Netting Revenue & Expenses Under GAAP

The Statement of Activities is an essential financial document for nonprofit organizations, providing a summary of revenue and expenses during a given period. Under Generally Accepted Accounting Principles (GAAP), nonprofit organizations are typically required to report revenue and expenses separately, showing the full gross amounts. However, there are specific circumstances in which netting is appropriate.

This article outlines situations in which netting is acceptable under GAAP and common mistakes nonprofits make when they incorrectly net revenue and expenses.

Acceptable Netting Practices Under GAAP

1. Investment Income Net of Investment Fees: Nonprofits often generate income from investments, but this income may come with associated fees, such as management fees or custodial fees. Under GAAP, it is permissible to net investment income with related investment fees, as these fees directly reduce the amount of income generated from the investment
2. Special Events Revenue: Nonprofits frequently hold special fundraising events, such as galas, auctions, or charity runs. In these cases, GAAP allows for netting of event revenue and expenses if the event is peripheral and incidental and the expenses directly benefits the donor or attendee. Direct benefits include meals or catering provided to attendees, venue rental used by the attendees, entertainment at the event, auction items or prizes that donors directly receive.
3. Cost of Goods Sold (COGS) Net with Sales Revenue: When a nonprofit sells goods, such as merchandise, gift shop products, or other items, GAAP permits the netting of the cost of goods sold against the sales revenue, provided the COGS is directly tied to the revenue generated from the sale.
4. Tuition Revenue Net of Discounts: Nonprofit educational institutions often offer tuition discounts to students (e.g., scholarships or financial aid). Under GAAP, it is appropriate for the nonprofit to report tuition revenue net of any discounts, as these discounts reduce the amount of revenue the institution expects to collect.
5. Program Revenues Net of Contractual Adjustments: For nonprofits that earn fee-for-service revenue, such as organizations billing private insurance, Medicaid, or Medicare, contractual adjustments represent the portion of billed charges the organization does not expect to collect due to agreements with third-party payers. These adjustments are not bad debt; rather, they reflect the difference between the nonprofit’s standard fee schedule and the reimbursement rates negotiated with insurers. Under GAAP, it is appropriate to net contractual adjustments directly against the related service revenue on the Statement of Activities, because the organization never expects to realize those amounts as revenue.

Common Mistakes in Netting Revenue and Expenses

While there are clear guidelines for acceptable netting, nonprofits sometimes make mistakes by incorrectly netting certain revenue and expense items. Below are common errors to watch out for:

1. Contributions Net of Credit Card Fees: One common mistake nonprofits can make is netting contributions received via credit card with the associated processing fees. Under GAAP, credit card fees should not be netted from contributions. Instead, the full contribution amount should be reported as revenue, and the credit card processing fee should be separately recorded as an expense.
2. Netting Restricted Donations with the Spending of Funds: Another mistake is to net restricted donations with the corresponding expenses as the funds are spent. GAAP requires that restricted contributions be reported as revenue when received, with the expense recorded separately when the funds are spent. It is incorrect to net the restricted donation amount against the expenses incurred, as this would misrepresent both the revenue and the spending of the restricted funds.
3. Pass-Through Grants Netted as Subrecipient Payments: When a nonprofit is the lead organization on a grant but passes funds through to other subrecipient organizations, it’s important not to net the revenue and related expenses as if the nonprofit is directly incurring the costs. In these cases, the nonprofit should report the funds passed through to the subrecipients as a separate expense. The nonprofit should report the full amount of the grant as revenue and the portion passed through to subrecipients as an expense.

Understanding when revenues and expenses can be properly netted on a nonprofit’s Statement of Activities is essential for producing financial statements that are both accurate and compliant with accounting standards. While certain situations allow for net presentation, each category has its own rules and must be evaluated carefully. By applying these guidelines thoughtfully, nonprofits can provide financial reports that remain transparent, meaningful, and aligned with GAAP.

If you have any questions, please contact your Hawkins Ash CPAs representative.

Kaitlin Kubiak

Kaitlin Kubiak originally joined Hawkins Ash CPAs as an intern during the busy seasons of 2017 and 2018. Now a Manager and Certified Public Accountant (CPA), Kaitlin provides consistent and thoughtful audit and tax services to nonprofit organizations, private schools, and commercial entities.