In preparing financial statements for not-for-profit organizations (NPO), management and accountants should be aware of some common errors in presentation that affect the statements of financial position and activities. By paying attention to these simple tips, you can help to ensure that your financial statements will be ready for audit!

Statement of Financial Position

This statement addresses the liquidity of the organization. Here are some common errors in reporting:

  • Failure to report cash or other assets separately if there are restrictions for long-term use
  • Including conditional pledges as receivables
  • Reporting unearned revenue for grants in cases where they should truly be treated as revenue with donor-imposed restrictions (where the grant is truly contribution and not a cost-reimbursement based arrangement)
  • Failure to capitalize the value of leasehold improvements, which is amortized over the shorter of the useful life or the lease agreement term
  • Recording board designated assets as donor restricted instead of designated

Statement of Activities

This statement addresses the operational efficiency and performance of the organization. Here are some common errors in reporting:

  • Spending down unrestricted net assets before releasing available net assets that are restricted for the same purpose
  • Reporting revenues from exchange transactions as increases in restricted net assets when only contributions with donor-imposed restrictions can create restricted net assets
  • Recording amounts as a receivable under a cost-reimbursement contract for which costs have been incurred
  • Failing to properly classify revenues as exchange and non-exchange transactions (ie. Program service fees versus contributions revenue)
  • Not reporting the fair value of all non-cash or in-kind donations

Keep in mind these are just some of the common errors that NPOs tend to make when preparing their financial statements for audit. We recommend consulting with an experienced accountant in the not-for-profit industry to assist with preparation of the financial statements or reviewing internal controls to ensure that financial information is properly identified, processed and reported.

Written by Michael Klein, CPA, CMA, EA, Manager