Why Nonprofits Should Follow GAAP
There are many reasons why nonprofit organizations should follow GAAP, or generally accepted accounting principles. Perhaps the most important reason is that doing so often makes an organization more attractive to potential contributors by helping to ensure that financial statements are accurate and reliable. In addition, government awards for nonprofit organizations typically require compliance with GAAP. Let's take a closer look at why nonprofit organizations should adhere to GAAP guidelines.
What is GAAP?
GAAP is a set of standards that codify accounting procedures. The goal of GAAP is to ensure that financial statements are consistent, transparent, and reliable. This increases the chances that investors or contributors will put their trust in an organization's numbers. In addition, nonprofit organizations that follow GAAP often find it easier to obtain loans from banks or other financial institutions.
Why GAAP Financials Are Important
GAAP accounting and GAAP financials are important because they provide a more accurate picture than cash or modified cash basis. This is because GAAP accounting records provide details expecting revenues and contributions based on pledges and contracts, while also showing expenses that have been incurred but not yet paid. Various types of intangible assets are likely not recorded for a nonprofit that is using cash basis accounting. Overall this provides a more robust picture and can make decision-making easier and more informed.
GAAP and Compliance Needs
As noted earlier, nonprofit organizations that want to apply for government funding typically need to show compliance with GAAP. This is because the government wants to ensure that taxpayer money is being used appropriately and in accordance with sound accounting practices. Past a certain threshold of expenditures, currently $750,000, in federal funds entities are required to obtain an audit under the Uniform Guidance. Among numerous other criteria required by these types of awards is GAAP compliant accounting. In addition, nonprofit organizations that comply with GAAP may be seen as more credible and trustworthy by both donors and the general public.
It is easier to start by implementing proper accounting policies now than to wait until your entity needs to. Although it is possible to convert cash or modified cash accounting to GAAP it can be tedious and result in more mistakes. For most nonprofits, the task of implementing GAAP-based accounting systems is straightforward and only requires minimal time upfront and regular check-ins with someone knowledgeable that can advise you on more complex transactions.