For-profit vs. not-for-profit: Compare and contrast financial reporting goals
As the term suggests, for-profit companies are driven primarily by one goal — to maximize profits for their owners. Nonprofits, on the other hand, are generally motivated by a charitable purpose. Here’s how their respective financial statements reflect this difference.
Reporting revenues and expenses
For-profits produce an income statement (also known as a profit and loss statement), listing their revenues, gains, expenses and losses to evaluate financial performance. They report mainly on profitability and increasing assets, which correlate with future dividends and return on investment to owners and shareholders.
In a similar vein, a nonprofit entity also needs to focus on having revenue meet expenses and exceed them – for furthering its mission into the future; ‘nonprofit’ is a tax classification, not a goal in managing an organization. However, nonprofits often rely on grants and donations in addition to fees for service income and the use of these funds in accordance with grantor/donor restrictions is critical. So they prepare a statement of activities, which lists all revenue less expenses, that classifies the impact on each net asset class.
Many nonprofits currently produce a statement of functional expenses. A new accounting standard takes effect for periods beginning after December 15, 2017 – Accounting Standards Update (ASU) No. 2016-14, Not-for-Profit Entities (Topic 958): Presentation of Financial Statements of Not-for-Profit Entities – that will require this statement for all nonprofit organizations. This statement classifies expenses by nature (meaning categories such as salaries and wages, rent, employee benefits and utilities) and function (mainly program services and supporting activities). This information will need to be expressed in a grid format that shows the amount of each natural category spent on each function.
Balance sheet considerations
For-profit companies prepare a balance sheet that lists the owner’s or shareholders’ equity, which is based on the company’s assets, liabilities and prior profits. The equity is a reflection of the value of a company’s common and preferred stock.
Nonprofits, which have no owners, prepare a statement of financial position. This statement also looks at assets, liabilities and prior earnings also known as net assets. The resulting net assets historically have been classified as 1) unrestricted, 2) temporarily restricted, or 3) permanently restricted, based on the presence of donor restrictions. Starting in 2018, the new accounting standard will reduce these classes to two: 1) net assets without donor restrictions and 2) net assets with donor restrictions. This will mainly impact the presentation of the statement of financial position; the current tracking of restrictions as board-designated, temporary and/or permanent will still need to be maintained by an organization.
Footnote disclosures
Nonprofits financial statements and footnotes include disclosures with regard to restrictions on the availability and use of net assets. The ASU noted above will require additional disclosure within each category of net assets. Additional disclosures will also be required to outline the availability and liquidity of assets to cover operations in the coming year.
Common denominator
Whether operating a for-profit or a nonprofit, all entities have a common need to produce timely financial statements that stakeholders can trust. Contact us Herzl Ginsburg, CPA, Ciuni & Panichi, Inc., Senior Manager, by email here, or at 216.831.7171 for help reporting accurate financial results for your organization.
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