Clients: Not-For-Profits: Sources and uses of fundsThe different ways in which nonprofit organizations receive some or all of their resources probably have the most significant impact on nonprofit organizations, including how they may use and account for their resources. Generally, nonprofit organizations can obtain resources needed for operations in five ways. They can:
The nature of these sources of resources results in greater restrictions on the expenditure of funds, uses of physical assets, and permissible activities of personnel of nonprofit organizations than is typical for business enterprises. This is because the use of governmental grants is tightly controlled by legislation and regulation and even private foundations, corporations, or individuals who provide resources often attach significant restrictions on their use. In addition, a growing number of states regulate fund-raising activities and require regular reports. In addition, some states also place restrictions on expenditures, mergers and combinations. Only when a nonprofit organization receives support from private sources or earns money with no restrictions on its use does the organization begin to approach the level of flexibility and discretion with respect to resource use that business enterprises enjoy. The nature of each basic source of resources is discussed in the following paragraphs.
Grants are awards of money provided by government agencies, foundations, corporations, federated fund-raising agencies, such as the United Way, or individuals. Grants are usually sought by nonprofit organizations on a competitive basis by submitting proposals and budgets to funding sources, which then select the proposals to fund. Authorized representatives of nonprofit organizations usually must sign a grant award agreement (including a detailed budget) to receive grant funds. The grant award agreement then assumes the status of a contractual agreement between the recipient organization and the funding source. The grant agreement usually specifies the degree of flexibility the organization has to make unilateral financial and program changes and whether financial or program changes must have the approval (usually written and usually in advance) of the funding source. It also may identify certain goals or results to be achieved by the organization in carrying out the programs or activities funded by the grant. Some grants are considered exchange transactions, while others may be contributions. Grant funds that are contributions are categorized as either restricted (to be spent for specified programs, activities, or cost categories) or unrestricted (to be spent at the organization's discretion), with restricted or unrestricted status usually determined by the grant award agreement. Grant award agreements may specify or refer to audit requirements to be followed, and they are one source of information to be consulted by the auditor in determining the scope of the audit.
Nonprofit organizations can be paid for providing goods or services, and such payments usually take one of two forms. One form is fees from private individuals for goods or services they receive or will receive; for example, service fees billed directly to service recipients such as tuition billed to school students or sales revenue charged for the sale of publications. A second common form is reimbursement by third parties (such as insurance companies, governmental units, or others) for goods or services the organization provides to others. Third-party reimbursement is almost always limited to payment after the specified goods or services have been provided to eligible recipients and the nonprofit organization has filed required reports or reimbursement requests. Third-party reimbursement is usually carried out under a contract or written guidelines that may include audit requirements. In any event, contracts or guidelines under which nonprofit organizations receive payments from third parties for goods and services are an important source of information for the auditor in setting audit scope and as evidential matter about the accounting for the arrangement.
Payments for goods and services are usually considered unrestricted resources that the nonprofit organization can use as it chooses unless the organization has publicly stipulated that such payments will be used for one or more specific purposes or activities. In most cases, once third-party reimbursement has been made (assuming all contractual requirements are met), the organization is usually free to use the amounts however it chooses unless otherwise specified in a contract or agreement with the third party. Under the Internal Revenue Code, payments to a nonprofit organization for goods and services considered to be substantially related to the organization's exempt purpose (related business income) may be free from taxation. Conversely, payments for goods and services not considered to be substantially related to the organization's exempt purpose (unrelated business income) may be subject to taxation if certain other criteria are met.
Nonprofit organizations that define themselves in their incorporation papers or bylaws as membership organizations may receive support from their members, either in the form of membership dues or as contributions from members. Membership dues may include both a portion for an exchange transaction and a portion for a contribution. Any portion representing an exchange transaction is always considered to be unrestricted. Contributions from members are also usually treated as unrestricted funds unless the individual contributor stipulates that the contribution be used for one or more specific purposes or unless the organization informs its members that it is soliciting contributions from them for one or more specific purposes or activities.
Nonprofit organizations can also solicit contributions from the general public through direct mail, special events, delayed or planned giving, or other fund-raising methods. Contributions can be in the form of cash or securities (generally known as cash contributions) or in the form of materials, facilities, and services (known as in-kind contributions). Funds raised from the general public are generally considered to be unrestricted funds unless the individual donor stipulates that the contribution be used for one or more specific purposes or unless the organization publicly states that it is soliciting contributions for one or more specific purposes or activities.
Nonprofit organizations may receive income from investments, including rents and royalties, dividends and interest, and proceeds from disposition of investments. In some cases, this revenue may be restricted by donors of the related investments. Nonprofit organizations that are considered private foundations for federal income tax purposes also are subject to excise taxes on their net investment income.
Many nonprofit organizations realize support and revenue through more than one of the methods mentioned above or from more than one funding source. If various funding source audit guides or requirements are involved, multiple funding has implications for auditing the nonprofit organization. For example, the organization must be able to account for different program cost components that are funded by different funding sources to support amounts billed and recorded as revenue for reimbursable costs.
In many nonprofit organizations (especially health and welfare organizations), the beneficiaries of the organization's activities are different from those who provide the resources for the organization's activities. Resource providers usually have some charitable, humanitarian, religious, public interest, or other nonmonetary motive and do not have a need for the services or can pay for the services themselves. The charitable beneficiaries have a need for which they cannot fully pay.