Overview of the Distinguishing Characteristics of Not-for-Profit Organizations

Posted by admin in General on Feb 10th, 2010 | 0 comments

Perspective and Issues

Not-for-profit organizations represent a significant portion of the economy of the United States. Over one million of these organizations provide almost every conceivable type of service from education to politics, from health and welfare to country clubs, and from churches and synagogues to research organizations. The Financial Accounting Standards Board (FASB) defines

not-for-profit organizations by distinguishing them from for-profit organizations. They possess the following characteristics not usually found in for-profit organizations:

  1. They receive contributions from significant resource providers who do not expect a commensurate or proportionate monetary return.

  2. They operate for purposes other than to make a profit.

  3. There is an absence of ownership interests like those of business enterprises.

Note

Item 1. above describes transactions that are sometimes called “nonexchange” transactions. In a typical contribution to a not-for-profit organization the giver (donor) and the receiver (the not-for-profit organization) don’t exchange items of equivalent value—the not-for-profit organization receives the majority of the value in the actual transaction. The donor compensates for this difference by obtaining value separate from the transaction, such as through a tax deduction that it is likely to receive, recognition, goodwill, or simply a good feeling about supporting a cause that the donor believes is worthwhile.

While not-for-profit organizations share many of the same accounting principles as commercial enterprises, their accounting and financial reporting is quite unique because the focus of financial reporting for not-for-profit organizations is not on the measurement of net income. Reflecting this and other differences, the FASB has issued some pronouncements specifically affecting the accounting and financial reporting of not-for-profits. In addition, the application of the FASB’s other accounting standards to not-for-profit organizations typically requires some modification for applying those standards to not-for-profit organizations.

Taken From : Wiley Not-for-Profit Accounting Field Guide 2003

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