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Posted by Joyce Masse Troy on Mon, Oct 23, 2017 @ 04:11 PM

Questions for NFPsA financial statement audit is bound to produce questions on financial statement reporting, and many are matters that are better addressed before the start of the audit. Questions addressed during the reporting year can save not-for-profit organizations a lot of time during their next audit and could eliminate potential control deficiencies reported as a result of addressing these prior to the audit. The following are among the top questions we routinely hear from our clients.

How Should A Not-For-Profit Record a Certificate of Deposit?

Certificates of Deposits (CDs) are not considered investments under Accounting Standards Codification Topic 320, InvestmentsDebt and Equity Securities (ASC Topic 320) and are not considered a fair value item under ASC Topic 820, Fair Value Measurements and Disclosures. CDs should be reported as part of cash and cash equivalents at cost plus accrued interest if less than 90 days duration at the purchase date, and on its own line in the financial statements if the duration at the time of purchase is greater than 90 days.

Should Not-For-Profits Segregate Investments in Split-Interest Agreements on the Balance Sheet?

Most states don’t regulate the instruments in split-interest agreements, but it’s possible that some states require organizations to separate investments in split interest funds. In practice, most organizations commingle these donations in their investment pool until the death of the donor, even if the organizations segregate investments in split-interest agreements on their balance sheet. The notes to the financial statements should include the appropriate disclosures on the split interest agreements.

If a Board Restricts Earnings on Endowment Funds, Do Those Resources Get Accounted for in Temporarily Restricted Assets?

No. Only donors or local laws determine whether funds are classified as restricted net assets. The temporarily restricted assets designation can be confusing. So, too, has been the treatment of funds that are not restricted but have board restrictions. Board restricted funds should be accounted for as board designated funds and reported under the unrestricted net assets caption in the financial statements. Not-for-profits will have clearer guidance on both of these issues with the new not-for-profit financial statement standard, which clarifies asset classes as assets with donor restrictions and assets without donor restrictions. Board-restricted funds will be classified as assets without donor restrictions and will require enhanced disclosures about the amounts and purposes of the governing board designations and appropriations.

If a Prior Year Summarized Data Is Reported, What Should Be Done Relative to Prior Period Footnotes?

It is highly recommended that not-for-profit organizations report comparative financial statements each year. Summarizing prior period data is allowed so long as it contains the proper titles within the statements. In either case, comparative footnotes should be presented for all required disclosures under U.S. generally accepted accounting principles (GAAP).

Do Significant Contributions from an Officer or Board Member Require a Financial Statement Disclosure?

Officers and board members of the organization are considered related parties and therefore fall under ASC Topic 850, Related Party Disclosures. If the contribution is material or significant, then disclosure of such contribution should be made. When in doubt, you should probably disclose it.

How Should Reports Be Issued When Material Errors Are Found After the Financial Statement Has Been Issued?

If a material error is identified that occurred during a period for which the financial statements have already been issued, there are several things that should be considered. First, it needs to be determined whether or not the financial statements containing the error should be recalled and re-issued. This should include a conversation with your auditor and your board about the best course of action. The auditor will also have to consider the controls within the organization that did not prevent such an error from occurring and whether a material weakness in internal control needs to be reported. 

If everyone is in agreement that the financial statement should be recalled, management must notify the users of the financial statements about the recall. If the error is going to be corrected with the issuance of the current year financial statements, prior period adjustment accounting must be applied by pushing through the correction to retrospectively restate the prior period balances being presented in the current period financial statements and the appropriate disclosures need to be reported.

If a Not-For-Profit Changes Its Year End, Can a Longer than Normal Fiscal Year Be Presented?

Yes, longer reporting periods can be presented. It is important for the not-for-profit organization to consider the users of the financial statements (board members, banks and others) when reporting on a period other than 12 months to ensure their needs are being met. Also keep in mind that when presenting comparative financial statements and one period is presented on the fiscal year and the other period is longer (or shorter), the comparability of the financial statements period over period is no longer achieved. ASC Topic 205, Presentation of Financial Statements, requires that disclosures and comparability issues be explicitly disclosed but does not limit financial statements to a 12-month period.

Should Not-For-Profit Reporting Be Used if An Organization Does Not Have An Approved IRS Determination Letter?

Yes. Not-for-profit organizations can follow tax-exempt reporting before receiving their IRS determination letter. For financial statement purposes, management would need to assess this as part of their overall assessment of tax positions and whether their status of being tax exempt is uncertain or not. The issue of being exempt from federal income taxes is a matter of tax law. Generally, the auditor verifies such exemption by obtaining the IRS determination letter. The exemption approval by the IRS is not a lengthy process, and is the best evidence that management can obtain to support the organization’s position that it is a tax-exempt organization.

Is the Loss of an Exempt Status Automatically a Going Concern?

No. Tax-exempt status is a tax position. The loss of a tax-exempt status does not mean the organization presents a risk of not continuing as a going concern. It means the organization is now taxable and must modify its tax and disclosure reporting.

Does a Not-For-Profit Qualify to Use the Equity Method of Accounting?

A not-for-profit may encounter the equity method of accounting question if it holds an equity investment in a for-profit company. The not-for-profit organization should first determine if an election was made to report such interests at fair value in accordance with the fair value option. If the organization has not made the election to report these type of investments at fair value, for example the not-for-profit accounts for other investments at market value, and if the arrangement meets the criteria outlined in ASC Topic 323, Investments- Equity Method and Joint Ventures, the organization would follow the equity method of accounting.

For More Questions

If you have any additional comments, questions or concerns, contact us.

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JTroyoyce Troy is a Director in the New England Not-For-Profit & Education Practice. She can be reached at 401.626.3224 or






Tags: Joyce Masse Troy, not-for-profit, endowment funds, Not-For-Profit Audits, Split-Interest Agreements, financial statement audit, financial statement reporting

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