Key Differences Between Reporting on the Form 990 and Financial Statements
There are several differences of which you should be aware when comparing a nonprofit organization’s IRS Form 990 to its U.S. GAAP financial statements. We have summarized some of the key differences below.
Reporting Entity
In accordance with accounting principles generally accepted in the United States of America (U.S. GAAP), some organizations are required to be consolidated for financial statement presentation. However, consolidated Form 990 filings are not allowed unless there is a group exemption. The only exception is for disregarded entities; the Form 990 generally includes the activity of disregarded entities that are also consolidated for U.S. GAAP reporting. Such disregarded entities are also disclosed on Schedule R of the Form 990. See our article on Form 990, Schedule R.
Donated Services
Donated services (or “in-kind services”) that meet the criteria for recognition under U.S. GAAP are recognized as revenue and as a related expense or capital asset on the financial statements. However, on the Form 990, donated services are not recognized regardless of recognition on the financial statements. Donated service revenue and expense are presented as a reconciling item on the Form 990.
Investment Expenses
U.S. GAAP financial statements report investment income net of investment expenses; however, on the Form 990, the investment income is not reported net of investment management expenses. Rather, expenses related to the sale of investments are reported on Part VIII – Statement of Revenues and investment management expenses are reported on Part IX – Statement of Functional Expenses, line 11f. Investment expenses not reported on Part VIII or Part IX may be reported on line 7 of Part XI as part of the reconciliation of net assets.
Unrealized Investment Gains and Losses
Another difference with respect to investment reporting is that on U.S. GAAP financial statements the organization reports unrealized gains and losses on its investments as part of its statement of activities; however, unrealized gains and losses on investments are not reportable on the Form 990 and are presented as a reconciling item.
Functional Expenses
FASB ASU 2016-14 requires all non-profit organizations to include a statement of functional expenses in their U.S. GAAP financial statements; however, there are different requirements for the IRS Form 990. The Form 990 instructions require all non-profit organizations to list out expenses by type in column (A) of Form 990, Part IX Statement of Functional Expenses. However, only organizations that are exempt under Internal Revenue Code sections 501(c)(3) or 501(c)(4) are required to complete the functional classification for expenses reported on Form 990, Part IX – Statement of Functional Expenses, columns (B), (C) and (D).
Special Events
U.S. GAAP allows for some flexibility in the presentation of expenses from special events. However, the Form 990 requires direct expenses for special events to be presented as a reduction to related revenue on Form 990, Part VIII -Statement of Revenue. This difference in presentation is reconciled on Form 990, Schedule D, Parts XI and XII for organizations with a U.S. GAAP financial statement audit and on the Form 990, Part XI for those without a financial statement audit.
The differences noted above are some of the most common differences between U.S. GAAP financial statements and the IRS Form 990 but is not a comprehensive list. Take note of Parts XI and XII of Form 990, Schedule D of the IRS Form 990 which reconciles total revenue and total expenses per the U.S. GAAP audited financial statements, and the amounts reported on the Form 990.
The Jones & Roth Nonprofit niche team specializes in working with Organizations of all sizes to ensure the Form 990 is accurately prepared. Please reach out to one of our advisors for additional information.
