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3 Potential Financial Reporting Errors Found at Not-for-Profit Organizations

Shutterstock_388167307As a CPA who has been in public practice for many years, I know the challenges that not-for-profit organizations face in financial reporting, and, more specifically, in applying generally accepted accounting principles.

Financial statements provide a compelling picture of the not-for-profit entity’s activities. However, in my experience, there are potential financial reporting concerns not-for-profit organizations need to be aware of to make sure that picture is conveyed properly. Here are three errors that come to mind.

  1. Gross Reporting of Revenues and Expenses Related to Fund-Raising Activities.

GAAP generally requires that an organization report gross amounts of revenues and expenses in its statement of activities. However, there are situations where the not-for-profit may receive proceeds from fundraising activities net of related fees. In these instances, the entity would not report the net amount as contribution revenue; rather, the amount of the donor’s contribution would be reported as contribution revenue, and the fees would be reported as fundraising expenses. Consider the following:

A charity works with an outside provider such as an online service that markets and sells tickets or a telemarketing firm that solicits contributions on the not-for-profit’s behalf. The processing fee that the online ticketing service or telemarketing firm collects would be reported as a fundraising expense while the gross ticket sales or contributions received would be recorded as contribution revenue.

In contrast, a charity may receive the net proceeds of a fundraising activity in which it had minimal involvement in the planning or conduct of the event. In this case, the charity is not required to report the gross proceeds of the event since the net check is the donation from the individual or organization who conducted the event.

  1. Reporting Promises to Give at Fair Value.

Contributions are to be reported at fair value. This includes donors’ pledges to give. When a donor promises to provide cash or other assets at a future date, the charity should estimate the fair value of the amounts that will be received. Oftentimes, present value techniques incorporating risk-adjusted discount rates reflecting the assumptions market participants would use in pricing the asset are used. 

If the donation is expected to be received within one year, the charity should report the contribution at net realizable value (the amount expected to be collected) and may forgo the calculation of the discount in accordance with FASB ASC 958-605-30-6, which indicates that net realizable value is a reasonable estimate of fair value.    

For example, a charity conducts an annual phone-a-thon fundraising appeal and receives promises to give of $100,000. The charity has been able to collect 85% of promised donations from similar appeals in past years.  In this instance, the charity should report contribution revenue of $85,000.  Should actual collections exceed this original value, the excess amount should be reported as additional contribution revenue. If amounts received fall short of the original estimate, the promised donations should be written off to bad debt expense.

In the above example, some organizations would report $100,000 of contribution revenue, and bad debt expense for any amounts not collected. This overstates both revenue and bad debts expense. In order to avoid these overstatements, not-for-profit organizations should record promises to give at their net realizable values.

  1. Reporting Program Services.

A surprising number of not-for-profits report only one category of program services in their financial statements or in their IRS Form 990, Return of Organization Exempt from Income Tax. This not only may be at odds with GAAP, but is definitely a lost opportunity to tell your story and make the case that your programs are worthy of volunteer and financial support.

Preparing financial statements requires the proper balance of summarization and disaggregation. Too much detail can be confusing; too little can be misleading. Most organizations accomplish their mission by conducting more than one distinct program. For example, an organization dedicated to feeding the hungry may have a year-round food distribution program as well as a program to feed school-aged children during the summer. These two programs should be displayed separately.


Common financial reporting errors typically conjure fears of audit adjustments and findings.  But in many cases, correcting these errors leads to improved financial reporting and a more favorable picture of the organization and its activities.

The AICPA’s Not-for-Profit Section has relevant resources and learning opportunities available including a Common Financial Statement Errors tool. Additionally, you may be interested in attending a webcast on “Avoiding Common Errors in Not-for-Profit Financial Reporting”, taking place on July 19 at 1 p.m. ET.

Stephen Kattell, CPA, Managing Shareholder, Kattell and Company. He founded Kattell and Company in 2004 to provide assurance, tax and consulting services exclusively for not-for-profits. Kattell served on several committees of the Florida Institute of Certified Public Accountants and the AICPA, including serving as Chair of the Not-for-Profit Industry Expert Panel from 2003 to 2007. He has spoken extensively on accounting, auditing and tax related topic at local, state and national venues.

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