4 COVID-19 Accounting Considerations When Preparing for Your Nonprofit’s Year-End
Closing the year is an important task for every nonprofit organization for many reasons.
Not only is it a GAAP requirement, but it is also required for tax filing purposes and is often mandated by funders. The year-end accounting process also provides the board and management team with useful information to evaluate performance and chart the course for the next fiscal year.
Year-end nonprofit accounting can be challenging at the best of times. However, with the volatility of today’s economic climate, your end-of-year activities as a nonprofit organization may be even more complex than usual.
Here are four key COVID-19 accounting considerations your nonprofit organization should consider when closing out the financial year.
1. Do your year-end books accurately reflect your financial situation?
Given that your financial statements must always mirror the economic reality of your nonprofit organization, it’s important that your books reflect any special costs attached to operating during the pandemic.
For example, as you think through the accruals (non-invoice supported expenses) you may need to report as liabilities in your year-end accounting, don’t forget to include charges resulting from postponed or canceled conferences, programs, or gala events.
Other common accruals you may need to consider include:
- Unpaid office rent amounts your landlord won’t be waiving
- Wrongful employee dismissal claims you’ve been legally advised are material
Since auditors will want to see documented support for expenses like these, you’ll also need to collect and organize contracts and other source documents into a clear audit trail.
2. Have you tapped any new revenue sources?
If your organization’s resourcefulness during the pandemic has led to the creation of new revenue sources, you should determine whether those revenue streams are growing.
To tap fresh sources of funding, for example, many nonprofits have ramped up their donor exposure through:
- Microphilanthropy gifting programs
- Dedicated email marketing initiatives
- Automated direct mail campaigns
If your new funding stream has become a significant source of revenue for your nonprofit, it may warrant a separate disclosure in your financial statements.
Want to learn more about the year-end nonprofit accounting process in light of the pandemic?
Watch this on-demand webinar to learn tips to improve your year-end accounting process.
3. Can you facilitate a leaner audit process?
Audit fees are increasing, so expect a higher bill this year. This is being driven by a labor shortage that is driving salaries for audit professionals up. Also, auditors are spending more time on financial statement disclosures related to the pandemic.
Ideally, your nonprofit should always be looking for ways to enable a leaner audit process so you can reduce the cost and complexity of your year-end accounting.
To keep audit fees down, for example, it’s worth:
- Ensuring all your year-end financial documentation is accurate and complete in advance
- Mitigating any changes that may be ongoing during your audit
- Reducing your auditor’s hours by asking if there are certain tasks your organization can perform in their place
There’s no better time than now to streamline your audit process.
4. Does your organization have a going concern risk?
Has the pandemic cast doubt around your nonprofit’s ability to continue as a going concern in the twelve months ahead?
Many Canadian charities and social services, for example, have been forced to switch from delivering programs in-person to making their offerings available digitally. In some cases, this has increased their level of going concern risk as they struggle to make virtual programming financially viable.
Given that an auditor is likely to scrutinize events or conditions affecting your NPO more closely in uncertain times, it’s important to evaluate your operations and financials carefully with regard to any:
- Loan defaults or credit denials
- Trending losses or wasteful long-term financial commitments
- Ongoing legal proceedings
If your auditors feel that you might have a going concern risk and you believe that is not the case, you may need to present pro forma financial statements (or forecasts) that reasonably demonstrate otherwise.
The pandemic has affected many organizations in a myriad of ways over the past year – from having to switch back and forth between online and in-person programming, to finding new fundraising sources and more.
It is important for your organization to ensure these changes are clearly reflected in your books and backed up with source documents. This will help your organization to facilitate a leaner audit process and clearly demonstrate your organization’s ability to continue as a going concern.
Join us for a more in-depth discussion!
As the COVID-19 situation continues to evolve and impact various NPOs differently, it’s important that you consider the economic risks facing your nonprofit—and include the appropriate disclosures in your year-end financial statements.
Want to learn more about the year-end nonprofit accounting process in light of the pandemic? Check out this on-demand webinar, where we discuss common year-end accounting challenges faced by NPOs, additional COVID-19 factors your organization may need to consider, and what you can do to close out the year more efficiently.
Hope to see you there!
About the author:
Omar Visram, CPA, CA, Co-Founder and CEO of Enkel Backoffice Solutions
Omar is the Co-Founder and CEO of Enkel Backoffice Solutions, which he founded in 2016. For over 15 years, Omar has been active in the Canadian taxation, strategic planning, audit advisory, and finance operations disciplines within senior roles at KPMG and BCAA.
Prior to founding Enkel, Omar worked to launch BCAA’s Evo car-sharing business by managing the fleet operations and customer experience teams from launch to full-scale operations
Omar holds a BBA from Simon Fraser University and is a qualified CPA, CA.