Accounting and Financial Reporting for Not-For-Profit Recipients of Grant Funds in Tennessee State of Tennessee Comptroller of the Treasury Department of Audit 1998 Edition
TABLE OF CONTENTS ii. Acknowledgments ii-1 1. Introduction and General Requirements 1-1 a) Overview 1-1 b) General Requirements 1-2 c) F&A Policy 03 and Indirect Cost Rates 1-3 d) F&A Policy 03 and Cost Allocation Methods 1-4 e) Comments and Suggestions 1-5 2. Your Accounting and Reporting System 2-1 a) Purpose and Objectives 2-1 b) About Today s Accounting Software Systems 2-2 c) Basis of Accounting 2-4 d) Basis for Reporting Expenses to State of Tennessee Funding Agencies 2-4 e) Activity-Level Accounting for Multi-Level Revenue & Expense Reporting 2-5 f) Activity-Level Transaction Coding 2-7 g) Activity-Level Accounting Provides Flexibility in Reporting 2-7 h) The Accounting and Financial Reporting Cycle (Steps 1 to 12) 2-9 i) Basic Accounting Cycle (Steps 1 to 3) 2-10 j) Financial Reporting Cycle (Steps 4 to 12) 2-13 3. The Chart of Accounts 3-1 a) The Objective of Your Chart of Accounts (COA) 3-1 b) The Suggested Numbering System 3-2 c) Example 3a: Chart of Accounts with Cross-Reference 3-6 d) Revenue & Expense Activity Code Tables and Charts 3-11 e) Example 3b: Revenue and Expense Activity Code Table 3-12 f) Example 3c: Activity Code Chart by Function 3-13 g) Example 3d: Activity Code Chart by Contract/Grant 3-14 h) How the COA Relates to Revenue and Expense Budgeting & Reporting 3-15 i) Development of the Illustrative Trial Balance 3-16 j) Example 3e: Universal, Functionalized, Adjusted Trial Balance 3-19 4. Cost Allocation 4-1 a) Special Requirements Regarding Cost Allocation 4-1 b) Terminology and Definitions 4-2 c) Cost Accumulation 4-2 d) Cost Distribution 4-2 i-1
e) Cost Objectives 4-3 f) Example 4a: Cost Distribution Table 4-4 g) Types of Costs Distributed to Cost Objectives 4-6 h) Direct Costs 4-7 i) Allocable-Direct Costs 4-7 j) Line Item Allocable-Direct Cost Pools 4-8 k) Service Department Cost Pools 4-9 l) Administrative/Management & General (M&G) Costs 4-9 m) Requirements for Cost Allocation 4-11 n) The GAAP Requirement for Cost Allocation 4-12 o) The IRS and State Charity Regulatory Requirements for Cost Allocation 4-13 p) Other Government Requirements for Cost Allocation 4-14 q) Your Cost Allocation Objectives and Policies 4-15 r) Cost Allocation Methods 4-16 s) Activity-Level Cost Allocation 4-16 t) Dimensions of Cost Allocation Methods 4-17 u) Example 4b: Allocation Variables by Object Expense Category 4-23 v) Reliable Staff Time Recordkeeping is a Requirement 4-24 w) Authoritative References that Address Cost Allocation and Functional Expense Reporting 4-28 x) Example 4c: Salary Time Sheets and Distribution Reports 4-29 5. Your Records 5-1 a) Required Recordkeeping 5-1 b) Written Policies & Procedures 5-1 c) Personnel Procedures 5-2 d) Purchasing Procedures 5-2 e) Supporting Documentation 5-5 f) Budgets 5-6 g) Formal Books of Account 5-7 6. Your Internal Controls 6-1 a) Internal Control Requirements 6-1 b) Revenue Cycle 6-3 c) Payroll Cycle 6-5 d) Purchasing Cycle 6-7 e) Investment Cycle 6-9 f) Fixed Asset Cycle 6-11 g) Inventory Cycle 6-13 h) Debt Cycle 6-15 i) Reporting Cycle 6-16 i-2
7. Your NPO s External Financial Reports 7-1 a) Requirements Regarding External Financial Reporting 7-1 b) Exhibit 7: Standardized Nonprofit Reporting Chart 7-3 8. Your NPO s GAAP Financial Statements 8-1 a) Required Financial Reporting 8-1 b) Statement of Financial Position 8-2 c) Statement of Activities 8-4 d) Statement of Cash Flows 8-6 e) Statement of Functional Expenses 8-6 f) Example 8a: Statements of Financial Position 8-8 g) Example 8b: Statement of Activities 8-9 h) Example 8c: Statement of Functional Expenses 8-10 i) Example 8d: Statement of Cash Flows 8-11 j) Disclosures in Notes to Financial Statements 8-12 k) Example 8e: Schedule of Expenditures of Federal Awards and State/Other Assistance 8-19 9. Tennessee Uniform Subrecipient Reporting 9-1 a) Policy 03 Uniform Reporting Requirements 9-1 b) Exhibit 9: Department of Finance and Administration--Policy 03 9-3 c) Example 9: Illustrative Policy 03 Program Expense and Revenue Reports 9-33 10. IRS Form 990 Financial Statements 10-1 a) Requirements Surrounding IRS Form 990 10-1 b) Example 10a: IRS Form 990 Part I-Revenue, Expenses, and Changes in Net Assets 10-3 c) Example 10b: IRS Form 990 Part II-Statement of Functional Expenses 10-4 d) Example 10c: IRS Form 990 Part III-Statement of Program Service Accomplishments 10-5 e) Example 10d: IRS Form 990 Part IV-Balance Sheets 10-6 f) Example 10e: IRS Form 990 Part IV-A&B-Reconciliation of Audited Financials to Form 990 10-7 g) Example 10f: IRS Form 990 Part VII-Analysis of Income-Producing Activities 10-8 h) Example 10g: Illustrative Ratio Analysis of Form 990 10-9 i) Taking IRS Form 990 Seriously 10-10 j) Exhibit 10a: IRS Form 990 & IRS Form 990 Schedule A 10-13 11. The Tennessee Division of Charitable Solicitations Requirements 11-1 a) Annual Reporting Requirements to the Secretary of State 11-1 b) Who Needs to Register as a Charitable Organization? 11-2 c) Are There Any Exclusions? 11-2 d) What Activities Constitute Soliciting? 11-2 i-3
e) Where Does a Charitable Organization Register? 11-2 f) How Does a Charitable Organization Register? 11-3 g) Most Frequent Reasons for Rejection of Documents & Delay in Registration 11-4 h) Exhibit 11a: Application for Registration of a Charitable Organization 11-5 i) Exhibit 11b: Summary of Financial Activities of a Charitable Organization 11-7 j) Exhibit 11c: New Charitable Organization Quarterly Financial Report (Unaudited) 11-9 k) Exhibit 11d: Exemption Request 11-11 l) Exhibit 11e: Filing Instructions for Registration of Charitable Organizations 11-13 12. Single Audit Reporting 12-1 a) Requirements Surrounding the Single Audit 12-1 b) Reporting Package 12-1 c) Summary Schedule of Prior Audit Findings 12-3 d) Corrective Action Plan 12-3 e) Data Collection Form 12-4 f) Source for Current Federal Information 12-4 g) Exhibit 12: Data Collection Form 12-5 13. Some Questions & Answers 13-1 a) How Should We Account for Pledges Receivable & Grants Receivable? 13-1 b) What Are Net Assets? 13-2 c) When Are Donor-Restricted Contributions Recognized in Your Statement of Activities? 13-2 d) What is Unearned Revenue? 13-2 e) How Do We Account for Donated Materials (Gifts in Kind)? 13-3 f) How Do We Account for Donated Services & Use of Facilities? 13-3 g) How Should We Classify and Report Donated Fixed Assets? 13-4 h) How Should We Classify Net Assets Related to Fixed Assets? 13-6 i) How Do We Record & Protect Property, Plant & Equipment (Fixed Assets)? 13-6 j) How Do We Record Interest Income? 13-7 k) How Should We Establish & Manage Petty Cash Funds? 13-7 l) How Many Bank Accounts for Cash Should We Have? 13-8 m) What Are the Regulations Re: FDIC Insurance & Safeguarding of Government Funds? 13-8 n) How Should We Account for Investments? 13-8 o) When Should We Disclose Related-Party Transactions? 13-8 p) Do We Show Funds Held in Trust by Others, and If So, How? 13-9 q) How Should NPOs, That Are Grantors, Report Grants? 13-9 14. Examples of Bookkeeping Entries 14-1 a) Entering Cash Transactions in the General Ledger 14-1 b) Entering Petty Cash Transactions in the General Ledger 14-3 c) Recording Accounts Receivable Transactions 14-3 d) Recording Prepaid Expense Transactions 14-4 i-4
e) Recording Inventory Transactions 14-5 f) Recording Accounts Payable Transactions 14-6 g) Recording Accrued Expense Transactions 14-6 h) Recording In-Kind Service and Use of Facilities Transactions 14-10 i) Recording Transactions of Receivables Due from Grantors 14-10 j) Recording Refundable Advance Transactions 14-11 k) Format for an Accounts Receivable Subsidiary Ledger 14-11 l) Format for an Accounts Payable Subsidiary Ledger 14-12 m) Subsidiary Ledgers for Revenue and Expense Activity by Function or Grant 14-12 i-5
Acknowledgments The 1998 edition of Accounting and Financial Reporting for Not-for-Profit Recipients of Grant Funds in Tennessee has been revised under the general supervision of Dennis F. Dycus, CPA, CFE, CGFM, Director, Division of Municipal Audit, Comptroller of the Treasury. Fred Adom, CPA, Director, Financial Systems Consulting Group, Resource Development and Support, Department of Finance and Administration, directed the revision of the manual, assisted by Iris R. Owen, CPA, Auditor, Division of Municipal Audit, Comptroller of the Treasury. Staff of a number of Tennessee state agencies provided assistance including Jack Hill, Division of Accounts, Department of Finance and Administration; Barbara D. Toms, Division of Charitable Solicitations, Tennessee Secretary of State; Julie Smith and Paul Lamb, CPA, Department of Health; and James Harper, CPA, and Perry Register, Commission on Aging. Our special thanks go to Dianne Mitchell McKay, CPA, and the late Fawn Ellis, CPA, Division of State Audit, Comptroller of Treasury, for their review of Policy 03, which is addressed in Section 9 of the manual. Many groups have assisted the State of Tennessee to make this manual as useful to state agencies and subrecipients as possible. It is a pleasure to take this opportunity to acknowledge their participation. Our warm thanks to them all, beginning with the Tennessee Society of Certified Public Accountants Government Committee, chaired by Boyce P. Simpson. Their comments were especially helpful. A major contribution to the revision of this manual was made by Wilson Levis and Anne New of the Nonprofit Management Group, School of Public Affairs, Baruch College, City University of New York. Participation of the Nonprofit Management Group was funded in part by Lilly Endowment, Inc., and The Charles Stewart Mott Foundation. The National Grants Management Association (NGMA) formed a task force to assist with the revision. This task force was co-chaired by Charles Gale, Office of Grants Management, U.S. Department of Health and Human Services; and Donald Berkheimer, Grants Management Systems. NGMA is an organization of professionals dedicated to improving the management of government grants and other assistance programs. The Greater Washington Society of Certified Public Accountants also formed a task force to provide assistance, chaired by Margaret DeBoe, CPA, Rubino & McGeehan, CPAs. Several members of these task forces deserve special recognition. Ronald Speck, a cost policy officer with the U.S. Department of Health and Human Services, assisted with the cost principles aspects of the manual. Robert Gardiner with the Exempt Organizations Division of the Internal Revenue Service reviewed the sections in the manual related to the IRS Form 990. Gerard Keffer, who is responsible for the Single Audit Clearinghouse at the U.S. Bureau of the Census, was also helpful. ii-1
Providing extensive assistance with the general purpose financial reporting sections of the manual were Richard Larkin, Price Waterhouse; Kathy McKinless, KPMG Peat Marwick; Keith Long, Watkins, Meegan, Drury & Company; and Grant Wills, Nonprofit Service Group. Karen Franklin of the Tennessee Council of Community Services was also involved in the preparation of this manual. John Antos, Antos Enterprises, Inc., consulted on activity-based accounting. On behalf of the State of Tennessee, we again wish to express our appreciation to all the participants in this project--including many individuals and organizations not listed above. W. R. Snodgrass Comptroller of the Treasury ii-2