At times during audit season, not-for-profit financial statement auditors may feel like medical professionals in January.
They're extremely busy, and many of the "patients" receive the same diagnosis.
"It's like flu season," said Dennis Morrone, CPA, the national partner-in-charge of audit services in Grant Thornton's not-for-profit and higher education practices. "It seems like as we go through audit season, organizations are dealing with the same kinds of issues."
Morrone co-presented at a session on common not-for-profit financial statement mistakes last month at the AICPA Not-for-Profit Industry Conference near Washington. The good news is that one of the most common issues leading to not-for-profit restatements — classification of donor gifts — is changing with the implementation of FASB Accounting Standards Update No. 2016-14, Not-for-Profit Entities (Topic 958), Presentation of Financial Statements of Not-for-Profit Entities.
The new standard reduces from three to two the number of net asset classes in not-for-profit financial reports. Organizations under legacy GAAP would report gifts as temporarily restricted, permanently restricted, or unrestricted. Under the new standard, they will report net assets with donor restrictions and net assets without donor restrictions.
Although this will require reclassification work during implementation as not-for-profits place assets into two categories rather than three, it should result in less confusion. The misunderstanding of the differences between net assets that were temporarily restricted and permanently restricted has been a problem for financial statement users, board members, and even preparers.
"I think most would agree that it's much more intuitively understandable, the difference between net assets with donor restrictions and net assets without [donor restrictions]," Morrone said.
Nonetheless, being vigilant about other common not-for-profit financial statement mistakes can help preparers avoid problems for themselves later on. Here are five areas that Morrone and co-presenter John Mattie, CPA, national higher education and not-for-profit practice leader with PwC, urged preparers to consider.
Revenue recognition
Common mistakes made in revenue recognition include:
- Recognizing certain types of grants as contributions.
- Recognizing earnings on perpetual trusts as a component of contribution revenue.
- Not recognizing the inherent contribution in long-term, below-market lease agreements.
- Not recognizing at fair value the receipt of contributed services and gifts in kind (including public service announcements).
Morrone sometimes receives pushback on recognizing public service announcements as gifts in kind.
"Folks say, 'We didn't really ask for this. We didn't really want all these PSAs.' That doesn't matter. That's irrelevant," he said. "You have to recognize it, even if you never receive it again."
The value of those public service announcements may appear as an anomaly where gifts in kind are reported, but Morrone has a suggestion for explaining that. He advises putting a note on the statement of functional expenses explaining the public service announcements' inclusion in gifts in kind.
He said that organizations have embraced this tactic at his suggestion because one-time infusions of PSAs appear on the statement of functional expenses as significant aberrations that can significantly skew expenses (and revenues) for the reporting period. Because this distortive reporting catches the attention of financial statement users, Morrone advocates putting an explanatory note directly on the statement of functional expenses.
The note explains, for example, the nature of the PSAs received, perhaps the amount, that it is offset by a commensurate amount of revenue, and that it is not expected to recur (specific client situations guide the nature of the brief note if the client pursues Morrone's suggestion). The note is added directly to the statement of functional expenses, beyond the expense matrix toward the bottom of the statement.
Compare compensation disclosures with your 990
Within the IRS Form 990, not-for-profits provide information that's readily available to the public. While data in the financial statements is presented differently from 990 data, the information contained in both documents should be consistent and not contradictory.
"There are still a lot of holes between what's disclosed on the 990 and what's reported in the financials," Mattie said. "Don't underestimate or ignore the disclosures that are going out publicly in your 990s compared to what's actually reflected in your financial statements."
Ordering and numbering of footnotes
Many financial statement footnotes carry over from year to year, but new footnotes often are added and irrelevant footnotes may be deleted. When this happens, preparers need to make sure they change the numbering of their footnotes as well as any references to those footnote numbers within the financial statements.
Morrone and Mattie also encourage preparers to carefully consider the way their footnotes are ordered. For some, it might make the most sense to list the footnotes in order of importance. For others, it may be better to have the order of the footnotes follow an orderly flow that leads readers in a logical progression through the financial statements.
Endowment fund performance reporting
Morrone sometimes comes across a financial statement whose endowment performance disclosures don't match or logically correlate with the aggregate investment performance recognized in the statement of activities.
"Oftentimes, after a more careful review, preparers conclude some things are miscategorized," he said.
Imputing capitalized interest on construction costs
In certain instances, not-for-profits sometimes miss out on the opportunity to impute capitalized interest on internally funded construction projects. This might not make a material difference if there's not a major construction project in progress.
But it's something to consider for organizations that do have major, internally funded construction in progress and debt outstanding.
"Capitalization of that interest could be something of a material nature, and … it actually helps your bottom line, too," Morrone said.
—Ken Tysiac (Kenneth.Tysiac@aicpa-cima.com) is a JofA editorial director.
