Finding Text
Improper Accounting of Conditional and refundable advances for Federal and State Grants Category: Internal control -significant deficiency. Condition: The organization did not properly account for conditional and refundable advances received from federal and state grants totaling approximately $1,506,000. Of this amount, only $536,950 met the conditions to be recorded as revenue. Criteria: According to Accounting Standards Update (ASU) 2018-08, "Clarifying the Scope and the Accounting Guidance for Contributions Received and Contributions Made," not-for-profit entities must evaluate whether grants and contracts are conditional or unconditional. A contribution is considered conditional if it includes both: • A Barrier to Overcome: The recipient must meet specific performance-related conditions or other measurable barriers. • A Right of Return or Release: The grantor retains a right to reclaim the funds, or the recipient is released from the obligation if the conditions are not met. Conditional and refundable advances should be recorded as accrued expense (deferred revenue) until the conditions are substantially met or explicitly waived. Only then should they be recognized as revenue. Cause: The improper accounting was mainly due to the reports prepared for management and lead agencies being on a cash basis. Additionally, there was a lack of understanding of the relevant accounting guidance by the accounting staff. Effects: This resulted in an overstatement of income by approximately $972,600, and an overstatement of accrued expense and restricted net assets by the same amount. These misstatements could lead to inaccurate financial reporting and decision-making. Prior year’s findings:
Not identified
Questioned cost:
None
Recommendation:
We recommend that management strengthen internal controls over the accounting of conditional and refundable
advances, provide additional training to accounting staff on the proper recognition of conditional and refundable
advances, and conduct regular reviews to ensure compliance with ASU 2018-08. Additionally, reports to
management should be prepared following cash and accrual basis in order to meet the requirements for reporting
to agencies (cash basis) and compliance (accrual basis).
Management’s response:
Nuestra Escuela will design internal controls over the accounting of conditional and refundable advances. These
controls will include a rubric to determine whether the contract includes conditional contributions.
The accounting staff will take training on the proper recognition of conditional and refundable advances and
conduct regular reviews to ensure compliance with ASU 2018-08.
Additionally, Nuestra Escuela reports to management will be prepared on a cash and accrual basis in order to
meet the requirements for reporting to agencies (cash basis) and general accepted accounting principles GAAP
compliance (accrual basis).
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