December 1 Meeting 2016: Common Errors in Financial Statement Preparation And how to Avoid Them

Alexandria Regan, Partner at Citrin Cooperman, gave a presentation  about some of the most common errors found in not-for-profit financial statements, the impact that these errors could have on financial statements, and how to avoid errors in financial reporting, including reduction of adjusting entries during your audit. Alex is a an auditor and has over 21 years of experience working with non-profits.

Financial Statements are the responsibility of the organization that is being audited. The number of audit adjusting journal entries that are included in the final audit documents is an indicator of the adequacy of the organization’s internal controls. During the planning stage of the audit, management should use the previous years’ audited statements as a guide. Ask your auditor for advice about any complicated transactions that you are unsure of and try to resolve any issues before you send the final trial balance to the auditors for the audit.

The first area that Alex discussed where mistakes are commonly made, is revenue recognition.  There are various forms of revenue and sometimes there is a grey area when it comes to categorizing the type of revenue.  One of those areas is   contributions versus exchange transitions.  A contribution involves the donor making a donation to support the recipient’s programs, the donor determines the amount and delivery method of the payment, and the recipient is not penalized for non-performance.  An exchange transaction is more of a fee for service arrangement.  A cost reimbursement contract is an exchange transaction.  The resource provider makes it clear that it is making payment in exchange for certain benefits or outcomes, determines the delivery method and amount of payment, and the recipient can be penalized for non-performance.

Contributions can be either unconditional or conditional.  The organizational will recognize unconditional contributions when they occur, but it can only recognize conditional contributions when the conditions are met.  Another distinction occurs between intentions to give and promises to give. Intentions to give are not recorded until the contribution is received (such as inclusion in a will). Promises to give are subject to a different standard.  An example would be if a grant is promised over a 5 year period, but you have to match it – then you should not book it until the match is achieved.  Contributions or pledges receivable that are paid by donor advised funds should not be recognized until payment is received. If an organization receives a 5 year unconditional pledge, then you can book it as a temporary restricted asset. You should use a risk adjusted discount rate (present value calculation). The rate should be determined at the date the promise is initially recognized and should not be subsequently revised.  Please be aware the multi-year pledges are subject to an implicit time restrictions even if the donation is unrestricted for general operations. Multiyear grants should be released according to the due date schedule included in the grant. If expenses are incurred for which both restricted and unrestricted revenue is available, you should book the restricted revenue first.  Also, it is not possible to release funds greater than the net asset class balance even if you anticipate future funds.  Board designated net assets are recorded as temporarily or permanently restricted net assets However, even if funds are designated or restricted for a purpose by the Board, they are still unrestricted for GAAP purposes. Keep in mind that only donors can impose restrictions that create temporary or permanently restricted net assets.

Other common mistakes on financial statement is the failure to account for an operating lease in a straight-line basis; failure to report fundraising expenses fully; failure to report gifts-in-kind; and the failure to include a statement of functional expenses when required.

The PDF of her presentation is here: npfm-presentation-12-1-16