What is GAAP and How Does it Apply to Non-profit Finances? [Video]

As a nonprofit Executive Director, you’ve likely heard the financial acronyms GAAP, GASB, and FASB. Today, we discuss what they mean, and the importance of understanding these financial literacy terms. Watch today’s Monday Money Moments video for more (and skim the transcript below).

Dana Miller: (00:01): Hello, and welcome to Monday Money Moments with myself, your host, Dana Miller, from Executive Financial Insights. Today is another financial literacy day. We’re going to talk about some acronyms that you’ve heard, that you may not understand what they all are.

(00:18): The first is GAAP, generally accepted accounting principles.

And that basically is a common set of accounting rules and standards that dictate how financial statements are prepared.

Organizations, follow GAAP, public companies follow GAAP, nonprofit organizations follow GAAP and even governmental organizations follow GAAP.

(00:48): And we’ll get into a little bit detail about that in just a second, but understand that there are basically 10 major principles of GAAP, but really the four that I want to talk about right here are that GAAP involves objectivity, right? So we are being objective. It’s just about the numbers, right?

(01:09): Materiality. So at some point, materiality comes into play in every organization and it is specific to every single organization. $500 is generally not material to many organizations. $500,000 may be very material to some organizations and may not be to others. So it’s relative to your specific organization.

(01:38): Consistency. All right. So following the same processes, the same recognition of expenses and revenue every single time is important in the GAAP world. And that provides comfort to your readers and certainly to all of us, so that what you are looking at is you understand that the same rules were applied month after month, year after year, right.

(02:10): And prudence. So we do, and we are allowed in the gap world to make estimates. We can estimate depreciation. We can estimate what we think is other transactions that are happening in the organization, but be prudent about it. So don’t go off the rails and say, well, I’m estimating this giant number, that can get us in trouble. Think Enron way back in the day. That was a long time ago. Okay.

(02:47): Now underneath GAAP, there are two different types of rules for two different types of organizations:

1. For the government universe, it’s called GASB (often pronounced as ‘gaz-bee’), which stands for government accounting standards boards.

• The point of that is that there are different rules for how we account for revenues and primarily revenues, but some expenses actually in the government world. And so those rules are managed and dictated by GASB which is a board of people actually in DC who set what these rules are.
• They apply to all governments; local governments, state governments, and the federal government.
• What GASB does is it eliminates misleading and accounting, financial reporting practices. It incorporates GAAP and industry practices into how they require government accounting, but it’s a little bit different than it is for non-government entities.

(04:06):

2. And then the other regulatory body underneath GAAP is FASB (often pronounced as ‘faz-bee’). And that is the financial accounting standards boards versus the government accounting standard board.

• FASB is intended for investors and others who use financial reports to be able to follow again, a certain set of rules so that everyone understands what we’re looking at.
• When we see revenue, we understand that revenues in the financial world are recorded accordingly and consistently across all entities. And there are certain rules, I mean, different types of revenues are recorded differently, but think of donations are counted in a certain way, particular payments for future services are accounted a certain way, and that is consistent regardless of each organization.
• FASB is an independent organization. And again, like I said, it establishes financial accounting and reporting standards for organizations that follow GAAP.

(05:24): Every organization that is using accrual basis follows GAAP. There is actually, you can have cash basis accounting that is still GAAP based. You can also have modified accrual basis accounting that is GAAP based as well. For the most part GAAP is for an accrual basis on both government and non-government entities.

So there we go! That is GAAP.

So when your accountant comes to you and says, “well, we have to do something a certain way according to GAAP,” now, you know why.

If you have more questions or would like to have more discussion about this, please visit me at www.executivefinancialinsights.com. Thank you.

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