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Avoiding Common Errors in Not-For-Profit Financial Statements

Avoiding Common Errors in Not-For-Profit Financial Statements

Donors, grantors, governmental agencies, management and board members are just a few of the many parties who utilize an exempt organization’s financial statements to make decisions. These decisions are often major, such as deciding whether to continue or begin to fund a program, to hire new personnel, or to expand or detract program services.
It is critical that not-for-profit organizations use their financial statements as a tool to provide the most accurate and informative depiction of their financial position and illustrate how funds are fully utilized in accordance with their mission.

Following is a summary of the financial statement areas where errors could occur and may raise a red flag as to the reliability of the information presented:

1. Restricted vs. Unrestricted Net Assets

  • Voluntary board designated funds should be included with unrestricted net assets.
  • Only funds externally restricted by donors should be included in temporarily or permanently restricted net assets.
  • Expenses are always reductions in unrestricted net assets.
  • Generally, reductions to restricted net asset classes can result only from reclassifications due to the satisfaction of donor restrictions or losses on restricted assets.

2. Donated Services, Use of Facilities, or Goods

  • Difficulty in determining the fair value of donated services, facilities use or goods does not permit an entity to exclude them from the financial statements if they otherwise meet the criteria for recognition. See the recent article, When Should I Record the Value of Contributed Services?, written by Mike Pintabone, WS+B Partner, for more information on the criteria for recognition.

3. Unconditional Promises to Give

  • Unconditional promises to give are to be measured at fair value and recognized as contributions when received. Contributions expected to be received within one year are permitted to be measured at net realizable value because that is a reasonable estimate of fair value. For subsequent measurement, unconditional promises to give that are due in more than one year are generally valued using present value techniques, although fair value is permitted.

4. Statement of Cash Flows

  • Noncash transactions, such as donated property or securities, leasing equipment, and equipment and forgiveness of debt should be included as non-cash financing or investing activities in a supplemental disclosure on the statement of cash flows.

5. Single Audits

  • Is your organization’s federal or New Jersey funding over $500,000? If so, the organization’s financial statements generally should be accompanied by a Schedule of Expenditures of Federal and/or State Awards and two additional reports from your auditor that encompass both financial and compliance components. New U.S. Office of Management and Budget (“OMB”) grant reform rules effective for years beginning after December 26, 2014 will increase the federal threshold from $500,000 to $750,000.

6. Statement of Functional Expenses

  • This is your time to shine and show how your organization maximizes the use of the funds bestowed upon them for their programs.
    1. Generally, the allocation between program services, management and general, and fundraising on the financial statements is replicated on the organization’s IRS Form 990 Return of Organization Exempt from Income Taxes (“990”). The 990 is a public document that is utilized by not-for-profit watchdog organizations. The functional allocation of expenses can greatly affect the Organization’s ratings and the financial performance metrics published online.
    2. Expenses that relate to more than one function should be allocated across all appropriate functions. Expenses that often are not allocated properly include management compensation, occupancy, insurance, and depreciation. It may be your first instinct to allocate these entirely to management and general; however, after further analysis, you will likely discover that these expenses often directly benefit program services as well.
    3. Fundraising expenses should always be reported in a column separate and distinct from management and general expenses. If you have fundraising revenue it is more likely than not that fundraising expenses will be present.

Need More Information?

If you have any questions about this not-for-profit update, please contact your WithumSmith+Brown professional, a member of Withum’s Not-for-Profit & Education Services Group by filling out the form below.

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