes the basic elements of the financial statements like
government-wide statements, fund financial statements, notes and required supplementary
information.
- GASB Statement No. 54: It establishes standards for classifying fund balance amounts on the
governmental fund balance sheet as nonspendable, restricted, committed, assigned or
unassigned.
- GASB Statement No. 62: It codifies standards for accounting and financial reporting for
derivative instruments. It aims to enhance the usefulness and comparability of derivative
instrument disclosures.
- GASB Statement No. 63: It establishes accounting and financial reporting standards for
financial guarantees. This statement requires a government that extends a financial guarantee
to recognize a liability when qualitative factors and historical data indicate that it is more likely
than not that the government will be required to make a payment on the guarantee.
Some key features of GASB standards for governmental accounting include:
- Modified Accrual Basis of Accounting: Under this basis, revenues are recognized when they
become measurable and available. Expenditures are recognized when the related fund liability
is incurred.
- Fund Accounting: Governmental entities are required to organize and report their activities in
individual funds to demonstrate accountability and fiscal compliance.
- Government-wide Financial Statements: These include the Statement of Net Position and
Statement of Activities, reporting all activities using the full accrual basis of accounting similar to
private sector entities.
- Required Disclosures: Comprehensive disclosures are mandated regarding the government's
significant accounting policies, investment and debt details, interfund balances and transfers,
risks from concentrations etc.
- Separate Reporting for Governmental and Business-type Activities: Activities intended to
recover costs mainly through user charges like utilities are reported separately from
governmental activities.
Accounting Standards for Not-for-Profit Organizations:
Not-for-profit organizations engaged in activities other than business-type also have separate
accounting standards issued by FASB adapted for their special nature and needs. Some key
differences in accounting standards between for-profits and not-for-profits include:
- Financial Statement Presentation: Not-for-profits present their statement of financial position
based on levels of liquidity or resources rather than current/non-current classification.
- Statement of Activities: It reports all changes in net assets and replaces the income statement.
It segregates revenues, gains/losses, expenses and losses between operating and
non-operating activities.
- Classification of Net Assets: Total net assets are segregated into three classes - unrestricted,
temporarily restricted and permanently restricted based on donor-imposed restrictions.
- Contributions: Contributions received, including unconditional promises to give, are recognized
as revenues in the period received at fair value. Conditional promises are recognized when
conditions are substantially met.
- Expense Recognition: Expenses are reported by function like program services, management,
general and fundraising activities on the statement of functional expenses.
Some key FASB standards applicable to not-for-profits include:
- FASB Statement No. 116: It establishes standards of accounting and reporting for contributions
received and made.
- FASB Statement No. 117: It establishes standards for external financial statements of
not-for-profit organizations and requires reporting total net assets in three classes.
- ASU No. 2016-14: It enhances the relevance, consistency and comparability of NFP external
financial statements by streamlining disclosures around liquidity, financial performance and cash
flows.
There are also industry-specific standards for certain types of NFP entities like healthcare
organizations, colleges and universities. Overall, accounting standards help not-for-profits report
financial information in a transparent manner to demonstrate effective use of resources.
Analysis and Comparison:
While both governmental entities and not-for-profits have accounting standards tailored to their
unique needs, there are also certain similarities owing to their shared characteristic of not
focusing primarily on profit generation. Some key similarities and differences are:
Similarities:
- Modified/Full Accrual Basis of Accounting - Both recognize revenues when earned/measurable
and expenses when incurred.
- Statement of Financial Position - Both present assets, liabilities and net assets, though in
different formats.
- Note Disclosures - Comprehensive disclosures on accounting policies, risks, debt, related
party transactions etc. are mandated.
- Separate Reporting of Activities - Both segregate operating activities from
non-operating/capital in nature.
Differences:
- Basis of Measurement - Governments follow modified accrual while NFPs use full accrual
basis for government-wide statements.
- Net Asset/Fund Classification - Governments use governmental and proprietary fund types
while NFPs classify into unrestricted, temporarily and permanently restricted categories.
- Revenue/Expense Recognition - Timing and classification of revenues and expenses differ for
activities like contributions, grants etc.
- Required Financial Statements - Governments present additional fund financial statements
and RSI while statement of activity replaces income statement for NFPs.
- Functional Reporting - NFPs report expenses by program and support functions on statement
of functional expenses which governments do not require.
- Applicable Standard Setters - Standards for governments are issued by GASB while FASB
with AICPA guidance applies to NFPs. Some industry specific standards also exist.
The key differences arise due to the varied organizational structures, funding sources and
operational nature of these entities which accounting standards cater to. While proper financial
reporting is the goal for both sets of standards, contextualization to unique requirements is
important.
Areas of Convergence:
Over the years though, areas of convergence have emerged between accounting standards for
governments and not-for-profits:
- Adoption of Pronouncements - Both increasingly adopt cross-cutting pronouncements of each
other on areas like derivatives, financial instruments, leases etc.
- Communication and Collaboration - Constant interaction ensures identification of similarities
and avoids creation of conflicting guidance.
- Conceptual Framework Project - GASB's framework draws parallels from FASB/IASB
conceptual framework to promote comparability.
- Use of Performance Information - Greater focus is seen on outcome/impact based
non-financial performance information in external reports.
- Uniform Guidance for Federal Awards - Common guidance issued by OMB streamlines
administration of federal grants, contracts for both.
- Similar Financial Issues - Standards evolved to address issues like endowments, split-interest
agreements, mergers/acquisitions impacting both.
- Movement to Principles-based Standards - Transition away from rules-based detailed
standards to principles facilitates converged practices.
- Digital Reporting - XML based tagging for data extraction enhances comparability of reported
information.
While differences will persist as per unique operating models, areas of convergence ensure that
lessons can be learned across sectors in evolving transparent and decision useful accounting
practices. Both standard setters also frequently undertake research collaborations to identify
areas where standards may harmonize over time.
Current Issues and Future Outlook:
Despite significant progress, a few issues remain pertinent for accounting standards applicable
to governmental and not-for-profit entities:
- Communication of Performance Information - Consistent framework to report outcomes/impact
in non-financial terms is still evolving.
- Accounting for Specified Positions - Standards are complex and difference of opinion exists in
treatment of certain portfolios.
- Materiality Considerations - Guidance does not clearly define thresholds for deciding 'material'
nature of transactions.
- Consolidation of Related Entities - Guidance is inconsistent for consolidation of component
units, joint ventures.
- Contributed Services - Valuation and recording policies vary significantly across sectors.
- Pension Accounting - Complex standards exist and inter-period allocation still an area of
divergence.
- Use of Estimates - Significant judgment involved in estimates like collectability, asset lives but
complexity differs.
Going forward, there can be further convergence in developing a conceptual framework
addressing performance reporting, adoption of international standards and principles-based
guidance. Use of data analytic tools for disaggregated, interactive reporting also holds promise.
Coordinated research and outreach programs would aid convergence where appropriate while
respecting the distinct contexts that standards address. Overall, continual review and
progressive evolution of accounting standards ensures their relevance and ability to present a
true and fair view for stakeholders.
Conclusion:
Accounting standards for governmental and not-for-profit entities play a very important role in
promoting transparency, consistency and accountability in financial reporting despite their
distinct goals compared to profit-driven organizations. Our comparative analysis highlighted
both similarities as well as differences between GASB standards for governments and adapted
FASB standards for not-for-profits arising from their varied structures and environments.
Areas of convergence have emerged over time and standard setters are interacting more to
identify opportunities for further alignment. While sector-specific needs must be respected,
principles-based guidance and adoption of best practices can promote international
comparability where appropriate. Evolving performance reporting frameworks and advances in
digital tools also open new avenues for improved communication of organizational impacts.
Continual evaluation and progressive refinement of accounting standards ensures that
information needs of diverse stakeholders are best served.
Accounting standards play a very important role in maintaining transparency and ensuring
consistency in financial reporting. However, accounting standards for for-profit organizations are
different than those for governmental and not-for-profit organizations owing to the difference in
their nature and objectives. While for-profit organizations are primarily concerned with
generating profit, governmental and not-for-profit organizations have other objectives like
delivery of public services or social causes. This leads to some fundamental differences in the
way their accounting and financial reporting is done.
In this paper, we will analyze and compare the key accounting standards used for governmental
and not-for-profit organizations. We will look at the standards issued by the Governmental
Accounting Standards Board (GASB) for governmental entities and Financial Accounting
Standards Board (FASB) standards adapted for not-for-profit organizations. The comparison will
highlight the similarities and differences in areas like basis of accounting, revenue and expense
recognition, financial statement format and required disclosures. This will help understand how
accounting helps meet the distinct information needs of these organizations and their
stakeholders.
Accounting Standards for Governmental Entities:
Governmental entities in the United States are required to follow accounting standards issued
by the Governmental Accounting Standards Board or GASB. GASB was established in 1984 as
an independent, private-sector organization to set generally accepted accounting principles or
GAAP for state and local governments across the United States. Some of the key standards
issued by GASB include:
- GASB Statement No. 34: It establishes the basic financial statements and note disclosures
required for governmental entities. The basic financial statements include government-wide and
fund financial statements along with required supplementary information (RSI), including MD&A.
- GASB Statement No. 35: It provides guidance for presentation of financial statements of state
and local governments. It establishes the basic elements of the financial statements like
government-wide statements, fund financial statements, notes and required supplementary
information.
- GASB Statement No. 54: It establishes standards for classifying fund balance amounts on the
governmental fund balance sheet as nonspendable, restricted, committed, assigned or
unassigned.
- GASB Statement No. 62: It codifies standards for accounting and financial reporting for
derivative instruments. It aims to enhance the usefulness and comparability of derivative
instrument disclosures.
- GASB Statement No. 63: It establishes accounting and financial reporting standards for
financial guarantees. This statement requires a government that extends a financial guarantee
to recognize a liability when qualitative factors and historical data indicate that it is more likely
than not that the government will be required to make a payment on the guarantee.
Some key features of GASB standards for governmental accounting include:
- Modified Accrual Basis of Accounting: Under this basis, revenues are recognized when they
become measurable and available. Expenditures are recognized when the related fund liability
is incurred.
- Fund Accounting: Governmental entities are required to organize and report their activities in
individual funds to demonstrate accountability and fiscal compliance.
- Government-wide Financial Statements: These include the Statement of Net Position and
Statement of Activities, reporting all activities using the full accrual basis of accounting similar to
private sector entities.
- Required Disclosures: Comprehensive disclosures are mandated regarding the government's
significant accounting policies, investment and debt details, interfund balances and transfers,
risks from concentrations etc.
- Separate Reporting for Governmental and Business-type Activities: Activities intended to
recover costs mainly through user charges like utilities are reported separately from
governmental activities.
Accounting Standards for Not-for-Profit Organizations:
Not-for-profit organizations engaged in activities other than business-type also have separate
accounting standards issued by FASB adapted for their special nature and needs. Some key
differences in accounting standards between for-profits and not-for-profits include:
- Financial Statement Presentation: Not-for-profits present their statement of financial position
based on levels of liquidity or resources rather than current/non-current classification.
- Statement of Activities: It reports all changes in net assets and replaces the income statement.
It segregates revenues, gains/losses, expenses and losses between operating and
non-operating activities.
- Classification of Net Assets: Total net assets are segregated into three classes - unrestricted,
temporarily restricted and permanently restricted based on donor-imposed restrictions.
- Contributions: Contributions received, including unconditional promises to give, are recognized
as revenues in the period received at fair value. Conditional promises are recognized when
conditions are substantially met.
- Expense Recognition: Expenses are reported by function like program services, management,
general and fundraising activities on the statement of functional expenses.
Some key FASB standards applicable to not-for-profits include:
- FASB Statement No. 116: It establishes standards of accounting and reporting for contributions
received and made.
- FASB Statement No. 117: It establishes standards for external financial statements of
not-for-profit organizations and requires reporting total net assets in three classes.
- ASU No. 2016-14: It enhances the relevance, consistency and comparability of NFP external
financial statements by streamlining disclosures around liquidity, financial performance and cash
flows.
There are also industry-specific standards for certain types of NFP entities like healthcare
organizations, colleges and universities. Overall, accounting standards help not-for-profits report
financial information in a transparent manner to demonstrate effective use of resources.
Analysis and Comparison:
While both governmental entities and not-for-profits have accounting standards tailored to their
unique needs, there are also certain similarities owing to their shared characteristic of not
focusing primarily on profit generation. Some key similarities and differences are:
Similarities:
- Modified/Full Accrual Basis of Accounting - Both recognize revenues when earned/measurable
and expenses when incurred.
- Statement of Financial Position - Both present assets, liabilities and net assets, though in
different formats.
- Note Disclosures - Comprehensive disclosures on accounting policies, risks, debt, related
party transactions etc. are mandated.
- Separate Reporting of Activities - Both segregate operating activities from
non-operating/capital in nature.
Differences:
- Basis of Measurement - Governments follow modified accrual while NFPs use full accrual
basis for government-wide statements.
- Net Asset/Fund Classification - Governments use governmental and proprietary fund types
while NFPs classify into unrestricted, temporarily and permanently restricted categories.
- Revenue/Expense Recognition - Timing and classification of revenues and expenses differ for
activities like contributions, grants etc.
- Required Financial Statements - Governments present additional fund financial statements
and RSI while statement of activity replaces income statement for NFPs.
- Functional Reporting - NFPs report expenses by program and support functions on statement
of functional expenses which governments do not require.
- Applicable Standard Setters - Standards for governments are issued by GASB while FASB
with AICPA guidance applies to NFPs. Some industry specific standards also exist.
The key differences arise due to the varied organizational structures, funding sources and
operational nature of these entities which accounting standards cater to. While proper financial
reporting is the goal for both sets of standards, contextualization to unique requirements is
important.
Areas of Convergence:
Over the years though, areas of convergence have emerged between accounting standards for
governments and not-for-profits:
- Adoption of Pronouncements - Both increasingly adopt cross-cutting pronouncements of each
other on areas like derivatives, financial instruments, leases etc.
- Communication and Collaboration - Constant interaction ensures identification of similarities
and avoids creation of conflicting guidance.
- Conceptual Framework Project - GASB's framework draws parallels from FASB/IASB
conceptual framework to promote comparability.
- Use of Performance Information - Greater focus is seen on outcome/impact based
non-financial performance information in external reports.
- Uniform Guidance for Federal Awards - Common guidance issued by OMB streamlines
administration of federal grants, contracts for both.
- Similar Financial Issues - Standards evolved to address issues like endowments, split-interest
agreements, mergers/acquisitions impacting both.
- Movement to Principles-based Standards - Transition away from rules-based detailed
standards to principles facilitates converged practices.
- Digital Reporting - XML based tagging for data extraction enhances comparability of reported
information.
While differences will persist as per unique operating models, areas of convergence ensure that
lessons can be learned across sectors in evolving transparent and decision useful accounting
practices. Both standard setters also frequently undertake research collaborations to identify
areas where standards may harmonize over time.
Current Issues and Future Outlook:
Despite significant progress, a few issues remain pertinent for accounting standards applicable
to governmental and not-for-profit entities:
- Communication of Performance Information - Consistent framework to report outcomes/impact
in non-financial terms is still evolving.
- Accounting for Specified Positions - Standards are complex and difference of opinion exists in
treatment of certain portfolios.
- Materiality Considerations - Guidance does not clearly define thresholds for deciding 'material'
nature of transactions.
- Consolidation of Related Entities - Guidance is inconsistent for consolidation of component
units, joint ventures.
- Contributed Services - Valuation and recording policies vary significantly across sectors.
- Pension Accounting - Complex standards exist and inter-period allocation still an area of
divergence.
- Use of Estimates - Significant judgment involved in estimates like collectability, asset lives but
complexity differs.
Going forward, there can be further convergence in developing a conceptual framework
addressing performance reporting, adoption of international standards and principles-based
guidance. Use of data analytic tools for disaggregated, interactive reporting also holds promise.
Coordinated research and outreach programs would aid convergence where appropriate while
respecting the distinct contexts that standards address. Overall, continual review and
progressive evolution of accounting standards ensures their relevance and ability to present a
true and fair view for stakeholders.
Conclusion:
Accounting standards for governmental and not-for-profit entities play a very important role in
promoting transparency, consistency and accountability in financial reporting despite their
distinct goals compared to profit-driven organizations. Our comparative analysis highlighted
both similarities as well as differences between GASB standards for governments and adapted
FASB standards for not-for-profits arising from their varied structures and environments.
Areas of convergence have emerged over time and standard setters are interacting more to
identify opportunities for further alignment. While sector-specific needs must be respected,
principles-based guidance and adoption of best practices can promote international
comparability where appropriate. Evolving performance reporting frameworks and advances in
digital tools also open new avenues for improved communication of organizational impacts.
Continual evaluation and progressive refinement of accounting standards ensures that
information needs of diverse stakeholders are best served.
Accounting standards play a very important role in maintaining transparency and ensuring
consistency in financial reporting. However, accounting standards for for-profit organizations are
different than those for governmental and not-for-profit organizations owing to the difference in
their nature and objectives. While for-profit organizations are primarily concerned with
generating profit, governmental and not-for-profit organizations have other objectives like
delivery of public services or social causes. This leads to some fundamental differences in the
way their accounting and financial reporting is done.
In this paper, we will analyze and compare the key accounting standards used for governmental
and not-for-profit organizations. We will look at the standards issued by the Governmental
Accounting Standards Board (GASB) for governmental entities and Financial Accounting
Standards Board (FASB) standards adapted for not-for-profit organizations. The comparison will
highlight the similarities and differences in areas like basis of accounting, revenue and expense
recognition, financial statement format and required disclosures. This will help understand how
accounting helps meet the distinct information needs of these organizations and their
stakeholders.
Accounting Standards for Governmental Entities:
Governmental entities in the United States are required to follow accounting standards issued
by the Governmental Accounting Standards Board or GASB. GASB was established in 1984 as
an independent, private-sector organization to set generally accepted accounting principles or
GAAP for state and local governments across the United States. Some of the key standards
issued by GASB include:
- GASB Statement No. 34: It establishes the basic financial statements and note disclosures
required for governmental entities. The basic financial statements include government-wide and
fund financial statements along with required supplementary information (RSI), including MD&A.
- GASB Statement No. 35: It provides guidance for presentation of financial statements of state
and local governments. It establishes the basic elements of the financial statements like
government-wide statements, fund financial statements, notes and required supplementary
information.
- GASB Statement No. 54: It establishes standards for classifying fund balance amounts on the
governmental fund balance sheet as nonspendable, restricted, committed, assigned or
unassigned.
- GASB Statement No. 62: It codifies standards for accounting and financial reporting for
derivative instruments. It aims to enhance the usefulness and comparability of derivative
instrument disclosures.
- GASB Statement No. 63: It establishes accounting and financial reporting standards for
financial guarantees. This statement requires a government that extends a financial guarantee
to recognize a liability when qualitative factors and historical data indicate that it is more likely
than not that the government will be required to make a payment on the guarantee.
Some key features of GASB standards for governmental accounting include:
- Modified Accrual Basis of Accounting: Under this basis, revenues are recognized when they
become measurable and available. Expenditures are recognized when the related fund liability
is incurred.
- Fund Accounting: Governmental entities are required to organize and report their activities in
individual funds to demonstrate accountability and fiscal compliance.
- Government-wide Financial Statements: These include the Statement of Net Position and
Statement of Activities, reporting all activities using the full accrual basis of accounting similar to
private sector entities.
- Required Disclosures: Comprehensive disclosures are mandated regarding the government's
significant accounting policies, investment and debt details, interfund balances and transfers,
risks from concentrations etc.
- Separate Reporting for Governmental and Business-type Activities: Activities intended to
recover costs mainly through user charges like utilities are reported separately from
governmental activities.
Accounting Standards for Not-for-Profit Organizations:
Not-for-profit organizations engaged in activities other than business-type also have separate
accounting standards issued by FASB adapted for their special nature and needs. Some key
differences in accounting standards between for-profits and not-for-profits include:
- Financial Statement Presentation: Not-for-profits present their statement of financial position
based on levels of liquidity or resources rather than current/non-current classification.
- Statement of Activities: It reports all changes in net assets and replaces the income statement.
It segregates revenues, gains/losses, expenses and losses between operating and
non-operating activities.
- Classification of Net Assets: Total net assets are segregated into three classes - unrestricted,
temporarily restricted and permanently restricted based on donor-imposed restrictions.
- Contributions: Contributions received, including unconditional promises to give, are recognized
as revenues in the period received at fair value. Conditional promises are recognized when
conditions are substantially met.
- Expense Recognition: Expenses are reported by function like program services, management,
general and fundraising activities on the statement of functional expenses.
Some key FASB standards applicable to not-for-profits include:
- FASB Statement No. 116: It establishes standards of accounting and reporting for contributions
received and made.
- FASB Statement No. 117: It establishes standards for external financial statements of
not-for-profit organizations and requires reporting total net assets in three classes.
- ASU No. 2016-14: It enhances the relevance, consistency and comparability of NFP external
financial statements by streamlining disclosures around liquidity, financial performance and cash
flows.
There are also industry-specific standards for certain types of NFP entities like healthcare
organizations, colleges and universities. Overall, accounting standards help not-for-profits report
financial information in a transparent manner to demonstrate effective use of resources.
Analysis and Comparison:
While both governmental entities and not-for-profits have accounting standards tailored to their
unique needs, there are also certain similarities owing to their shared characteristic of not
focusing primarily on profit generation. Some key similarities and differences are:
Similarities:
- Modified/Full Accrual Basis of Accounting - Both recognize revenues when earned/measurable
and expenses when incurred.
- Statement of Financial Position - Both present assets, liabilities and net assets, though in
different formats.
- Note Disclosures - Comprehensive disclosures on accounting policies, risks, debt, related
party transactions etc. are mandated.
- Separate Reporting of Activities - Both segregate operating activities from
non-operating/capital in nature.
Differences:
- Basis of Measurement - Governments follow modified accrual while NFPs use full accrual
basis for government-wide statements.
- Net Asset/Fund Classification - Governments use governmental and proprietary fund types
while NFPs classify into unrestricted, temporarily and permanently restricted categories.
- Revenue/Expense Recognition - Timing and classification of revenues and expenses differ for
activities like contributions, grants etc.
- Required Financial Statements - Governments present additional fund financial statements
and RSI while statement of activity replaces income statement for NFPs.
- Functional Reporting - NFPs report expenses by program and support functions on statement
of functional expenses which governments do not require.
- Applicable Standard Setters - Standards for governments are issued by GASB while FASB
with AICPA guidance applies to NFPs. Some industry specific standards also exist.
The key differences arise due to the varied organizational structures, funding sources and
operational nature of these entities which accounting standards cater to. While proper financial
reporting is the goal for both sets of standards, contextualization to unique requirements is
important.
Areas of Convergence:
Over the years though, areas of convergence have emerged between accounting standards for
governments and not-for-profits:
- Adoption of Pronouncements - Both increasingly adopt cross-cutting pronouncements of each
other on areas like derivatives, financial instruments, leases etc.
- Communication and Collaboration - Constant interaction ensures identification of similarities
and avoids creation of conflicting guidance.
- Conceptual Framework Project - GASB's framework draws parallels from FASB/IASB
conceptual framework to promote comparability.
- Use of Performance Information - Greater focus is seen on outcome/impact based
non-financial performance information in external reports.
- Uniform Guidance for Federal Awards - Common guidance issued by OMB streamlines
administration of federal grants, contracts for both.
- Similar Financial Issues - Standards evolved to address issues like endowments, split-interest
agreements, mergers/acquisitions impacting both.
- Movement to Principles-based Standards - Transition away from rules-based detailed
standards to principles facilitates converged practices.
- Digital Reporting - XML based tagging for data extraction enhances comparability of reported
information.
While differences will persist as per unique operating models, areas of convergence ensure that
lessons can be learned across sectors in evolving transparent and decision useful accounting
practices. Both standard setters also frequently undertake research collaborations to identify
areas where standards may harmonize over time.
Current Issues and Future Outlook:
Despite significant progress, a few issues remain pertinent for accounting standards applicable
to governmental and not-for-profit entities:
- Communication of Performance Information - Consistent framework to report outcomes/impact
in non-financial terms is still evolving.
- Accounting for Specified Positions - Standards are complex and difference of opinion exists in
treatment of certain portfolios.
- Materiality Considerations - Guidance does not clearly define thresholds for deciding 'material'
nature of transactions.
- Consolidation of Related Entities - Guidance is inconsistent for consolidation of component
units, joint ventures.
- Contributed Services - Valuation and recording policies vary significantly across sectors.
- Pension Accounting - Complex standards exist and inter-period allocation still an area of
divergence.
- Use of Estimates - Significant judgment involved in estimates like collectability, asset lives but
complexity differs.
Going forward, there can be further convergence in developing a conceptual framework
addressing performance reporting, adoption of international standards and principles-based
guidance. Use of data analytic tools for disaggregated, interactive reporting also holds promise.
Coordinated research and outreach programs would aid convergence where appropriate while
respecting the distinct contexts that standards address. Overall, continual review and
progressive evolution of accounting standards ensures their relevance and ability to present a
true and fair view for stakeholders.
Conclusion:
Accounting standards for governmental and not-for-profit entities play a very important role in
promoting transparency, consistency and accountability in financial reporting despite their
distinct goals compared to profit-driven organizations. Our comparative analysis highlighted
both similarities as well as differences between GASB standards for governments and adapted
FASB standards for not-for-profits arising from their varied structures and environments.
Areas of convergence have emerged over time and standard setters are interacting more to
identify opportunities for further alignment. While sector-specific needs must be respected,
principles-based guidance and adoption of best practices can promote international
comparability where appropriate. Evolving performance reporting frameworks and advances in
digital tools also open new avenues for improved communication of organizational impacts.
Continual evaluation and progressive refinement of accounting standards ensures that
information needs of diverse stakeholders are best served.
Accounting standards play a very important role in maintaining transparency and ensuring
consistency in financial reporting. However, accounting standards for for-profit organizations are
different than those for governmental and not-for-profit organizations owing to the difference in
their nature and objectives. While for-profit organizations are primarily concerned with
generating profit, governmental and not-for-profit organizations have other objectives like
delivery of public services or social causes. This leads to some fundamental differences in the
way their accounting and financial reporting is done.
In this paper, we will analyze and compare the key accounting standards used for governmental
and not-for-profit organizations. We will look at the standards issued by the Governmental
Accounting Standards Board (GASB) for governmental entities and Financial Accounting
Standards Board (FASB) standards adapted for not-for-profit organizations. The comparison will
highlight the similarities and differences in areas like basis of accounting, revenue and expense
recognition, financial statement format and required disclosures. This will help understand how
accounting helps meet the distinct information needs of these organizations and their
stakeholders.
Accounting Standards for Governmental Entities:
Governmental entities in the United States are required to follow accounting standards issued
by the Governmental Accounting Standards Board or GASB. GASB was established in 1984 as
an independent, private-sector organization to set generally accepted accounting principles or
GAAP for state and local governments across the United States. Some of the key standards
issued by GASB include:
- GASB Statement No. 34: It establishes the basic financial statements and note disclosures
required for governmental entities. The basic financial statements include government-wide and
fund financial statements along with required supplementary information (RSI), including MD&A.
- GASB Statement No. 35: It provides guidance for presentation of financial statements of state
and local governments. It establishes the basic elements of the financial statements like
government-wide statements, fund financial statements, notes and required supplementary
information.
- GASB Statement No. 54: It establishes standards for classifying fund balance amounts on the
governmental fund balance sheet as nonspendable, restricted, committed, assigned or
unassigned.
- GASB Statement No. 62: It codifies standards for accounting and financial reporting for
derivative instruments. It aims to enhance the usefulness and comparability of derivative
instrument disclosures.
- GASB Statement No. 63: It establishes accounting and financial reporting standards for
financial guarantees. This statement requires a government that extends a financial guarantee
to recognize a liability when qualitative factors and historical data indicate that it is more likely
than not that the government will be required to make a payment on the guarantee.
Some key features of GASB standards for governmental accounting include:
- Modified Accrual Basis of Accounting: Under this basis, revenues are recognized when they
become measurable and available. Expenditures are recognized when the related fund liability
is incurred.
- Fund Accounting: Governmental entities are required to organize and report their activities in
individual funds to demonstrate accountability and fiscal compliance.
- Government-wide Financial Statements: These include the Statement of Net Position and
Statement of Activities, reporting all activities using the full accrual basis of accounting similar to
private sector entities.
- Required Disclosures: Comprehensive disclosures are mandated regarding the government's
significant accounting policies, investment and debt details, interfund balances and transfers,
risks from concentrations etc.
- Separate Reporting for Governmental and Business-type Activities: Activities intended to
recover costs mainly through user charges like utilities are reported separately from
governmental activities.
Accounting Standards for Not-for-Profit Organizations:
Not-for-profit organizations engaged in activities other than business-type also have separate
accounting standards issued by FASB adapted for their special nature and needs. Some key
differences in accounting standards between for-profits and not-for-profits include:
- Financial Statement Presentation: Not-for-profits present their statement of financial position
based on levels of liquidity or resources rather than current/non-current classification.
- Statement of Activities: It reports all changes in net assets and replaces the income statement.
It segregates revenues, gains/losses, expenses and losses between operating and
non-operating activities.
- Classification of Net Assets: Total net assets are segregated into three classes - unrestricted,
temporarily restricted and permanently restricted based on donor-imposed restrictions.
- Contributions: Contributions received, including unconditional promises to give, are recognized
as revenues in the period received at fair value. Conditional promises are recognized when
conditions are substantially met.
- Expense Recognition: Expenses are reported by function like program services, management,
general and fundraising activities on the statement of functional expenses.
Some key FASB standards applicable to not-for-profits include:
- FASB Statement No. 116: It establishes standards of accounting and reporting for contributions
received and made.
- FASB Statement No. 117: It establishes standards for external financial statements of
not-for-profit organizations and requires reporting total net assets in three classes.
- ASU No. 2016-14: It enhances the relevance, consistency and comparability of NFP external
financial statements by streamlining disclosures around liquidity, financial performance and cash
flows.
There are also industry-specific standards for certain types of NFP entities like healthcare
organizations, colleges and universities. Overall, accounting standards help not-for-profits report
financial information in a transparent manner to demonstrate effective use of resources.
Analysis and Comparison:
While both governmental entities and not-for-profits have accounting standards tailored to their
unique needs, there are also certain similarities owing to their shared characteristic of not
focusing primarily on profit generation. Some key similarities and differences are:
Similarities:
- Modified/Full Accrual Basis of Accounting - Both recognize revenues when earned/measurable
and expenses when incurred.
- Statement of Financial Position - Both present assets, liabilities and net assets, though in
different formats.
- Note Disclosures - Comprehensive disclosures on accounting policies, risks, debt, related
party transactions etc. are mandated.
- Separate Reporting of Activities - Both segregate operating activities from
non-operating/capital in nature.
Differences:
- Basis of Measurement - Governments follow modified accrual while NFPs use full accrual
basis for government-wide statements.
- Net Asset/Fund Classification - Governments use governmental and proprietary fund types
while NFPs classify into unrestricted, temporarily and permanently restricted categories.
- Revenue/Expense Recognition - Timing and classification of revenues and expenses differ for
activities like contributions, grants etc.
- Required Financial Statements - Governments present additional fund financial statements
and RSI while statement of activity replaces income statement for NFPs.
- Functional Reporting - NFPs report expenses by program and support functions on statement
of functional expenses which governments do not require.
- Applicable Standard Setters - Standards for governments are issued by GASB while FASB
with AICPA guidance applies to NFPs. Some industry specific standards also exist.
The key differences arise due to the varied organizational structures, funding sources and
operational nature of these entities which accounting standards cater to. While proper financial
reporting is the goal for both sets of standards, contextualization to unique requirements is
important.
Areas of Convergence:
Over the years though, areas of convergence have emerged between accounting standards for
governments and not-for-profits:
- Adoption of Pronouncements - Both increasingly adopt cross-cutting pronouncements of each
other on areas like derivatives, financial instruments, leases etc.
- Communication and Collaboration - Constant interaction ensures identification of similarities
and avoids creation of conflicting guidance.
- Conceptual Framework Project - GASB's framework draws parallels from FASB/IASB
conceptual framework to promote comparability.
- Use of Performance Information - Greater focus is seen on outcome/impact based
non-financial performance information in external reports.
- Uniform Guidance for Federal Awards - Common guidance issued by OMB streamlines
administration of federal grants, contracts for both.
- Similar Financial Issues - Standards evolved to address issues like endowments, split-interest
agreements, mergers/acquisitions impacting both.
- Movement to Principles-based Standards - Transition away from rules-based detailed
standards to principles facilitates converged practices.
- Digital Reporting - XML based tagging for data extraction enhances comparability of reported
information.
While differences will persist as per unique operating models, areas of convergence ensure that
lessons can be learned across sectors in evolving transparent and decision useful accounting
practices. Both standard setters also frequently undertake research collaborations to identify
areas where standards may harmonize over time.
Current Issues and Future Outlook:
Despite significant progress, a few issues remain pertinent for accounting standards applicable
to governmental and not-for-profit entities:
- Communication of Performance Information - Consistent framework to report outcomes/impact
in non-financial terms is still evolving.
- Accounting for Specified Positions - Standards are complex and difference of opinion exists in
treatment of certain portfolios.
- Materiality Considerations - Guidance does not clearly define thresholds for deciding 'material'
nature of transactions.
- Consolidation of Related Entities - Guidance is inconsistent for consolidation of component
units, joint ventures.
- Contributed Services - Valuation and recording policies vary significantly across sectors.
- Pension Accounting - Complex standards exist and inter-period allocation still an area of
divergence.
- Use of Estimates - Significant judgment involved in estimates like collectability, asset lives but
complexity differs.
Going forward, there can be further convergence in developing a conceptual framework
addressing performance reporting, adoption of international standards and principles-based
guidance. Use of data analytic tools for disaggregated, interactive reporting also holds promise.
Coordinated research and outreach programs would aid convergence where appropriate while
respecting the distinct contexts that standards address. Overall, continual review and
progressive evolution of accounting standards ensures their relevance and ability to present a
true and fair view for stakeholders.
Conclusion:
Accounting standards for governmental and not-for-profit entities play a very important role in
promoting transparency, consistency and accountability in financial reporting despite their
distinct goals compared to profit-driven organizations. Our comparative analysis highlighted
both similarities as well as differences between GASB standards for governments and adapted
FASB standards for not-for-profits arising from their varied structures and environments.
Areas of convergence have emerged over time and standard setters are interacting more to
identify opportunities for further alignment. While sector-specific needs must be respected,
principles-based guidance and adoption of best practices can promote international
comparability where appropriate. Evolving performance reporting frameworks and advances in
digital tools also open new avenues for improved communication of organizational impacts.
Continual evaluation and progressive refinement of accounting standards ensures that
information needs of diverse stakeholders are best served.
Accounting standards play a very important role in maintaining transparency and ensuring
consistency in financial reporting. However, accounting standards for for-profit organizations are
different than those for governmental and not-for-profit organizations owing to the difference in
their nature and objectives. While for-profit organizations are primarily concerned with
generating profit, governmental and not-for-profit organizations have other objectives like
delivery of public services or social causes. This leads to some fundamental differences in the
way their accounting and financial reporting is done.
In this paper, we will analyze and compare the key accounting standards used for governmental
and not-for-profit organizations. We will look at the standards issued by the Governmental
Accounting Standards Board (GASB) for governmental entities and Financial Accounting
Standards Board (FASB) standards adapted for not-for-profit organizations. The comparison will
highlight the similarities and differences in areas like basis of accounting, revenue and expense
recognition, financial statement format and required disclosures. This will help understand how
accounting helps meet the distinct information needs of these organizations and their
stakeholders.
Accounting Standards for Governmental Entities:
Governmental entities in the United States are required to follow accounting standards issued
by the Governmental Accounting Standards Board or GASB. GASB was established in 1984 as
an independent, private-sector organization to set generally accepted accounting principles or
GAAP for state and local governments across the United States. Some of the key standards
issued by GASB include:
- GASB Statement No. 34: It establishes the basic financial statements and note disclosures
required for governmental entities. The basic financial statements include government-wide and
fund financial statements along with required supplementary information (RSI), including MD&A.
- GASB Statement No. 35: It provides guidance for presentation of financial statements of state
and local governments. It establishes the basic elements of the financial statements like
government-wide statements, fund financial statements, notes and required supplementary
information.
- GASB Statement No. 54: It establishes standards for classifying fund balance amounts on the
governmental fund balance sheet as nonspendable, restricted, committed, assigned or
unassigned.
- GASB Statement No. 62: It codifies standards for accounting and financial reporting for
derivative instruments. It aims to enhance the usefulness and comparability of derivative
instrument disclosures.
- GASB Statement No. 63: It establishes accounting and financial reporting standards for
financial guarantees. This statement requires a government that extends a financial guarantee
to recognize a liability when qualitative factors and historical data indicate that it is more likely
than not that the government will be required to make a payment on the guarantee.
Some key features of GASB standards for governmental accounting include:
- Modified Accrual Basis of Accounting: Under this basis, revenues are recognized when they
become measurable and available. Expenditures are recognized when the related fund liability
is incurred.
- Fund Accounting: Governmental entities are required to organize and report their activities in
individual funds to demonstrate accountability and fiscal compliance.
- Government-wide Financial Statements: These include the Statement of Net Position and
Statement of Activities, reporting all activities using the full accrual basis of accounting similar to
private sector entities.
- Required Disclosures: Comprehensive disclosures are mandated regarding the government's
significant accounting policies, investment and debt details, interfund balances and transfers,
risks from concentrations etc.
- Separate Reporting for Governmental and Business-type Activities: Activities intended to
recover costs mainly through user charges like utilities are reported separately from
governmental activities.
Accounting Standards for Not-for-Profit Organizations:
Not-for-profit organizations engaged in activities other than business-type also have separate
accounting standards issued by FASB adapted for their special nature and needs. Some key
differences in accounting standards between for-profits and not-for-profits include:
- Financial Statement Presentation: Not-for-profits present their statement of financial position
based on levels of liquidity or resources rather than current/non-current classification.
- Statement of Activities: It reports all changes in net assets and replaces the income statement.
It segregates revenues, gains/losses, expenses and losses between operating and
non-operating activities.
- Classification of Net Assets: Total net assets are segregated into three classes - unrestricted,
temporarily restricted and permanently restricted based on donor-imposed restrictions.
- Contributions: Contributions received, including unconditional promises to give, are recognized
as revenues in the period received at fair value. Conditional promises are recognized when
conditions are substantially met.
- Expense Recognition: Expenses are reported by function like program services, management,
general and fundraising activities on the statement of functional expenses.
Some key FASB standards applicable to not-for-profits include:
- FASB Statement No. 116: It establishes standards of accounting and reporting for contributions
received and made.
- FASB Statement No. 117: It establishes standards for external financial statements of
not-for-profit organizations and requires reporting total net assets in three classes.
- ASU No. 2016-14: It enhances the relevance, consistency and comparability of NFP external
financial statements by streamlining disclosures around liquidity, financial performance and cash
flows.
There are also industry-specific standards for certain types of NFP entities like healthcare
organizations, colleges and universities. Overall, accounting standards help not-for-profits report
financial information in a transparent manner to demonstrate effective use of resources.
Analysis and Comparison:
While both governmental entities and not-for-profits have accounting standards tailored to their
unique needs, there are also certain similarities owing to their shared characteristic of not
focusing primarily on profit generation. Some key similarities and differences are:
Similarities:
- Modified/Full Accrual Basis of Accounting - Both recognize revenues when earned/measurable
and expenses when incurred.
- Statement of Financial Position - Both present assets, liabilities and net assets, though in
different formats.
- Note Disclosures - Comprehensive disclosures on accounting policies, risks, debt, related
party transactions etc. are mandated.
- Separate Reporting of Activities - Both segregate operating activities from
non-operating/capital in nature.
Differences:
- Basis of Measurement - Governments follow modified accrual while NFPs use full accrual
basis for government-wide statements.
- Net Asset/Fund Classification - Governments use governmental and proprietary fund types
while NFPs classify into unrestricted, temporarily and permanently restricted categories.
- Revenue/Expense Recognition - Timing and classification of revenues and expenses differ for
activities like contributions, grants etc.
- Required Financial Statements - Governments present additional fund financial statements
and RSI while statement of activity replaces income statement for NFPs.
- Functional Reporting - NFPs report expenses by program and support functions on statement
of functional expenses which governments do not require.
- Applicable Standard Setters - Standards for governments are issued by GASB while FASB
with AICPA guidance applies to NFPs. Some industry specific standards also exist.
The key differences arise due to the varied organizational structures, funding sources and
operational nature of these entities which accounting standards cater to. While proper financial
reporting is the goal for both sets of standards, contextualization to unique requirements is
important.
Areas of Convergence:
Over the years though, areas of convergence have emerged between accounting standards for
governments and not-for-profits:
- Adoption of Pronouncements - Both increasingly adopt cross-cutting pronouncements of each
other on areas like derivatives, financial instruments, leases etc.
- Communication and Collaboration - Constant interaction ensures identification of similarities
and avoids creation of conflicting guidance.
- Conceptual Framework Project - GASB's framework draws parallels from FASB/IASB
conceptual framework to promote comparability.
- Use of Performance Information - Greater focus is seen on outcome/impact based
non-financial performance information in external reports.
- Uniform Guidance for Federal Awards - Common guidance issued by OMB streamlines
administration of federal grants, contracts for both.
- Similar Financial Issues - Standards evolved to address issues like endowments, split-interest
agreements, mergers/acquisitions impacting both.
- Movement to Principles-based Standards - Transition away from rules-based detailed
standards to principles facilitates converged practices.
- Digital Reporting - XML based tagging for data extraction enhances comparability of reported
information.
While differences will persist as per unique operating models, areas of convergence ensure that
lessons can be learned across sectors in evolving transparent and decision useful accounting
practices. Both standard setters also frequently undertake research collaborations to identify
areas where standards may harmonize over time.
Current Issues and Future Outlook:
Despite significant progress, a few issues remain pertinent for accounting standards applicable
to governmental and not-for-profit entities:
- Communication of Performance Information - Consistent framework to report outcomes/impact
in non-financial terms is still evolving.
- Accounting for Specified Positions - Standards are complex and difference of opinion exists in
treatment of certain portfolios.
- Materiality Considerations - Guidance does not clearly define thresholds for deciding 'material'
nature of transactions.
- Consolidation of Related Entities - Guidance is inconsistent for consolidation of component
units, joint ventures.
- Contributed Services - Valuation and recording policies vary significantly across sectors.
- Pension Accounting - Complex standards exist and inter-period allocation still an area of
divergence.
- Use of Estimates - Significant judgment involved in estimates like collectability, asset lives but
complexity differs.
Going forward, there can be further convergence in developing a conceptual framework
addressing performance reporting, adoption of international standards and principles-based
guidance. Use of data analytic tools for disaggregated, interactive reporting also holds promise.
Coordinated research and outreach programs would aid convergence where appropriate while
respecting the distinct contexts that standards address. Overall, continual review and
progressive evolution of accounting standards ensures their relevance and ability to present a
true and fair view for stakeholders.
Conclusion:
Accounting standards for governmental and not-for-profit entities play a very important role in
promoting transparency, consistency and accountability in financial reporting despite their
distinct goals compared to profit-driven organizations. Our comparative analysis highlighted
both similarities as well as differences between GASB standards for governments and adapted
FASB standards for not-for-profits arising from their varied structures and environments.
Areas of convergence have emerged over time and standard setters are interacting more to
identify opportunities for further alignment. While sector-specific needs must be respected,
principles-based guidance and adoption of best practices can promote international
comparability where appropriate. Evolving performance reporting frameworks and advances in
digital tools also open new avenues for improved communication of organizational impacts.
Continual evaluation and progressive refinement of accounting standards ensures that
information needs of diverse stakeholders are best served.
