Not-for-Profit Organizations (NPOs)

:An Overview
 Not-for-Profit Sector

Nonprofit organizations (NPOs) are among the

most influential and powerful institutions in our
society. They range in size from small and local to
large and national—or even international. Their
scope includes a wide range of activity: health and
welfare, education, unionism, social, culture, youth,
and agriculture associations. They include
foundations, hospitals, schools, and sports and
political organizations.
 Defining Nonprofit Organizations.

There is no consensus regarding how to define a

nonprofit organization (NPO). In fact, there is an
excess of terms being employed to describe the same
type of entity including: “nonprofit sector,”
“charities,” “third sector,” “independent sector,”
“voluntary sector,” “tax-exempt sector,”
“nongovernmental organizations,” “social economy”
and “social enterprise,” and many more. Clearly,
researchers argued that each of these terms depicts one
aspect of the social reality. For example:
 Defining Nonprofit Organizations.

 The term char ity emphasizes the support of these

organizations receive from private charitable
donations and assumes a certain motivation on
behalf of both donor and recipient.

 The term independent sector highlights the role of

these organizations play as a “third force” outside of
the land of government (i.e. political power) and
private business (i.e. the profit motive).
 Defining Nonprofit Organizations.

 The term voluntar y or ganizations or sector

emphasizes both the significant input that volunteers
make to the management and operation of this sector
and the voluntary nature of participation in terms of
membership.

 The term nonprofit or ganizations/sector . This term

emphasizes the fact that these organizations do not
exist primarily to generate profits for their owners.
Characteristics of Nonprofit Organizations.

There is a consensus on five structural-operational

features that defined nonprofit organizations:
 Or ganized , i.e., they have some structure and
regularity to their operations, as reflected in regular
meetings, a membership, and procedures for making
decisions.
 Pr ivate, i.e., they are institutionally separate from the
government, even though they may receive support from
governmental sources.

14-6
Characteristics of Nonprofit Organizations.

 Not profit-distr ibuting, i.e., they are not primarily

commercial in purpose and do not distribute profits to a
set of directors, stockholders, or managers.
Self-gover ning, i.e., they have their own mechanisms
for internal governance, are able to cease operations on
their own authority, and are fundamentally in control of
their own affairs .
Voluntar y, i.e., membership or participation in them is
not compulsory.
 Key Differences between Nonprofit and Profit
Organizations.

1- the first principal difference between them is they

have different reasons for their existence. The ultimate
objective of a commercial organization is to realize net
profits for its owners, whereas the ultimate objective of
a nonprofit organization is to meet some socially
desirable need of the community or its members.
Instead of profit, many nonprofit organizations are
concerned with the size of their cash and investment
balances. They can continue to exist only so long as
they have sufficient cash resources to provide for their
programs.
 Key Differences between Nonprofit and Profit
Organizations.

2-Secondly, the nature of most nonprofit organizations’

operations is that they receive most of their revenues
from contributions (rather than receiving fees for
services). This means of receiving revenues gives a
nonprofit organization an important fiduciary
responsibility for the funds that it receives. This
responsibility is why donors to a nonprofit organization
are significant users of the financial statements of
nonprofit organizations
 Key Differences between Nonprofit and Profit
Organizations.

3-Thirdly, nonprofit organizations also usually have a

responsibility to account for specific funds that they
have received. This responsibility includes accounting
for certain specific funds that have been given for use
in a particular project, for a particular purpose or for a
specified period of time.
In some cases, donors provide nonprofit organizations
with resources in the form of an endowment, in which
the nonprofit organization must maintain the principal
of the gift in perpetuity and only use the investment
earnings in support of its programs
 Key Differences between Nonprofit and Profit
Organizations.

4-Lastly, in commercial or business enterprises, there

is no such thing as a “pledge” or a contribution for
something other than obtaining an ownership interest.
If the business is legally owed money, that amount is
recorded as an account receivable. A pledge to a
nonprofit organization may or may not be legally
enforceable, the organization may have a policy of not
taking legal action to attempt to enforce unpaid pledges
because they know from experience that they will
collect them.
 Stakeholders

Stakeholders are any group or individual who can affect

or is affected by the achievements of an organization’s
objectives. Depending on the organization, stakeholders
include members, trustees, employees, volunteers, clients
or users, customers, funders, contractors, government,
oversight agencies, and community groups, etc.

Figure 2.1 offers a stakeholder chart for a child day

care center to illustrate the complexity of stakeholder
relations in nonprofit organizations.
Stakeholders
 Accounting Distinctions between NPO and FPO
Organizations

There are seven areas where the accounting

principles followed by non-profit organizations
often differ, at least somewhat, from the
accounting principles followed by commercial
organizations. Of the seven areas of differences,
only one of them—contributions— is truly
unique to not-for-profit organizations, since
businesses do not receive gifts. Thus there are no
accounting principles addressing how businesses
should account for contributions received.
 Accounting Distinctions between NPO and FPO
Organizations

1) Cash ver sus Accr ual Accounting

In all but the smallest commercial organizations, the records
are almost always recorded on an accrual basis. Sometimes
NPOs follow a modified form of cash-basis accounting,
where certain items are recorded on an accrual basis and
certain items on a cash basis. Other organizations keep their
records during the year on a cash basis.
With regards to Gaza Strip, all NPOs keep their records
on a modified form of cash-basis accounting, where
certain items are recorded (Expenses) on an accrual basis
and certain items (Revenues) on a cash basis.
 Accounting Distinctions between NPO and FPO
Organizations

2) Fund Accounting
Although in commercial enterprises separate accounting for
departments, branches, subsidiaries, and product lines, fund
accounting is a term that is not used by most businesspersons
and can cause some level of confusion. In fund accounting,
amounts are segregated into categories according to the
restrictions placed by donors and designations placed by the
organization’s governing board on their use. Fund accounting
is widely used by NPOs because it provides the ability to
ensure compliance with legal restrictions, to report on the
organization’s stewardship of amounts entrusted to it by
donors.
 Accounting Distinctions between NPO and FPO
Organizations

3) Tr ansfer s and Appropr iations

In not-for-profit organizations, transfers are sometimes made
between “funds”. Some organizations make “appropriations”
or “designations” for specific future projects (i.e., set aside a
part of the net assets for a board-designated purpose).
Transfers and appropriations are not accounting terms used by
commercial enterprises.
 Accounting Distinctions between NPO and FPO
Organizations

4) Treatment of Fixed Assets

In commercial enterprises, fixed assets are recorded as assets
on the balance sheet, and are depreciated over their expected
useful lives. Historically, this has not always been true in non-
profit accounting, although most NPOs have now adopted the
business model.
 Accounting Distinctions between NPO and FPO
Organizations

5) Contr ibutions, Pledges, and Noncash Contr ibutions

In commercial or business enterprises, there is no such thing
as a “pledge,” or a promise to contribute. If the business is
legally owed money, that amount is recorded as an account
receivable. A pledge to a NPO may or may not be legally
enforceable. A related problem is where and how to report
both restricted and unrestricted contributions in the financial
statements.
 Accounting Distinctions between NPO and FPO
Organizations

6) Accounting for Investments

With the issuance of FAS 124, Accounting for Certain
Investments Held by Not-for-Profit Organizations, not-for-
profit organizations have moved closer to the fair market
value approach to valuing equity and debt instruments with
readily determinable market values that are used by for-profit
entities. For-profits are subject to FAS 115, Accounting for
Certain Investments in Debt and Equity Securities.
 Accounting Distinctions between NPO and FPO
Organizations

7) Functional Repor ting of Expenses

NPOs have long been required to report some degree of
functional expenses, that is, segregation of expenses incurred
for operating the programs from expenses incurred for
supporting the programs (e.g., fund-raising or management
and general expenses).
 Financial Reporting in NPOs.

The AICPA and the FASB have made a

concerted effort to standardize the accounting,
financial reporting, and auditing rules for the
diverse set of entities in the non-profit sector
and reduce the inconsistencies across
segments of this sector.
 Financial Reporting in NPOs.

As stated in Statement of Financial Accounting Concepts

No. 4, the FASB’s objectives of financial reporting for
not-for-profit agencies are to provide information
useful in
(1) making resource allocation decisions,
(2) assessing services and ability to provide services,
(3) assessing management stewardship and performance,
(4) assessing economic resources, obligations, net
resources, and changes in them.
 Financial Reporting in NPOs.

FASB Statement No. 117 establishes standards for

financial reporting that require, as a minimum, that
NPOs present
(1) Statement of Financial Position,
(2) Statement of Activities,
(3) Statement of Cash Flows, and
(4) Statement of Functional Expenses that shows
expenses by both function and natural classification. In
addition, certain note disclosures are also required and
others are recommended.
 Not-for-Profit Sector

 not-for-profitorganizations are controlled by boards of

directors composed of individuals who generally
volunteer their time. The size of not-for profit
organizations varies greatly. A small not-for-profit
organization may have no paid staff; all functions may be
performed by a governing board and volunteers. On the
other hand, some not-for-profit organizations are quite
large with hundreds or even thousands of employees, such
as a university, a health-related research association, or a
large cultural organization such as a museum
 ROLE OF BOARD OF DIRECTORS IN
NONPROFIT GOVERNANCE

 The board of directors (sometimes known as the board of

trustees or governing board) is the primary group of
people entrusted with and accountable for the leadership
and governance of the nonprofit corporation

 The basic responsibilities of nonprofit boards within

the broader context of contemporary best practices.
Below is a list of these responsibilities:
1)Deter mine the or ganization’s mission and pur pose. It is
the board’s responsibility to create and review a statement of
mission and purpose that articulates the organization's goals,
means, and primary constituents served.
 ROLE OF BOARD OF DIRECTORS IN
NONPROFIT GOVERNANCE

2)Select the chief executive. Boards must reach consensus

on the chief executive's responsibilities and undertake a
careful search to find the most qualified individual for the
position.

3)Provide proper financial over sight . The board must

assist in developing the annual budget and ensuring that
proper financial controls are in place.
 ROLE OF BOARD OF DIRECTORS IN
NONPROFIT GOVERNANCE

4)Ensure adequate resources. One of the board's foremost

responsibilities is to provide adequate resources for the
organization to fulfill its mission.

5)Deter mine, monitor, and strengthen the

or ganization's progr ams and ser vices. The board's
responsibility is to determine which programs are consistent
with the organization's mission and to monitor their
effectiveness.
 ROLE OF BOARD OF DIRECTORS IN
NONPROFIT GOVERNANCE

 The board will usually appoint one of its own part-time

volunteer members as treasurer. In most cases, the
treasurer is second in importance only to the chairperson
of the board because the ability of the organization to
carry out its programs is based upon strong oversight and
administration of its finances. Every board member has a
fiduciary responsibility for all of the affairs of the
organization, including finances. While the treasurer may
be charged with paying special attention to this area.
 ROLE OF BOARD OF DIRECTORS IN
NONPROFIT GOVERNANCE

 The treasurer has significant responsibilities,

including the following:
1. Keeping financial records
2. Preparing accurate and meaningful financial statements
3. Budgeting and anticipating financial problems
4. Safeguarding and managing the organization’s financial
assets
5. Complying with federal and state reporting requirements
 Regulation of the NPOs Sector.

 While much has been written about the lack of regulation

of the not-for-profit sector, it is important to note that a
large amount of nonprofit activity is already well
regulated. Nonprofit hospitals and other health care
providers are closely regulated by governmental bodies,
as are many other social welfare programs.
 Regulation of the NPOs Sector.

 The absence of regulatory requirements implies that there is

insufficient information available about the effectiveness of
individual NPOs, their programs and stewardship of
community resources used, including when these resources
comprise public monies or public company shareholder funds.
In addition, it is important to have policies and procedures in
place that support relevant, accurate and up-to-date
information. This ensures that the financial information used
by NPOs is meaningful and helpful to stakeholders who are
also decision makers. A deficiency in governance and a poor
financial reporting system may also conceal any form of
money laundering and fraud within NPOs.
 Regulation of the NPOs Sector.

With regards to NPOs in Gaza strip, nonprofit

organizations subject to the requirements of Ministry
of Interior (MOI). Nonprofit organizations are
generally required to prepare annual financial and
non-financial reports. These reports include basic
financial statements.