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Common Questions, Issues and Pitfalls Observed in Nonprofit Audits

At Windes, we are fortunate to have a large nonprofit audit practice that provides services to over 100 organizations. As our nonprofit audit busy season comes to a close, we thought it would be helpful to summarize some common issues and questions that we encounter.

What are the keys to having a smooth audit?

We find that organizations who 1) meet their timing commitments, 2) take ownership of their numbers (audit themselves to a degree in advance), 3) communicate frequently, and 4) set up exit and entrance conferences with their audit committees in order to establish deadlines tend to have the most effective audits.

What is the distinction between restricted contributions and deferred revenue?

We often notice that organizations receive funds in advance of the intended period of use for the funds. This leads to questions on whether or not these funds should be recorded as deferred revenue or restricted revenue. The answer lies in understanding the distinctions between the type of transaction (exchange transaction or contribution) and between the conditions and restrictions placed on the contributions to be received.

Conditions occur when a donor promises to contribute assets to an organization only if specified future and uncertain events occur. A condition is effectively a barrier that must be overcome before a promised gift becomes a contribution. Restrictions can only occur on contributions and they limit or direct the use of donated assets. Essentially, conditions must be overcome before a contribution is recognized and only at that point can donor imposed restrictions can be considered. Deferred revenue would only occur with funds that are received before the conditions/barriers to recognize revenue have been overcome.

In an exchange transaction (where an organization is paid a commensurate value for a product or service that it sells), deferred revenue arises when funds are received in advance of the organization fulfilling its obligations under the transaction.

These nuances in revenue recognition are so easy to trip over we strongly encourage active communication between organizations and their auditors to ensure everyone is on the same page when it comes to revenue recognition in a nonprofit audit.

When do the new accounting standards begin?

Our clients have been aware for some time that significant changes to accounting standards affecting nonprofits are on the way. However, almost all jumped at the opportunity to go over the timeline and be reminded of what the changes might entail for their organization. Here is a brief reminder:

  • Accounting Standards Update (ASU) 2016-14 Presentation of Financial Statements of Not-for-Profit Entities

This new standard will go into effect for fiscal years beginning after December 15, 2017 (calendar year 2018 and all fiscal years ending in 2019). This standard will change the way certain information is presented in the financial statements and will enhance certain disclosures in the footnotes to the financial statements for not-for-profit entities.

  • ASU 2014-09 Revenue from Contracts with Customers and the related ASU 2018-08 Not-for-Profit Entities: Clarifying the Scope and the Accounting Guidance for Contributions Received and Contributions Made

This new standard will go into effect for fiscal years beginning after December 15, 2018 (calendar year 2019 and fiscal years ending in 2020). This standard will require an entity to recognize the amount of revenue to which it expects to be entitled for the transfer of promised goods or services to customers. The related ASU provides guidance on distinguishing between exchange transactions and contribu-tions, as well as distinguishing between conditional and unconditional contributions.

  • ASU 2016-02 Leases

This new standard will go into effect for fiscal years beginning after December 15, 2019 (calendar year 2020 and fiscal years ending in 2021). This standard will require lessees to show lease assets and lease liabilities on the statement of financial position for all leases with terms longer than 12 months.

Please visit our Nonprofit Advisor Newsletter archive at www.windes.com/intelligence/nonprofit-advisor for more information about the changes listed above.

How will this (insert issue here) affect my Form 990?

As an auditor, I get to spend a fair amount of time face-to-face with our clients. When helping a client with a technical issue, it is common that auditors are asked the question, “How will this affect our 990?” While we might not always know the answer to this question, we are fortunate to have nonprofit tax personnel at our firm with an expertise in the 990 and the issues facing nonprofit organizations. Our clients are encouraged to communicate direct with our tax personnel and develop relationships that are mutually beneficial and long lasting.

Our accounting department is stretched thin, is this normal?

One common issue and complaint that we see in the nonprofit world is a lack of investment in the accounting department. It is common for accounting departments in nonprofit organizations to be under-staffed, underqualified, and underequipped. These conditions make it difficult for organizations to operate efficiently and effectively, opens them up to risk of misstatement or mishandling of funds, makes it difficult for management to make informed decisions, and makes it difficult for organizations to obtain qualified accounting staff. It’s key for an organization from those in governance on down to think critically about how to mitigate any associated risks related to limited resources.

If you have questions or would like more information regarding implementation, please contact Ben McKinney at bmckinney@windes.com or 844.4WINDES.

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