By Saleem Aboite
Tax Manager
Introduction
he IRS Form 990 is a public document filed annually that presents key information a reader can use to analyse an exempt organization’s programs, understand its key policies, and most importantly, its financial activities. Audited financial statements are prepared in accordance with U.S. Generally Accepted Accounting Principles (GAAP) to present the organization’s financial position and results of operations with the goal to issue an independent opinion on whether the statements are fairly presented. For exempt organizations that undergo an audit, the 990 filing generally follows the issuance of audited financial statements. How an exempt organization presents its financial data on the 990 can enhance a reader’s understanding of their operations and priorities in a different way than reading through audited financial statements alone. This article identifies the key differences between the 990 compared to audited financial statements.
Differences in purpose
The Form 990 and audited financial statements serve different purposes, even though they report on the same organization. Form 990 is primarily a tax compliance and public disclosure document, designed to help its readers evaluate a nonprofit’s activities, governance, compensation practices, and compliance with tax-exempt requirements. In contrast, audited financial statements are subject to an independent audit, the primary objective of which is for the auditor to express an opinion on whether the financial statements are fairly presented, in all material respects, in accordance with GAAP. Audited financial statements provide readers with a fair presentation of the organization’s financial position, operating results, and cash flows.
Differences in presentation
While both the 990 and audited financial statements are drawing from the same accounting records (i.e. trial balance and general ledger) – both present financial information differently due to their distinct reporting objectives and requirements.
Balance Sheet (Statement of Financial Position) – The audited financial statements present a Statement of Financial Position in accordance with GAAP, reporting assets, liabilities, and net assets based on accounting standards. Form 990 reports similar information on Part X (Balance Sheet), but certain accounts may be grouped, reclassified, or reported differently to meet IRS reporting requirements. As a result, line items on the Form 990 may not directly correspond to those presented in the audited financial statements. For example, current and non-current assets or liabilities can be combined on a single line of the 990 in their respective categories while these items may be separated in audited financial statements.
Statement of Activities – The audited financial statements present a Statement of Activities that focuses on revenues, expenses, and changes in net assets under GAAP. Form 990 reports much of this same information in Part VIII (Revenue) and Part IX (Functional Expenses) but requires revenues and expenses to be categorized according to IRS-defined classifications.
990 Part VIII – Statement of Revenues – This statement requires organizations to classify revenue according to specific IRS categories, including contributions and grants, program service revenue, investment income, fundraising event revenue, inventory sales, and other revenue. Additionally, organizations must classify their non-contribution revenues as related revenue, unrelated business revenue, or excluded revenue under IRC sections 512-514. Certain expenses should be presented in Part VIII as well including rental expenses connected to rental income, cost of goods sold expense, and fundraising/gaming expenses.
In contrast, audited financial statements may present certain revenue sources in broader groupings based on the organization’s operations and GAAP presentation requirements. For example, investment income may be presented as a single line item in the audited financial statements but separated into interest, dividends, and realized gains (losses) on Part VIII of the 990. If investment income also includes unrealized gains (losses) and investment fees – these items are presented separately in other parts of the 990 (see Other Differences below).
990 Part IX – Statement of Functional Expenses – Similar to the audited financial statements, this part requires expenses to be presented by both natural classification (such as salaries, occupancy, professional fees, and grants) and functional classification (program services, management and general, and fundraising). Certain line items in Part IX may be traceable directly to the financial statements while others may require further reconciliation. As an additional note, exempt organizations that are classified as 501(c)(3) and 501(c)(4) generally will allocate expenses in Part IX using the described method above. Exempt organizations classified under other codes, including 501(c)(6) organizations, are permitted to present functional expenses solely by natural classification without any further classification into function.
Audited financial statements also commonly include a statement or note presenting functional expenses, however, the level of detail and allocation methodology can be more involved on the 990. For example, certain expenses may be grouped in an audit functional expense that the IRS requires further breakout in Part IX. For example, ‘Professional fees’ is a common expense that is presented as one line item in the financial statements, but, in Part IX, must be classified into specific lines such as legal, accounting, and management services.
Other Differences
Below are a few noteworthy mentions that often create reconciliation differences between the 990 and the audited financial statements
Unrealized Gains (Losses) are typically included with investment income or netted with realized gains (losses) in the audited financial statements, but this item is not reported with revenues in Part VIII of the 990. Net unrealized gains (losses) are reported in the 990 as a reconciling item in Part XI – Reconciliation of Net Assets and Schedule D Reconciliation of Revenues.
Investment Management Fees are typically netted with investment income in audited financial statements, but this item should be reported in Part IX – Statement of Functional Expenses on the 990. Accordingly, this item also creates a reconciling difference from financial statement expenses and is reportable in Schedule D – Reconciliation of Expenses.
Donated Goods and Services – GAAP requires in-kind contributions to be reported as revenue and expense in the audited financial statements. The 990 presents in-kind contributions differently depending on whether the in-kind contributions were donated goods or donated services. Donated goods are reported in Part VIII along with contributions and Schedule M as noncash contributions. Donated goods should also be reported Part IX if recorded accordingly in the audited financial statements. Donated services, however, are not reported in Part VIII or Part IX, but should be reported in the Schedule D Reconciliation for Revenues and Expenses.
Prior period adjustments – Audited financial statements typically do not separately include a line item for adjustments to beginning net assets if reporting an adjusted figure, but the IRS includes a specific line item to report these adjustments in Part XI – Reconciliation of Net Assets.
Final Thoughts
Neither the Form 990 nor the audited financial statements should be viewed in isolation. Audited financial statements provide assurance regarding the reliability of an organization’s financial information, while Form 990 provides additional context about how those resources are generated, spent, and governed. By understanding the unique objectives and reporting requirements of each, readers can better evaluate an exempt organization’s financial performance, stewardship of resources, and mission-related activities.
To learn how Han Group can help your organization present your financial information clearly and accurately, Contact us.