Accounting Standards
Chapters should follow generally accepted accounting principles for nonprofit organizations, maintaining their financial records on an accrual basis of accounting. Transitioning from a cash basis to an accrual basis of accounting may require filing a change of accounting method with the IRS or state agency.
- Chapters may be required to submit financial statements (balance sheet and income statement) for the Chapter, the Chapter’s PAC administration and PAC political funds and any related entities such as foundations to NAIFA.
- NAIFA may require certain Chapters to submit financial reports more frequently to monitor performance.
- Financial reports must provide enough detail to evaluate the Chapter’s financial position (assets & liabilities), sources of revenue and allocation of expenses to program areas (Changes in Net Assets) and change in cash balances from prior year (Statement of Cash Flow).
- Reserves (fund balances) should be allocated between the following:
- Operating Funds: Funds available for use in general operations of the organization.
- Temporarily Restricted Funds or Board Designated Funds: Funds raised for special project funds or segregated from operating funds by the board for specific purposes as part of a strategic plan.
- Permanently Restricted Funds: Permanently restricted funds are gifts made to the organization by donors who designate that the gift itself cannot be spent (the restriction never expires). Nonprofit organizations often raise permanently restricted funds to create an endowment that is invested and the proceeds from those investments (interest/dividends) are used to fund operations or special projects.
Cash vs. Accrual Basis Accounting
There is one main difference between accrual and cash basis accounting. Accrual based accounting focuses on anticipated revenue and expenses, where as the cash method is a more immediate recognition of revenue and expenses. Accrual basis accounting is the most appropriate accounting method according to Generally Accepted Accounting Principles (GAAP).
Accrual accounting portrays a more accurate portrait of a company's health by including accounts payable and accounts receivable. NAIFA Chapters are able to do this given the nature of predictable fixed income via member dues and sponsor fees and predictable annual expenses, executive compensation and fixed administrative costs.
Accrual Accounting - Under the Accrual Accounting Method, expenses are recorded regardless of whether or not cash has been paid out yet. On the other hand, revenue is accounted for when its earned, and is often times recorded before any money changes hands.
Cash Basis Accounting - Cash Basis Accounting is mainly used by small businesses and personal finances. Expenses are recorded when cash is paid out and revenue is reported on the income statement when cash is received.
