MEMORANDUM FOR
PRINCIPAL COMBINED FUND ORGANIZATIONS (PCFOs)
|
FROM: |
MARA T. PATERMASTER, DIRECTOR |
|
SUBJECT: |
Cash vs. Accrual Methods of Accounting |
Several LFCCs and PCFOs involved in the local application
process have asked us to clarify the requirement for CFC applicants to prepare
their financial disclosure forms and reports (specifically, the IRS Form 990
and audited financial statements) using the accrual method of accounting.
The policy with respect to the accrual method requirement is applied
differently, depending upon the amount of annual revenue appearing on line 12
of the Form 990.
CFC regulations require applicants with $100,000 or more in
revenues to submit a copy of their most recent audited financial
statements. The financial statements must be prepared using Generally
Accepted Accounting Principles (GAAP) and must be audited using Generally
Accepted Auditing Standards (GAAS). This means only the accrual method of
accounting is acceptable. CFC regulations also require applicants to
provide a copy of their IRS Form 990 for the same fiscal period. The
figures shown for revenues and expenses on both documents must reconcile and
both documents must be prepared using the accrual method of accounting.
The regulations do provide an exception to the audit
requirement for local applicants with less than $100,000 in revenue (see 5 CFR
§950.204(a)(2)(ii)). These agencies do not have to provide an
audit. Because there is no need to reconcile the IRS Form 990 with an
audit, the IRS Form 990 does not have to be prepared using the accrual
method. This is consistent with instructions appearing in Item 5 of the
CFC Local Unaffiliated Instructions.
You may want to provide instructions (below) to staff
reviewing the financial disclosure documents of local applicants.
For agencies with $100,000 or more in revenue on line
12: Both
the IRS Form 990 and the audited financial statements must be prepared using
the accrual method. Box J on the first page of the Form 990 must be
checked indicating that the accrual (not cash or §other") method of
accounting has been used. This is the case even if a cash-based IRS Form
990 reconciles with an audited financial statement prepared using the accrual method.
Reconciliation letters prepared and signed by a certified public accountant
that purport to reconcile differences between a cash-based Form 990 and the
audited financial statements cannot be accepted if the Form 990 has been
prepared using a cash-based system.
For agencies with less than $100,000 in revenue on line 12: These local applicants are not
required to provide an audited financial statement with their CFC
application. As a result, many prepare their financial disclosure
documents on a cash or modified-cash basis, which is acceptable. If line
12 on the first page of the IRS Form 990 shows an amount less than $100,000,
Box J may be checked to indicate that the Form was prepared using a cash or
other method. It is unrealistic to expect very small organizations to use
an accrual accounting method solely to be eligible for a local CFC.
Some applicants may provide an audit even though revenues are less than
$100,000. In these cases, the audit is not a requirement and can be
viewed as an immaterial part of the application - even if it was prepared using
a different method of accounting than the IRS Form 990.
Address questions or comments to cfc@opm.gov