GAAP Financial Statements Versus Form 990

Posted on Wednesday, August 26, 2015

Have you noticed the differences between your nonprofit’s financial statements and its Form 990?  Besides the additional questions on Form 990, there are some differences in the actual financial amounts reported on Form 990.

Unrealized Gains and Losses

Generally accepted accounting principles (GAAP) require unrealized gains and losses to be recorded in the statement of activities as increases or decreases in net assets.  Normally they are recorded as a change in unrestricted net assets; however, they may be included in the change in temporarily restricted or permanently restricted if they are related to endowment funds.  In any case, they are included in the change in net assets on GAAP financial statements. 

Unrealized gains and losses are recorded separately on Form 990 as a reconciling item of net assets and not included in the revenue less expenses line (change in net assets). 

Special Events

Nonprofits often hold special events (dinners, galas, auctions, etc.) to raise money.  Normally the attendees receive a meal or something of value in return for a payment that exceeds the cost of the benefit they received.  Under GAAP the amount of the payment that exceeds the cost of the benefit received is recorded as a contribution while the amount equal to the cost of the benefit received is recorded as an exchange transaction.  For example, a nonprofit may hold a dinner with a ticket price of $100.  Attendees receive a dinner that costs the organization $40 each.  $40 would be recorded as an exchange transaction with the remaining $60 recorded as a contribution.  The $40 cost for the organization to purchase the meal is recorded as a direct benefit. 

Under GAAP, special events may be presented one of the following ways: (1) The cost of direct benefits ($40 meal cost) to donors as a line item deducted from special events gross revenue ($100 ticket price). (2) Special events gross revenues ($100 ticket price) in the revenue section and costs of direct benefits to donors ($40 meal cost) in the same section as other programs or supporting services. (3) The contribution ($60 contribution) and exchange portions ($40 meal price) of the gross revenues presented separately, with the costs of direct benefits to donors ($40 meal cost) deducted from the exchange portion ($40 meal price) of the gross revenue.

The IRS requires the contribution portion ($60 contribution) of special events to be included in total contributions, gifts, grants and other similar amounts.  The exchange portion ($40 meal price) is reported separately as income from fundraising events less the direct expenses ($40 meal cost).  

In-Kind Contributions

In-kind contributions include noncash assets such as inventory, property and equipment, as well as materials and facilities, all of which should be recorded at their fair market value for GAAP financial statements.  In-kind services should be recorded under GAAP if they create or enhance a nonfinancial asset or meet all of the following criteria: (1) require specialized skill, (2) are provided by individuals who possess those skills, and (3) the service would typically need to be purchased if not contributed.  Examples of common in-kind services include advertising, marketing, accounting and legal services. 

Generally the value of donated services or use of materials, equipment or facilities is not recorded on Form 990 in revenue or expense.  These amounts should; however, be included in the reconciliation of Form 990 to audited financial statements on Schedule D of the 990.  Only noncash assets such as equipment, inventory or investments, should be recorded as noncash contributions on Form 990 in revenue and on the balance sheet.

It is important to make sure your organization’s information is properly reported on both the financial statements and Form 990 so that users can make informed decisions. 

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.

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