Business Ethics

Answer

Nonprofit Organizations Financial Reporting

Nonprofit organizations are required to make several disclosures regarding financial accounting. For instance, these institutions must report concerning available or net assets. The regulations require not-for-profit organizations to provide qualitative as well as quantitative information explaining the manner in which they manage their liquid resources available to address general expenditures within a year of the provided balance sheet date. The intention is to explain to the user of the information regarding any limitations on the utilization of liquid assets including cash as well as investments (Mulherin, 2016). Nonprofit businesses are also required to disclose investment income. This is reported as net of related external as well as internal investment expenses. However, it also eliminates the requirement to the total of the netted investment expenses. The aim of making this disclosure is tied to the need to do away with the challenge as well as costs linked to identifying embedded investments charges in the returns, as is the case with some organizations such as hedge funds. Indeed, under ASU 2016-14, nonprofit businesses are required to provide the classification of their expenses by nature and function (Pierce, 2016). The disclosure must also involve operating cash flows. Pierce (2016) adds that whereas there is argument over the best method regarding direct and indirect method as far as presenting cash flows is concerned, ASU 2016-14 means not-for-profit companies can use one of them. 

            The disclosures provide vital information to users such as donors, creditors, governments, grant makers, and other interested individuals who read not-for-profit accounting statements. More so, the details concerning financial data help stakeholders in the decision-making process regarding their relationship with nonprofit organizations. As an example, the information helps stakeholders to evaluate the manner in which the business is doing concerning the protection of the assets that have been entrusted to the management. According to the Canadian Institute of Chartered Accountants (2012), external reporting to stakeholders through financial disclosures helps not-for-profit businesses to demonstrate their efficient as well as effective utilization of organizational resources in furtherance of their purpose. As such, nonprofit disclosures such as those related to financial accounting statements underline the work of these organizations including their responsibility to stakeholders.

            Disclosure requirements for nonprofit organizations by the IRS include tax-exempt, which is required upon request to offer copies of the three previously filed annual detail returns. Commonly, such information is contained in IRS Form 990. Other requirements include the application for tax exemption including messages between the business and the oversight body regarding the application. To reiterate their commitment to transparency as well as streamline the process, the National Council of Nonprofits (2017) and many charitable institutions post the requirements from links on their websites. A tax-exempt political organization under 527(a) must also make itself available for scrutiny as well as copying its report concerning expenditures and contributions on form 8872 (IRS, 2017).

            The requirements are increasingly important because they underline an organization’s obligation to promote transparency. More so, deviations and scandals involving financial accounting reporting are viewed as a failure on the part of a business to undertake social responsibilities. Prosecution by the government if a scandal is suspected usually follows cases of misreporting and lack of disclosure. For instance, Bhutta and Saeed (2011) report several scandals involving financial accounting reporting demonstrating that the practice is anchored on corporate social responsibility.