Common Financial Reporting Deficiencies (Part 2)

Published: Feb 15, 2016
By: Brian C. Collins
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This is Part 2 of a 3-part series. To see Part 1, please click here.

Continuing on from last week’s post, this week we’re discussing the common errors in the Statements of Activities and Functional Expenses as covered by our own Phil Bergamo and Jessica Dima a recent EisnerAmper webinar titled “Common Financial Reporting Deficiencies for Not-for-Profit Organizations.”

Common Error	Proper Reporting
Net Net assets not properly released from restriction.Net assets not properly released from restriction.assets not properly released from restriction.	Net assets restricted for specific purposes should be released from restriction before spending unrestricted net assets on the same purpose.
Misclassification of revenue from exchange transactions.	Revenue from exchange transactions (service fees, tuition, membership dues, and most government grants) should be classified as unrestricted revenue. Only donors can impose restrictions and therefore exchange transaction revenue should not be classified as temporarily restricted.
Contributions related to pledges due in future periods is reported as unrestricted revenue.	Amounts related to pledges due in future periods should be classified as temporarily restricted revenue. There is generally an implied time restriction (since the cash is not available to spend) unless the donor indicates that the contribution is intended to support the current period, in which case it would be reported as unrestricted.
A summary of expenses by function are not disclosed or the discloser does not include all of the organization’s expenses.	Health and welfare organizations are required to present a schedule of functional expenses which shows expenses by function (program, management and general, and fundraising) as well as nature (Salaries, rent, depreciation, etc.). All other entities must disclose expenses by function either on the face of the statement of activities or as a footnote. Some expenses are net with revenue (investment fees, direct benefit to donors) or shown separately from the expenses classified within their function. These expenses should be allocated according to their function on the statement of functional expenses or in the footnotes.
Expenses not appropriately allocated and/or consistently applied.	General management, record keeping, financing, and other related administrative activities, with the exception of direct program oversight or fundraising, should be classified within the management and general expenses function. Expenses that relate to various functions should be allocated based on a reasonable methodology (for example, rent according to square foot, employee benefits according to salaries). The methodology used should be consistent from year to year and re-evaluated if the allocation base changes (leasing of additional space).

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Brian C. Collins

Brian Collins is a Director of outsourced finance and accounting, with more than 20 years of public accounting experience, specializing in assisting business owners with monthly accounting, financial analysis, and other various accountings services.

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