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By David Stiles, HoganTaylor Assurance Manager

Each year our firm participates in the American Institute of Certified Public Accountants (AICPA) national nonprofit conference, which brings over 1500 professionals together and covers a variety of hot topics from new accounting standards and changes to the Uniform Guidance to common pitfalls for nonprofits. One of the popular sessions this year related to the most common errors encountered when conducting nonprofit audits. Over the next few minutes, I’ll cover the top two financial reporting and disclosure deficiencies:  contributions and net assets.

You can solve a lot of the problems caused with revenue recognition by mastering the definition of a contribution.   The Financial Accounting Standards Board (FASB) defines a contribution as “an unconditional transfer of cash or other assets or a settlement or cancellation of its liabilities in a voluntary nonreciprocal transfer by another entity acting other than as an owner.” The two key features in this definition to remember are that contributions have to be unconditional and nonreciprocal. Donor-imposed conditions are future uncertain events that give the promisor a right to a return of the assets given. A classic example of a donor-imposed condition would be a matching pledge.  Revenue should not be recognized until the conditions on which they depend are substantially met.  If you receive the cash before you can recognize the gift, you should record deferred revenue.  Is time a condition?  No.  Pledges and irrevocable trusts are common examples of time restrictions in which you record the contribution as revenue in the period the pledge is received. The next key feature to remember is the transaction must be a voluntary nonreciprocal transfer. A reciprocal transfer is often called an exchange transaction and is usually in the form of a grant or contract.  FASB provides two great examples: under an exchange transaction, “a resource provider may sponsor research and development activities at a research university and retain proprietary rights…similarly; a resource provider may sponsor research and development activities and specify the protocol of the testing…those transactions are not contributions.” Under these type of exchange transactions, deferred revenue should be recorded when the cash is received and revenue is then recognized to the extent of the expenses.  FASB goes on to say that there can be difficulties in determining whether a transfer is an exchange transaction or contribution and it requires a careful assessment on your part.  As you are planning your next capital campaign or preparing your year-end financial statements, review the underlying support to make sure the contribution meets both the unconditional and nonreciprocal requirements.

The second common deficiency in financial reporting and disclosures is net assets.  Let’s start with the three basic buckets: unrestricted, temporarily restricted, and permanently restricted.  The key thing to remember here is that these are all based on donor restrictions.  FASB defines permanently restricted net assets as “net assets resulting from contributions and other inflows of assets whose use by the organization is limited by donor-imposed stipulations that neither expire by passage of time nor can be fulfilled or otherwise removed by actions of the organization.” Temporarily restricted net assets are defined as “net assets resulting from contributions and other inflows of assets whose use by the organization is limited by donor-imposed stipulations that either expire by passage of time or can be fulfilled and removed by actions of the organization pursuant to those stipulations.” To simplify these definitions, it is important to remember permanently restricted net assets are donor contributions that never expire, temporarily restricted net assets are donor contributions that expire, and unrestricted net assets are everything else.  One of the weird rules to remember is that the statements of activities should report expenses as decreases in unrestricted net assets.  Using restricted assets to satisfy a restriction is reflected in the financials as a release of restriction on the statement of activities, which simultaneously increases the unrestricted class of net assets and decreases temporarily restricted net assets at the expiration of the donor-imposed restrictions.  If you have a lot of donor-imposed restricted contributions that expire within the same reporting period, you might consider an option provided by FASB which could simplify the reporting.  FASB states “donor-restricted contributions whose restrictions are met in the same reporting period may be reported as unrestricted support.” If you do elect this option, be sure to disclose this accounting policy in your footnotes.  This would also be a good time to remind you that the net asset buckets will be changing from three buckets to just two buckets – with and without donor restrictions. Be sure to check out Jack Murray’s article Presentation of Financial Statements of Nonprofit Entities Update for more information on changes coming.

As mentioned at the AICPA national nonprofit conference, contributions and net assets are the top two common financial reporting and disclosure deficiencies among nonprofits. Given the current environment and pressure to find new ways to raise funds, it is important to remember the basics when it comes to these areas.  Small changes in pledge cards and reviewing the support received from the donor could make a big impact on how your transactions are recorded.

Lastly, we understand unusual circumstances may come up and you have a lot going on.  If you ever find yourself in a situation where you are not sure what to do, call up your auditor – real time!  We love to be a resource throughout the year to our clients and friends within the nonprofit community.

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