How to Reconcile GAAP and Non-GAAP Results
Have you ever had your board members scratch their collective heads when the development and finance teams report their results? Do you get questions on why the two never match up?
The quandary that faces every management team is to communicate the difference in GAAP to non-GAAP operating results. In many respects, it is the same challenge our for-profit friends face when they eliminate stock based compensation from their financial statements, except in nonprofit accounting our challenges are on the revenue side of the equation.
My first couple of board meetings as a CFO were spent going down the rabbit hole of explaining why my development partners reported these great multi-million dollar quarters, and I would show the board just how little cash came into the door and how much of that could actually be spent on the operations of the organization.
So, what can you do to eliminate these uncomfortable conversations?
Educate, educate, educate. Do you have board members who are members of the business community or are they from other disciplines that never have the need to understand a financial statement? Obviously, depending on their comfort discussing financial statements, you’ll need to craft a workshop that helps them not only understand the differences in not-for-profit vs for profit accounting, but also what is considered to be a gift by your development staff vs what hits your financial statements.
- Does development count expectancies and bequests at face value or a discounted rate – do they record them at all?
- Do your development partners count conditional pledges?
- How do you explain the discount rate on multi-year pledges?
These are all areas that impact the variance between what you’re reporting and what the development office reports out.
The simplest solution I found (after educating my board on the above issues) was to create a simple schedule that reconciled the Non-GAAP development numbers back to what was reported on the financial statements.
- The top of the schedule listed all GAAP revenue – pledges, cash gifts, non-cash gifts, and irrevocable trusts.
- This was then subtotaled, and listed below were Non-GAAP gifts such as bequests and revocable trusts.
- The total of the schedule then tied out to the numbers reported by the development team.
By creating a simple, easy to follow reconciliation schedule, my development partner and I were able to clearly communicate the organization’s financial progress to our board.