Introduction
Governmental organizations are sovereign entities operating under superior authority to all other formally and informally chartered companies. Non-profits, on the other hand, are entities operating in compliance with regulations stipulated by the government at both the local and state levels. Besides this difference, these organizations differ in the way they present and report their financial information. Typically, governmental entities utilize the Government Accounting Standards (GAS) while the non-profits utilize the Financial Accounting Standards (FAS). Understanding the differences in requirements and standards is crucial for accountants and managers to be able to navigate reporting processes in their organizations. Hence, this discussion will explore the differences in financial reporting between these two types of entities with GAS as the reference point.
Reporting Requirements
Depending on factors such as ownership and mode of operations, organizations have different ways of presenting and reporting their financial statements. Brusca et al. (2015) purport that accounting for non-profit entities needs much oversight because of reasons such as maintenance of compliance with the tax-exempt status and the handling of personal donations. Non-profits present financial analyses and updates to the board of directors periodically. The reports presented by non-profits to their board of directors should include a profit and loss report (Statement of Financial Activities) and a balance sheet (Statement of Financial Position). The staff and board of non-profits have to agree on the needed reports, frequency of their presentation, and the stakeholders who will access them. For the general board, non-profits typically produce one-page summary reports that contain narrative notes backed with detailed and focused reports (Brusca et al., 2015). Such reports include cash flow projection reports, project and program reports, and fundraising progress reports.
Governmental financial reporting entails the communication of information regarding the government’s financial activities and position. According to Brusca et al. (2015), government financial reports should allow relevant stakeholders (taxpayers and creditors) to compare the legally adopted budget with the actual financial results. The reports should help in discerning compliance with laid down finance-related regulations, rules, and laws. Although these reports cannot meet the needs of all the stakeholders, they should exhibit accountability in the government.
Because of differences such as the scope of operations and organizational objectives, there are imminent differences between the financial reporting for non-profits and governmental entities as well as for-profits. When creating financial reports, for-profit organizations present their assets as entities they can distribute as retained earnings to shareholders. However, non-profits report their assets as entities they can use to further their missions and objectives. Furthermore, for-profits use their accounting reports to track their net profits while non-profits use these reports to track the excess of revenues over expenditure.
The major difference existing between financial reporting between for-profit and governmental entities is the stakeholders involved in each case. Financial reporting in for-profit organizations aims at addressing the shareholders who expect profits in return. However, governmental entities address taxpayers and creditors who demand accountability, integrity, and the provision of proper social amenities and government services in return.
Compliance with Government Accounting Standards (GAS)
Similar to governmental entities, non-profits do not have the aim of becoming lucrative. Instead, non-profits like governmental entities analyze their financial statements to determine if they have deficits or surpluses. Pavan et al. (2018) explain that the GAS accounting system allows government entities to calculate surpluses and deficits for compliance purposes. Non-profits organizations can address their accounting compliance issues using this approach as they also seek to have a relatively small gap between their expenditures and revenues. Since governments are not in business to make profits, when they receive surpluses, they reduce the burden on taxpayers by reducing the taxes. Similarly, non-profits can use this approach by decreasing the amount of aid they request from donors. Adopting this GAS approach helps in ensuring compliance within non-profit organizations.
Differences in Analysis
The evolution of accounting has brought forth various accounting bodies that have different accounting standards. Eames, Luttman, and Parker (2018) suggest that the main difference between the financial analysis using the traditional approach versus the non-profit and governmental approach is the objective of the analysis. Consequently, for-profit organizations are typically analyzed using structured information regarding the financial viability and position of a company. For instance, scholars indicate that various financial ratios can be used to judge whether or not a commercial organization is performing well (Bragg, 2017). These ratios include measures of liquidity, profitability, the effectiveness of investment, and other indicators that are crucial for evaluating the financial performance of a for-profit company.
In contrast, the analysis of non-profits’ financials often follows a different approach, wherein other indicators are used to assess performance. For example, Bragg (2017) mentions that evaluating the quality of financial reporting, sustainability, and corporate governance is crucial to understanding the performance of non-profit companies. Thus, the integration of these factors into analysis makes such financial statements comprehensive and pragmatic as they address all areas of a non-profit organization. Governmental organizations benefit from both approaches to analysis because they have to remain sustainable in the long term while also complying with standards and regulations.
Example Financial Statements
Figures 1 and 2 present example financial statements for a non-profit and governmental organization. The first statement reflects governmental reporting standards as it identifies the foundation’s assets, liabilities, and net results. The second statement is for a non-profit company because it focuses on the net income raised through operations, which is used to finance future activities. Comparison of the two statements allows highlighting the differences that distinguish non-profit and governmental reporting from traditional reporting.
Figure 1. Helping Hands Foundation (Governmental) Statement of Financial Position.
Figure 2. Helping Hands (Non-Profit) Statement of Activities
Conclusion
On the whole, governmental organizations and non-profit entities differ in various ways when it comes to financial reporting and analysis. Reporting is crucial to both types of entities since it enables fostering transparency and financial sustainability, thus allowing organizations to fulfill their functions. Governmental Accounting Standards (GAS) are useful for governmental entities in identifying and implementing the right reporting procedures, whereas Financial Accounting Standards (FAS) can be used in the same way by non-profits. Following the principles of financial analysis, both governmental and non-profit entities can draw important conclusions from their financial statements and apply them in decision-making. In this way, the collection, processing, and use of financial information can assist different types of companies in making strategic choices, ensuring long-term sustainability, and satisfying stakeholders’ needs.
References
Bragg, S. M. (2017). Financial analysis: A business decision guide (3rd ed.). Accounting Tools.
Brusca, I., Caperchione, E., Cohen, S., & Rossi, F. M. (2015). Comparing accounting systems in Europe. In Public Sector Accounting and Auditing in Europe (pp. 235-251). Palgrave Macmillan.
Eames, M., Luttman, S., & Parker, S. (2018). Accelerated vs. traditional accounting education and CPA exam performance. Journal of Accounting Education, 44, 1-13.
Pavan, A., Dessalvi, B., & Paglietti, P. (2018). Fund Accounting from the Italian Early Tradition to the US GAAP for Governments. International Journal of Public Administration, 41(9), 746-757.