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Blogging Beyond the Numbers

Common Variances between Financial Statements and the IRS Form 990
Posted by: Kristen Williams 8 months ago

Have you ever compared your financial statements to your IRS Form 990 and thought to yourself, “Why don’t these two match?” This is a question we receive from a number of clients and we have some answers!

Here are some of the most common differences between a nonprofit’s financial statements and IRS Form 990

Unless specified, most nonprofit financial statements are prepared in accordance with Generally Accepted Accounting Principles (U.S. GAAP), while the IRS Form 990 uses a unique blend of U.S. GAAP and tax-basis accounting. The differences in the reporting framework are the root of the variances you see in the comparison of the two.

For example, one of the common differences between the financial statements and the IRS Form 990 is that the revenue and expenses per the financial statements do not match the total revenue and expenses per the IRS Form 990. One reason for this is that per U.S. GAAP, donated services are considered a contribution and an expense and are to be included in the calculation of net income; however, the IRS Form 990 excludes donated services from its revenue and expense total. The IRS permits the inclusion of any donated services in narrative form; but the amount of those donated services must be excluded from total revenue and expenses.

Another example which may cause a difference in total revenues and expenses is the treatment of unrealized gains and losses. Per U.S. GAAP, unrealized gains and losses flow through the statement of activities.  Instead of including the unrealized gains and losses in the statement of activities, the IRS Form 990 excludes this from total revenue and treats it as a reconciling item in Schedule D of the IRS Form 990. Reconciling items are used to verify the net asset balance per the financial statements matches the net asset balance per the IRS Form 990.

Many fiscal year entities wonder why compensation for the Board of Directors and the Executive Director listed in Part VII of the IRS Form 990 varies from the amount listed in the statement of functional expenses in Part IX. The reason is: Part VII of the IRS Form 990 reports compensation on the calendar year (which will tie to W-2s or 1099s issued), while Part IX of the IRS Form 990 is reported based on the fiscal year.

These are some of the most common items that may cause a variance between your financial statements and the IRS Form 990, but it is just the tip of the iceberg. If you have specific questions or see other variances and you would like some further explanation, please reach out to Wegner CPAs and we would be happy to assist you!

 

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Kristen Williams

About the Author

Kristen joined Wegner CPAs’ Assurance Department as an intern in 2014 and was hired full-time as a staff accountant in June of 2015 after obtaining her Masters of Professional Accountancy (MPA) from the University of Wisconsin-Whitewater. She works with the audit team performing audits and tax return preparation for a number of different tax-exempt organizations. She also works on audits of governmental entities, specifically school districts. Kristen annually attends continuing professional education seminars on accounting, auditing, compliance, and tax issues.


 

 

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