Nonprofit organizations use funding from various sources to strengthen the fabric of our communities by exciting awareness and providing services, resources, and solutions to address unmet needs. You are an advocate for social change, bringing voices to those who are often unheard and faces to those who are often unseen. What you do is powerful. But with great power comes great responsibility. And when your organization is backed by large funding sources, your accounting responsibilities can change.
Nonprofits practice fund accounting, which means they account for resources on a deeper level through designated funds based on their origin. You may have funds to separately account for sales, corporate contributions, gifts-in-kind, fundraising income, grant income, revenue from events, capital projects funds, operating funds, and more. Why the need for so many “buckets”? Each fund comes with its own rules and regulations for recognition, expenditure, and disclosure.
According to The Giving Institute, in 2021, charitable giving increased by 6% over 2020. And the consolidation trend – larger donations from fewer donors – is expected to continue throughout 2022. When your organization files Federal Form 990 or 990-EZ, you must include details concerning your donations, specifically for large funding sources. On Schedule B, your organization must list all individuals, companies, or non-public charities who gave $5,000 or more. And for some nonprofits, the threshold for listing large funding sources is 2% or greater of donated revenue.
Generally, a contribution is reported after you receive a commitment from a donor or the donation itself. However, if the donor specifies that you can only obtain the funds after meeting certain requirements, the timing may differ. Your funds must be separated based on whether they are unrestricted or restricted. Your unrestricted fund consists of donations received with no strings attached. These are donations given without restrictions placed on the fund’s resources, so your organization may use these funds for whatever purpose it deems fit. These donations are typically recognized when received. Restricted donations are those in which the revenue in the fund must be used for specific purposes. When you get large funding sources, you are likely to see more restrictions. And more restrictions make recognition compliance increasingly complex.
Private Foundation & Government Grants
Nonprofits can receive grants from federal, state, or local governments and private grant-making foundations. When your organization receives a grant, you will need to recognize and record the revenue when it becomes usable income, which can differ depending on the type of grant received. Grants are generally unconditional, conditional, or reimbursable. Unconditional is similar to unrestricted – there are no strings attached. Conditional grants are funds that have both 1.) a barrier that must be met, and 2.) a right of return to the donor. A common form of a conditional grant is a matching grant, wherein the donor approves a grant based on an agreement that the funds will be issued once the nonprofit has raised a specific amount of money from other funding sources.
Reimbursable grants are often received upon completing a dedicated purpose or project. For example, if the project is building-related, your organization incurs costs for the purchase of materials and submits these invoices to the grantor for reimbursement. Typically, the grantor will require an itemized invoice and documentation asserting that any other measurable performance-related barriers have been overcome before your organization is reimbursed for the expenses.
Single Audit Requirements
A typical single audit contains two deliverables:
- a financial statement audit performed in accordance with Yellow Book requirements or generally accepted government auditing standards (GAGAS); and
- a compliance audit covering everything from operations and internal controls to compliance with laws, regulations, contracts relating to federal awards, and grant agreements.
Federal awards come in various shapes and sizes, including grants, loans, scholarships, endowments and others. With the influx of federal programs since the onset of the pandemic, many organizations are finding themselves subject to a single audit, perhaps for the first time. If your nonprofit is a non-federal entity that expends $750,000 or more in federal funds in one year, your organization may be subject to a single audit.
Each federal award is accompanied by the awarding agency’s grant agreement, terms, and Assistance Listing Program title and number. Your organization’s role as an award recipient, sub-recipient, or contractor also comes into play. And in some cases, an organization can be a recipient, sub-recipient, and contractor at the same time.
In combination, this information determines the related reporting requirements, which can be quite complex.
For example, while funds distributed through the SBA’s Economic Injury Disaster Loan (EIDL) Program are subject to single audit requirements, EIDL emergency advances are not. And while the value of new loans made or received during the audit period may apply, funds distributed through the SBA’s Paycheck Protection Program (PPP) are not subject to single audit requirements. Property received from a federal agency must be considered, while the amount of personal protective equipment (PPE) you received does not count for purposes of determining the single audit threshold.
Nonprofits need strong internal controls in place, including those related to revenue recognition, compliance, Schedule of Expenditures of Federal Awards (SEFA) preparation, grant intake, reconciliation, and internal review and approval. And Smith, Sullivan & Brown is here to help.
Contact Smith, Sullivan & Brown
The nonprofit services team at SSB is dedicated to helping our firm’s nonprofit clients meet their reporting compliance requirements and successfully fulfill their missions. If you’d like to talk about your organization’s plan to account for large funding sources, or other accounting needs, contact us today!
Linda Smith, CPA is SSB’s Managing Partner. She graduated summa cum laude from Bentley College in 1986 and became Certified as a Public Accountant in 1990. Linda actively participates in audit field work and manages the firm’s nonprofit accounting, auditing, and tax services.