Financial Reporting In Shifting Economic Landscapes

Federal funding disruptions and economic volatility are creating significant challenges for nonprofit and governmental organizations. Recent freezes and legal challenges - particularly in education, environmental, and Diversity Equity and Inclusion (DEI) programs - have introduced uncertainty around grant availability. At the same time, inflation, bond market fluctuations, and unpredictable revenue streams are complicating financial planning and reporting.

Adaptations to Financial Reporting

Organizations must take a closer look at how these developments impact their financial reporting. For revenue recognition, it’s critical to determine whether contributions are conditional. Organizations should review grant agreements to determine if actions by the Federal government impact conditional contributions. A federal funding freeze alone does not constitute a barrier under Generally Accepted Accounting Principles (GAAP). Entities should also evaluate the collectability of contributions receivable. The risk of credit loss from exchange related grants from the federal government is generally considered negligible, but organizations must still assess revenue adjustments such as variable considerations, contract modifications, and any changes in scope or pricing.

Financial Accounting Standards Board Statement FASB ASC 326 clarifies that a government’s refusal to pay does not constitute a credit loss, so allowances for credit losses should not be recorded in these cases.

Disclosures and Subsequent Events

Disclosures are another key area of focus. Events occurring after the balance sheet date—such as a federal funding pause—may require disclosure as subsequent events. If the impact can’t be reasonably estimated, organizations should still disclose the uncertainty and its potential implications. If the impact can be estimated, disclosures should include the amount of grant receivables at risk and any unrecognized future revenue that may be affected. Additionally, entities must disclose risks and uncertainties that could significantly affect financial results or operations in the near term, including concentrations in funding sources or reliance on specific federal programs.

Going concern assessments are also critical. If substantial doubt exists about an organization’s ability to continue operations, disclosures must outline the conditions raising that doubt, management’s evaluation, and any plans to mitigate the risk. Even if management’s plans alleviate the doubt, disclosure is still required.

Recommendations to Strengthen Financial Operations

To strengthen financial resilience:

• Build or replenish operating reserves
• Diversify revenue streams
• Model best, worst, and most-likely scenarios

To enhance engagement:

• Communicate with donors, funders, and partners
• Engage the board in financial oversight and fundraising efforts
• Leverage volunteers and community networks to fill service or staffing gaps

Reevaluate Missions and Programs

• Prioritize core programs with measurable impact and sunset underperforming initiatives
• Pause or sunset underperforming initiatives to focus resources
• Collaborate with peer organizations

Enhance Technology and Efficiency

• Leverage cloud-based accounting and donor management systems to improve efficiency
• Use automation tools for tasks like donation receipts, grant tracking, and payroll

Strengthen Risk Management

• Conduct a risk assessment covering financial, operation, reputation, and compliance risks
• Develop business continuity and crisis response plans
• Review insurance coverage for adequacy

Promote Staff Well Being and Employee Retention

• Implement flexible work arrangements and professional development opportunities
• Understand and address staff concerns
• Recognize and reward employees including non-monetary incentives

In this environment, proactive planning, transparent communication, and compliant financial disclosures are essential. By adapting your financial operations and reporting practices now, your organization will be in a stronger position to better navigate uncertainty and continue delivering on your mission.

If you have any questions regarding your financial reporting and operations, please contact a member of your audit team.