Reviewed by Denise Nitterhouse DePaul University

The book Financial Reporting for Nonprofit Organizations: A Fresh Look, by Robert K. Mautz, is readable and provocative. It uses an interesting “intellectual exercise” to develop a set of proposed principles for financial reporting by nonprofit entities. While one may not agree with all of the book’s propositions, it offers many points that deserve further consideration as we move forward with accounting principles and standards for nonprofit and governmental organizations.

al exercise that was used to explore the applicability of conventional accounting theory and practice to nonprofits. An unidentified team engaged in the intellectual exercise then develops a classification of nonprofit organizations, including governmental entities, and addresses several issues, including the nature of nonprofits and their involvement in profitdirected activities, and the audience and focus for nonprofit financial reporting.

Chapter 2 discusses current nonprofit financial reporting practice as embodied in the financial statements of two membership and one state government organization. The types of disclosure in each of the three sets of financial statements are discussed, but the financial statements themselves are not provided. One serious limitation of the work is the lack of charitable, educational or health care organization financial statements in the exercise. The chapter concludes [p. 3738] with the overall impressions of the team:

— the variety of activities and financial reporting within the nonprofit class.
— the extent to which nonprofit entities engage in for profit activities.
— the complexity of fund accounting in the state government’s financial statements.
— the freedom available in applying GAAP to nonprofit entities.
— the absence of a bottom line to indicate success or failure.
— the absence of any identifiable purpose of the reporting.
— confusion as to the anticipated readership of the reports.
— the apparent lack of interest in the differences between for profit and nonprofit entities.

Some team members appear to be experienced and sophisticated with respect to business accounting, but not with nonprofit accounting. A listing of the participants and their backgrounds would help the reader to better understand the findings, especially in light of their comments on the difficulty of understanding the nonprofit and governmental financial statements with which they were dealing [e.g., p. 36]. As it is, one is left guessing who was involved and what their backgrounds are.

Chapter 3 discusses several problems that the team felt made it inappropriate to apply accounting theory developed for business organizations to nonprofit entities. The key issues addressed [p. 3940] are:

— The nature and importance of differences between business and nonprofit organizations.
— The applicability of conventional financial statement formats to nonprofit organizations.
— The applicability of conventional accounting concepts to nonprofit organizations.
— The feasibility of the fund emphasis for financial reporting purposes.
— The nature and importance of difference among nonprofit entities.

Chapter 4 presents and discusses alternative financial statements that the team developed for the three nonprofit organizations introduced in Chapter 2. This part of the exercise was undertaken to get the team members to think about and apply the theoretical considerations in a practical way. All three sets of alternative financial statements include multiyear budgets referred to as “Commitments,” and none uses reporting by funds.

Chapter 5 summarizes the conclusions reached by the team members with respect to nonprofit accounting. They essentially dismiss at least parts of accrual accounting, although other parts appear to be retained. They see no need for financial fund reporting, although they do not propose to restrict its use as supplementary data to organizationwide general financial statements. They give the following advice [p. 103] with respect to how and how tightly financial reporting for nonprofits should be restricted:

No matter how small or uncomplicated a nonprofit may be, those who contribute to it have a right to know how their contributions are used. That is really all we are concerned with, financial reporting that gives those who contribute to nonprofits a fair reporting of what happened to their money and what is likely to happen to any additional contributions or taxes.
As long as that reporting is both complete and understandable, need we ask for anything more?

The book concludes with a set of proposed principles for financial reporting by nonprofit entities. These principles state that nonprofit organizations are sufficiently different from business organizations to require their own GAAP. The differences cited include the nature of equity, purpose, operations, performance measures, and relevant decision makers. It proposes that nonprofit financial reports useful to contributors or taxpayers should focus on questions [p. 110] such as:

— How much did the entity receive during the reporting period and from what sources?
— What did the entity do with what it received?
— How much does the entity have left?
— What are the entity’s plans and commitments for the future?

Profitdirected activities are to be clearly separated from those undertaken for nonprofit purposes. Flexibility in reporting is also recommended, as long as the resulting reports reflect these requirements.

This exercise appears to have been conducted with financial statements prepared under the preFAS No. 116 and 117 nonprofit accounting standards. It would be useful to replicate the exercise with financial statements prepared under the new standards. It seems likely that some of the concerns raised in this exercise were addressed in FAS 116 and 117, but that many others were not.

An important issue not addressed by this book is the growing competition between nonprofit and business entities, especially in the health care and higher education. It also does not mention the large number of nonprofit organizations that derive a significant amount of their resources from grants and contracts, an ambiguous type of resource inflow that can be difficult to categorize as nonprofit or profitdirected activity. The general difficulty of separating nonprofit and forprofit activities, which is of great interest because of the tax implications, is glossed over. The easy dismissal of accrual accounting is also problematic.

Perhaps the most important contribution of this book is its serious attempt to delineate the significant differences between nonprofit and business organizations, and the ensuing attempt to develop accounting approaches that reflect these important differences. Mautz [p. 45] questions whether FASB adequately considered these differences in the deliberations that resulted in FAS Nos. 116 and 117. The book certainly provides an interesting perspective on the role and makeup of financial statements for nonprofit organizations and poses an intriguing contrast to existing standards.