12 Most Common Financial Reporting Mistakes in Nonprofits

By Sibi Thomas, CPA

Proper financial reporting is essential for not-for-profit (NFP) organizations to maintain transparency, donor confidence, and regulatory compliance. However, despite their best intentions, many organizations consistently make critical errors in their financial statements. This article identifies 12 of the most common mistakes in NFP financial reporting under U.S. Generally Accepted Accounting Principles (GAAP) and offers practical tips for avoiding them.

1. Misclassifying contributions as exchange transactions

Many NFPs struggle with determining whether funding arrangements are contributions or exchange transactions. Under ASU 2018-08, the key distinction is whether the resource provider receives commensurate value in return. Grants from governments or foundations are often misclassified as exchange transactions when in fact they meet the criteria for contributions. This misclassification can result in inappropriate timing of revenue recognition and misreporting of obligations and restrictions.

Tip: Evaluate each transaction carefully using the guidance in ASU 2018-08. Err on the side of treating ambiguous transactions as contributions. Document your rationale and consult with legal or accounting experts when in doubt.

2. Failing to disaggregate net assets properly

Before ASU 2016-14, nonprofits categorized net assets as unrestricted, temporarily restricted, or permanently restricted. The updated guidance simplifies this into two classes: net assets with donor restrictions and net assets without donor restrictions. Many organizations still report using the old three-tier structure, leading to confusion among stakeholders and noncompliance with GAAP.

Tip: Update your chart of accounts and financial statement templates. Train staff and board members on the new terminology and classifications. Review old pledges and endowments to ensure appropriate categorization.

3. Inadequate disclosure of liquidity and availability of resources

ASU 2016-14 introduced a requirement for nonprofits to disclose information about the availability and liquidity of financial assets. Yet many NFPs either omit these disclosures or provide boilerplate language that lacks useful detail. This can leave donors and creditors uncertain about an organization’s ability to meet near-term obligations.

Tip: Provide a clear schedule showing available financial assets. Accompany this with a narrative that explains how the organization manages liquidity risks and financial resource availability.

4. Omitting functional expense reporting

All NFPs are required to present expenses by both natural classification (e.g., salaries, rent, and supplies) and by functional classification (e.g., program, management, and fundraising). Some fail to allocate shared costs properly, and others omit the disclosure entirely, which reduces transparency and comparability.

Tip: Develop a consistent allocation methodology based on staff time, square footage, or usage. Utilize accounting software to track and report expenses by function and nature. Include a statement of functional expenses or embed the presentation in the notes.

5. Incorrect accounting for donated goods and services

Donated services should only be recognized if they meet certain criteria under ASC 958-605: they must either enhance a nonfinancial asset or be specialized services typically purchased by the organization. Similarly, in-kind donations of goods must be valued and recorded appropriately. Overstating or omitting these can skew revenue and expense lines.

Tip: Maintain a log of in-kind donations and assess their value using market data or expert input. Train development and finance teams to identify qualifying services and document them contemporaneously.

6. Misapplying the timing of revenue recognition

Revenue from conditional contributions should not be recognized until all conditions have been substantially met. Many organizations overlook conditions such as matching requirements, measurable milestones, or incurring qualifying expenses. Recognizing such contributions prematurely inflates current-year revenue and understates future obligations.

Tip: Read grant agreements carefully and document conditions and barriers. Set up tracking mechanisms for milestones and ensure revenue is deferred until conditions are met. Coordinate closely with program staff to monitor progress.

7. Neglecting to record donor-imposed restrictions

Donor restrictions, whether for time or purpose, must be tracked until they are met. When restrictions are ignored, organizations may misclassify net assets or improperly release funds to operations. This not only leads to errors but can also breach donor agreements.

Tip: Use fund accounting or a subledger system to track restricted gifts. Establish policies for releasing restrictions and ensure compliance is reviewed periodically. Include clear disclosures in the financial statements.

8. Incomplete or inaccurate footnote disclosures

Footnotes are essential to understanding an organization’s financials, yet they are often incomplete or vague. Missing disclosures on related-party transactions, contingencies, or concentration risks can raise red flags with auditors and regulators.

Tip: Use a comprehensive disclosure checklist based on GAAP and industry best practices. Have footnotes reviewed by a CPA with nonprofit experience to ensure accuracy and completeness.

9. Overstating endowment funds by including board-designated reserves

Board-designated net assets, often called “quasi-endowments,” are funds set aside by internal decision and can be used at the board’s discretion. They should not be classified as donor-restricted endowments. This misclassification can mislead stakeholders about fund availability.

Tip: Maintain separate general ledger accounts and footnote disclosures for board-designated versus donor-restricted endowments. Make sure your investment policy and financial statements reflect the correct categorization.

10. Misunderstanding lease accounting rules (ASC 842)

ASC 842 requires nearly all leases to be recorded on the balance sheet. Many NFPs have not completed the lease inventory or updated accounting systems to comply. This results in understatement of liabilities and assets.

Tip: Identify and evaluate all leases, including embedded leases in service agreements. Record right-of-use assets and lease liabilities for operating leases. Update your accounting policies and financial statement footnotes accordingly.

11. Not consolidating related entities when required

Organizations that control other entities—such as supporting organizations or for-profit subsidiaries—may need to consolidate those entities. Misjudging control or ignoring financial dependence can lead to material omissions in reporting.

Tip: Perform an annual review of relationships with affiliates and assess control and economic interest. Consult ASC 958-810 and involve legal counsel if necessary. Disclose any significant judgments made in the determination.

12. Not performing an annual GAAP compliance review

As accounting standards continue to evolve, many nonprofits fall behind on new pronouncements and fail to assess whether their financial reporting is still fully compliant with U.S. GAAP. This is especially problematic in organizations with limited financial staff or where finance leadership turns over frequently. A lack of ongoing GAAP review can result in outdated practices, incorrect policies, and financial statements that miss critical disclosures or include misstatements.

Tip: Conduct an annual GAAP compliance check—ideally before the year-end close. This can include reviewing recent FASB updates, evaluating internal policies, and consulting with auditors or external advisors. Keeping pace with GAAP developments ensures that financial reporting remains accurate and aligned with current standards.

Conclusion

Avoiding these 12 common financial reporting mistakes can significantly enhance an NFP’s credibility and effectiveness. Staying current with U.S. GAAP updates and investing in staff training and professional accounting support are essential for high-quality reporting. In an environment where public trust and regulatory scrutiny are high, getting the financials right isn’t optional—it’s foundational.

This article is intended for informational purposes and should not be considered a substitute for professional accounting advice tailored to your specific situation.

ABOUT THE AUTHOR:

Sibi Thomas, CPA, is a managing director at CBIZ. Sibi brings more than 20 years of specialized expertise in accounting, auditing, tax, and consulting within the nonprofit, government, and healthcare sectors. 

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