Tax Brief: Differences Between Form 990 and U.S. GAAP Financial Statements
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 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.
Net Asset Terminology
U.S. GAAP financial statements now refer to two net asset classifications – net assets without donor restrictions and net assets with donor restrictions pursuant to Financial Accounting Standards Board Accounting Standard Update 2016-14 (FASB ASU 2016-14). However, the net asset terminology reported on the Form 990 was not updated for FASB ASU 2016-14 and still refers to three net asset classifications – unrestricted, temporarily restricted, and permanently restricted. The Form 990 instructions were updated to address the changes in terminology used for net assets pursuant to FASB ASU 2016-14, but the Form has not yet been updated.
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 expenses. Rather, investment expenses are reported on Part IX – Statement of Functional Expenses. Investment expenses are presented as a reconciling item on 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.
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; however, unrealized gains and losses on investments are not reportable on the Form 990 and are presented as a reconciling item.
Donated services that meet the criteria for recognition under U.S. GAAP are recognized as revenue and a related expense 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.
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).
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.