Common Financial Statement Errors
Posted on Wednesday, November 16, 2016
Nonprofit financial statements are utilized by various stakeholders (donors, board members, federal and state governments, etc.) to make decisions about the organization. As such, it is important to make sure the reporting provided is accurate. Below is a listing of common errors often seen in financial statements of nonprofit organizations. Make sure your organization does not make these mistakes.
1. Improper reporting of cash and cash equivalents.
Short-term, highly liquid investments, generally, with original maturities of three months or less should be recorded as cash equivalents. On the other hand, cash received with donor imposed restrictions limiting their use to long-term purposes should be presented separately from cash and cash equivalents.
2. Reporting conditional promises to give as an asset.
Conditional promises to give, those promises to give a stated amount of money in the future dependent on a specific condition being met, should be included in the footnotes, not as an asset.
3. Recording promises to give in the incorrect period.
Unconditional promises to give a stated amount of money in the future should be recorded as receivables when the promise is made.
4. Not recording a present value discount for promises to give that extend more than one year.
Unconditional promises to give due in more than one year should have a related present value discount recorded.
5. Recording contributions as deferred revenue.
Contributions or grants restricted for a future purpose or time period should be recorded as temporarily restricted revenue, not deferred revenue.
6. Recording board designated funds as restricted funds.
Only donors can restrict funds received. Board designated net assets should be recorded as unrestricted net assets.
7. Missing required totals on the statement of financial position.
The statement of financial position is required to report total assets, total liabilities, total net assets, total unrestricted net assets, total temporarily restricted net assets, and total permanently restricted net assets.
8. Improperly recording in-kind contributions.
Under generally accepted accounting principles, only donated services meeting specific criteria should be recorded.
9. Improperly recording restricted expenses.
Expenses should only be shown as decreases to unrestricted net assets, not as temporarily restricted or permanently restricted decreases.
10. Improperly releasing unrestricted net assets before temporarily restricted.
Temporarily restricted contributions received for a specific purpose should be spent before unrestricted contributions for the same purpose.
11. Improperly reporting functional expenses.
Nonprofits are required to report total expenses by program, management and general, and fund raising either on the statement of activities or in the footnotes. Only expenses that cannot be allocated to functional expenses, such as payments to national organizations, should be reported separately. Depreciation is not an unallocated expense and should be reported by function.
12. Not including a statement of functional expenses when required.
Voluntary health and welfare organizations are required to include a separate statement of functional expenses showing expenses by both function and natural classification.
13. Allocating management and general expenses to programs.
Management and general expenses relate to the overall direction of the organization and are not identifiable with a particular program. Management and general expenses include items such as accounting, audit cost, general recordkeeping, and salaries related to the general oversight of the organization.
14. Reporting expenses by one major program instead of each major program.
Program service expenses should be reported by each major program.
15. Missing required totals on the statement of activities.
The statement of activities is required to report the total change in net assets, total change in unrestricted net assets, total change in temporarily restricted net assets, and total change in permanently restricted net assets.
Posted by: Carrie Minnich, CPA
Posted in Mission Minded Nonprofits
Disclaimer: The information contained in Dulin, Ward & DeWald’s blog is provided for general educational purposes only and should not be construed as financial or legal advice on any subject matter. Before taking any action based on this information, we strongly encourage you to consult competent legal, accounting or other professional advice about your specific situation. Questions on blog posts may be submitted to your DWD representative.