Financial statements and the Form 990 are both important documents providing insights into an organization’s finances, but they serve different purposes and adhere to different reporting standards. It is not uncommon for clients to ask their CPAs, “Why don’t these two match?”
The IRS designed Form 990 to enhance transparency of a nonprofit organization’s mission and activities and to promote compliance with applicable tax law requirements. Since the Form 990 is a public disclosure document, Form 990s are easily accessible online for anyone to review. Therefore, the organization needs to ensure that the information reported on the Form 990 is accurate. To do so, you must understand the unique ways information is reported on Form 990, and how it relates to the organization’s financial statements.
Key Differences:
- Purpose: Financial statements offer a broad view for stakeholders, while Form 990 specifically addresses IRS compliance and public transparency for tax-exempt organizations.
- Standards: Financial statements follow GAAP (Generally Accepted Accounting Principles), while Form 990 adheres to IRS reporting requirements. The differences in the reporting framework are the root of the variances you see in the comparison of the two.
- Investment Reporting: Investment income is typically reported net of expenses on financial statements, whereas the income and expenses are reported separately on Form 990.
- Unrealized Gains/Losses: These are reported on financial statements as income, but are not reported as income on Form 990. Instead, these are reported as a change in net asses on Form 990.
- Donated Services: These are recognized as revenue and expense on financial statements (if meeting GAAP criteria) but not on Form 990, except as reconciling items. Per GAAP, donated services are considered a contribution and an expense and are to be included in the calculation of net income; however, the 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.
- Compensation Reporting: Part VII of Form 990 reports compensation (which will tie to W-2s or 1099s issued) on a calendar year basis, while the statement of functional expenses (Part IX) reflects the organization’s fiscal year. If your organization is not a calendar year-end, Part VII and Part IX will not match.
- Governance and Non-Financial Information: Form 990 includes details on governance, management, board composition, compensation practices, and program accomplishments not found in standard financial statements.
Most of the differences, mentioned above, between the Form 990 and your financial statements can be found by reviewing Schedule D, Parts XI and XII. These reconcile your Form 990 to your financial statements and are required if the organization received separate audited financial statements.
In conclusion, while both provide financial information, financial statements emphasize adherence to accounting principles for a broad audience, and Form 990 focuses on IRS compliance and transparency specific to tax-exempt organizations. It’s important to be aware of these differences to interpret the information accurately from each source.
Please contact the Not-for-Profit Niche team at Gilliam Bell Moser LLP for further guidance.
