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Cash vs. Accrual Methods of Accounting

CFC Memorandum 2001-02


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 $100,00 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.

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